reserve requirements, have allowed european banks to lock in funding for up to three years, thereby alleviating concerns about their near - term prospects. with the benefit of this support, european banks in turn have increased their holdings of sovereign debt, contributing to lower borrowing costs for some countries. second, euro - area leaders, the greek government, and private - sector holders of greek debt are taking steps to put greece on a more sustainable fiscal path. its sovereign debt has been significantly reduced, the greek authorities are intensifying their efforts to implement fiscal and structural reforms, and the european union and international monetary fund have pledged a considerable amount of new funds as part of a second assistance package. the greek economy remains in a deep recession, however. third and finally, leaders of most of the members of the european union have approved a new fiscal compact treaty that strengthens fiscal rules and their enforcement. this treaty represents a positive step toward resolving the fundamental tension inherent in having a bis central bankers ’ speeches monetary union without a fiscal union, and thus should help bolster the viability of the euro - area economy in the longer term. although progress has been made, more needs to be done. full resolution of the crisis will require a further strengthening of the european banking system ; a significant expansion of financial backstops, or “ firewalls, ” to guard against contagion in sovereign debt markets ; and, critically, continued efforts to increase economic growth and competitiveness and to reduce external imbalances in the troubled countries. actions taken by the federal reserve the federal reserve has followed developments in europe closely, and we are in frequent contact with key european policymakers. we are particularly focused on protecting u. s. financial institutions, businesses, and consumers from adverse financial and economic developments in europe. to help calm dollar funding markets and support the flow of credit to u. s. households and businesses, the federal reserve acted in concert with major foreign central banks to enhance the u. s. dollar swap facilities that were originally put in place during the global financial crisis and reestablished in may 2010. use of the reestablished lines was limited until late last year. however, in late november, the federal reserve agreed with the ecb and the central banks of canada, japan, switzerland, and the united kingdom to extend the swap lines through february 2013 and to reduce their pricing, from a spread of 100 basis points over the overnight index swap rate to 50 basis points. 1 the lower cost to the ecb

on bank reserves. because banks should be unwilling to lend reserves at a rate lower than they can receive from the fed, the interest rate the fed pays on bank reserves should help to set a floor on the overnight interest rate. moreover, other tools are available or can be developed to improve control of the federal funds rate during the exit stage. for example, the treasury could resume its recent practice of issuing supplementary financing bills and placing the funds with the federal reserve ; the issuance of these bills effectively drains reserves from the banking system, thereby improving monetary control. as we consider new programs or the expansion of old ones, the federal the monetary base is the sum of currency in circulation and bank reserves. m1 consists of currency, traveler's checks, demand deposits, and other checkable deposits. m2 consists of m1 plus savings deposits, small - denomination time deposits, and balances in retail money market mutual funds. m2 has grown more rapidly than normal in recent months, at about a 15 percent annual rate on a quarterly average basis in the fourth quarter. we attribute this increase primarily to investors'demand for greater safety, which has led them to increase their holdings of government - guaranteed bank deposits. we expect growth in m2 to slow considerably in 2009, barring a similar shift in portfolio preferences. reserve will carefully weigh the implications for the exit strategy. and we will take all necessary actions to ensure that the unwinding of our programs is accomplished smoothly and in a timely way, consistent with meeting our obligation to foster maximum employment and price stability. credit risk and transparency two other frequently asked questions about the federal reserve's balance sheet are : first, how much credit risk is the fed taking in its lending activities? and, second, is the fed informing the public adequately about these activities? to address the first question, for the great bulk of fed lending, the credit risks are extremely low. the provision of short - term credit to financial institutions – our traditional function – exposes the federal reserve to minimal credit risk, as the loans we make to financial institutions are generally short - term, overcollateralized, and made with recourse to the borrowing firm. in the case of the liquidity swaps, the foreign central banks are responsible for repaying the federal reserve, not the financial institutions that ultimately receive the funds, and the fed receives an equivalent amount of foreign currency in exchange for the dollars it provides foreign central banks. the treasury stands behind the debt and other securities issued by the