any severe disruption in the monetary policy transmission mechanism and thus ensured that the policy easing could produce its intended effects. this example illustrates that, as i have argued before, once non - standard measures are appropriately implemented, they can be thought of as being independent from the process of interest rate setting. there is however a prerequisite for such independence : an appropriate operational framework involving the remuneration of banks ’ reserves. this feature ensures that banks can hold increasingly large amounts of liquidity without suffering an increasingly hefty opportunity cost. a full allotment procedure such as that applied by the ecb could thus completely offset the effects of the money market freeze. if reserves had not been remunerated, however, banks under financial distress would have had to go above the minimum reserves to build appropriate liquidity buffers with the ensuing increase in their opportunity cost. the ecb could have induced banks to satisfy their demand for liquidity only through a contemporaneous reduction of the opportunity cost of reserves, which is the policy interest rate. the separation principle would have been broken. 13 a similar application of the separation principle has been made with the more recent smp, which the ecb introduced in response to the repercussions of the euro area government debt crisis. under the smp the eurosystem buys securities in dysfunctional debt market segments in order to safeguard the transmission of monetary policy. this framework has enabled the ecb to quickly respond to the market tensions resurfacing over the summer of 2011. let me briefly recapitulate the most recent measures. on 10 august, the ecb has again provided liquidity at a maturity of six months. on 15 september, the ecb has announced three additional us dollar operations with a maturity of about three months, which cover the end of the year. importantly, the ecb has, in ecb ( 2010 ), annual report. for a formal discussion of these different dimensions of monetary policy, see curdia and woodford, “ the central - bank balance sheet as an instrument of monetary policy ”, mimeo, april 2010. bis central bankers ’ speeches response to disorderly conditions in euro area debt securities markets, resumed the active implementation of the smp on 8 august to buy debt securities, though only in the secondary government bond market. the smp aims to create a better functioning transmission mechanism of monetary policy to all parts of the monetary union and is in full compliance with the prohibition of monetary financing. the

vitor constancio : the establishment of the european systemic risk board – challenges and opportunities introductory remarks by mr vitor constancio, vice - president of the european central bank, at the eurofi financial forum plenary session 14 on “ implementing the de larosiere agenda ”, brussels, 29 september 2010. * * * the european systemic risk board ( esrb ) will be established in january 2011 as the body responsible for the macro - prudential oversight of the eu financial system. it is mandated to actively monitor the various sources of risk to financial stability in the eu – across member states and financial sectors – with due consideration of also global developments. it should identify the risks and assess how they could impact the financial system so as to prioritise them. in this context, systemic risk is defined in legislation on the esrb as “ a risk of disruption in the financial system with the potential to have negative consequences for the internal market and the real economy. ” the esrb should issue warnings on significant systemic risks and issue recommendations for policy action to address such risks. the creation of the esrb is a response to one of the key lessons of the financial crisis regarding the need for an enhanced macro - prudential oversight of the financial system as a new policy function. the value added of a macro - prudential function to safeguard financial stability is its focus on detecting, assessing and addressing vulnerabilities that arise from the interconnections between financial institutions and markets, as well as from macroeconomic and structural developments, including financial innovation. it will thus take a system - wide perspective, which will complement micro - prudential supervision, whose purpose is to assess the soundness of individual financial institutions. the design of a framework for the conduct of macro - prudential oversight as new policy function involves significant challenges, but also represents a unique opportunity for reinforcing the arrangements to safeguard financial stability. in particular, the following three main components should underpin a macro - prudential framework : first, the necessary conditions for an enhanced monitoring of the financial system as a whole, in order to identify potential threats to financial stability ; second, the instruments for translating financial stability assessments into concrete policy action aimed at enhancing the resilience of the financial system ; and third, appropriate governance structures, including mechanisms for ensuring an effective interplay between, and coordination of, macro and micro - prudential responsibilities. as regards the first, one of the basic prerequisite