had caused the transmission of policy stimulus to the broader economy to be too slow and uncertain. the unconventional tools were designed to act both on the quasi - risk - free yield curve and on bank lending margins. by “ yield curve ” i mean the term structure that we observe in the money market for overnight indexed interest rate swaps, as well as the curves in the markets for the national sovereign debts, which traditionally constitute an important benchmark for pricing credit to the entire economy. due to this benchmark function, the level and shape of the yield curve are crucial determinants of prices of a whole range of longer - term financial assets, including those most closely tied to economic activity, such as bank lending rates, corporate bonds and mortgages. our policy to influence intermediate and long - term yields has been instrumental in bringing the whole structure of credit conditions for households and companies to the accommodative levels necessary to arrest disinflation and strengthen the recovery. as a complement to the impact of our measures on yield curves, our targeted longer - term refinancing operations ( “ tltros ” ) were specifically designed to compress bank lending rates – 1 / 6 bis central bankers'speeches a key intermediate objective of the policy toolkit, given the important role that bank credit plays in financing the euro area economy. through a number of mechanisms, the tltros have successfully bid down the level of bank lending rates on loans to households and companies while preserving banks ’ overall margins. 1 this toolkit has formed the backbone of ecb monetary policy for almost three years. at the same time, the package had to be adjusted at times in response to the evolving situation. in particular, such adjustments became necessary to counteract the sequence of external shocks that, between summer 2015 and summer 2016, have created headwinds for the euro area economy, thereby slowing down the firming of its recovery. the governing council responded to the marked weakening in the euro area macroeconomic outlook which materialised towards the end of 2015, in a deteriorating global economic environment with persistently elevated financial market volatility, by announcing in march 2016 an extension of the minimum time horizon over which it would conduct the app combined with a further reduction in the deposit facility rate ( dfr ). moreover, it reactivated the tltros to prevent the market turmoil that prevailed at that time from undermining the progress that had previously materialised with regard to bank intermediation. as bank lending conditions normalised

expectation that the ecb ’ s key interest rates will remain “ at their present levels for an extended period of time ” – should be calibrated in a way to anchor the short - to - medium maturities of the yield curve – those portions most sensitive to short - term interest rate expectations and, therefore, to forward guidance – around levels that are sufficiently steady and low. in this respect, a mildly negative dfr has proved to be particularly powerful in controlling and anchoring these maturities, which are key to pricing bank credit in the euro area. the notion that zero was not the effective lower bound has exerted additional flattening pressure on the short - to - intermediate maturities of the yield curve, those to which banks tend to index loans with adjustable interest rates. this has amplified the reach - out potential of the stimulus relative to a situation in which our policy rates had been reduced to levels no lower than zero. 2 the app applies further pressure on longer - term interest rates along the curve, mainly by compressing the term premium. why does the app influence the term premium? the mechanism operates principally by extracting duration risk from the market. markets see duration risk as a potential source of portfolio losses, so they want to hedge against it, and the compensation for hedging is precisely what we call the term premium. if this premium is high, it makes long - term borrowing more expensive than short - term borrowing. if, at times of disinflation and weak growth, long - term borrowing is to be made more affordable so as to promote investment and durable consumption, then the central bank can try to absorb part of the duration risk that otherwise would have to be held by private investors. this can be done by purchasing long - dated bonds, as the ecb did under its app. with less long - dated bonds to hold in the aggregate, private investors have more balance sheet capacity to hedge against the amount of duration risk that remain in the market, and more risk - bearing power to re - deploy funds to other investments, including the acquisition and financing of productive capital. as a consequence, the 3 / 6 bis central bankers'speeches desired compensation for hedging will decrease, which will drive down the term premium and the whole yield curve. this same mechanism will spur propagation. duration extraction is the catalyst for the portfolio rebalancing channel, which is the chief mechanism by which easing through quantitative interventions propagates through the entire economy. in practice,