. the fsf report encourages financial institutions to enhance their transparency already in their 2008 mid - year reports and to improve reporting standards for off - balance - sheet vehicles. the credit rating agencies also play a crucial role in this context, and the report has indicated several measures to improve their performance. the third lesson we have learnt from the turmoil is that when tensions arise and markets become illiquid, central banks may have to take care in explaining how they intend to act to maintain price stability while preserving orderly conditions on financial markets. this problem is likely to arise in particular on the money market, whose functioning is crucial to the liquidity of securities markets in general. in times of great uncertainty, monetary policy has to be perceived as a stabilizing force, providing a solid anchor to inflation expectations. when there are money - market strains, distinguishing between liquidity provision and the reasons underpinning the setting of policy rates, easy enough in normal circumstances, becomes difficult, but remains nonetheless essential. on the one hand, the actions needed to restore market liquidity may blur monetary policy signals ; on the other, decisions on interest rates could be interpreted as revealing information unknown to the market, thus exacerbating tensions. in these circumstances, it is important to make sure that more active liquidity management by the central bank, which is necessary to ease tensions in the money market, is not perceived as a signal of a looser commitment to price stability. see the considerations in o. issing, “ in search of monetary stability : the evolution of monetary policy ”, presented at the 7th bis annual conference, june 2008. during the recent turmoil, the policy actions and the communication of the eurosystem have carefully distinguished the operations needed to support the money market from genuine monetary policy decisions. since august 2007, the eurosystem has repeatedly injected funds into the money market through both mros and longer - term operations, in order to serve banks ’ demand for liquidity. these operations have been accompanied by prompt communication – via press releases or other channels – to reassure the markets that the ecb stood ready to do what was needed to guarantee the orderly functioning of the interbank market and to reduce the volatility of very - short - term rates. at the same time, the council has emphasized its determination to ensure that risks to price stability over the medium term do not materialize and to keep inflation expectations consistent with price stability. these events have demonstrated that central banks, and the ecb in particular

financial disequilibria and avoid perverse incentives and an asymmetric expansionary bias in investors ’ perception of monetary policy. m. draghi, “ monetary policy and new financial instruments ”, buenos aires, 4 june 2007. see, for example, the press release of the financial stability forum ’ s seventeenth meeting in frankfurt, 29 march 2007. see, for example, the report of the paulson committee on capital market regulation. of course, it is extremely difficult to define the meaning of “ disequilibria ” in this area and to design a policy that will mitigate the risks of financial imbalances and crises while ensuring the preservation of price stability. while we should probably avoid asking too much of monetary policy, we cannot ignore that excessively low interest rates and over - expansion of liquidity and credit can affect the financial industry by encouraging investors ’ risk - taking behaviour. this implies that monetary and credit developments should be central in the communication of our strategy. 15 the turmoil has confirmed that the ecb ’ s strategic emphasis on money and credit developments is appropriate. the second lesson we have drawn from the crisis is that to reap the full benefits of central bank transparency, the financial sector at large – financial institutions, financial instruments, and market behaviour – must also be transparent. first of all, a clear understanding of financial conditions is essential for policy decisions, since variables such as the leverage of the private sector, the distribution of debt and the riskiness of banks affect the transmission of monetary policy. moreover, when financial instruments are highly complex, the balance sheets of financial institutions may be so opaque that outsiders – central banks, supervisors and even shareholders – may fail to perceive the true degree of risk in the system and so react tardily to financial imbalances. it is even possible that a better predictability of central banks ’ actions – concerning the future path of policy rates or their reactions in a crisis – coupled with the perverse incentives for risk prevailing in some segments of the financial system, might encourage risk - taking by private investors. in order to arrive at first - best solutions and improve the system ’ s stability, progress in central bank transparency must be accompanied by regulatory and supervisory action to make the financial services industry less opaque. indeed, there is an urgent need for greater transparency in this sector, not only to improve the world financial system ’ s resilience, but also to ensure that the stance of monetary policy is consistent with both price and financial stability