through the remuneration of reserves at that rate. by pinning down the near - end of the interest rate curve, this is the first step in the transmission of monetary policy through financial markets to the real economy and thus influencing inflation. there are other ways of affecting short - term interest rates for monetary policy purposes, but all involve the use of central bank reserves in some way or another. before the global financial crisis, most central banks operated with a much lower level of reserves than today and an interest - rate ‘ corridor ’ between official rates on a borrowing and a deposit facility. the approach involved managing the ‘ scarcity ’ of reserves such that the money market rate was in the middle of the corridor. the bank of england operated a variant of this approach that required firms to specify the quantity of reserves they wanted to hold on average each month and then incentivised them to manage their holdings to this target by paying bank rate only on this target. in the system we have today, the much larger supply of reserves drives money market rates close to the ‘ floor ’ determined by bank rate. if money market rates were to fall much below bank rate, banks would have an opportunity to profit by borrowing reserves from other banks, for example, and earning bank rate on their reserve accounts. this ‘ floor ’ system has been successful in keeping money market rates very close to bank rate. while in principle we could implement monetary policy with a much smaller level of reserves than we have today, i will argue this evening that financial stability considerations point towards an increased reserve demand since the financial crisis, one that the central bank has very good reason to meet. but how many reserves do we need in the system to secure financial stability as well as to implement monetary policy effectively – what is the optimal level? and given that level, we are faced with another question : which assets should the bank hold to back it? these two questions are the topic of today. decisions on how we supply reserves will affect where it intersects demand. we need to account for potential market distortions from our choices, and what they imply for the balance between liquidity provision directly through the bank ’ s facilities and indirectly via the money market, both in normal times and in stress. and we need to consider where interest rate risk sits within the system and what the implications are of that. these are important questions. how we answer them will shape the bank of england ’ s balance sheet for years to come. it is useful to start with some history

jose manuel gonzalez - paramo : the euro as one of the main aspects shaping european identity today speech by mr jose manuel gonzalez - paramo, member of the executive board of the european central bank, on the occasion of the inauguration of the euro exhibition at banca nationala a romaniei, bucharest, 10 march 2011. * * * dear governor isarescu, ladies and gentlemen, i am delighted to be here today for the opening of the euro exhibition, which is being hosted by banca nationala a romaniei until 27 may 2011. this is yet another example of the strong ties that the european central bank has developed with banca nationala a romaniei over the last few years – i remember vividly the romanian artists who performed in frankfurt in 2009 as part of the ecb ’ s cultural days, which were showcasing romania that year. the euro exhibition is dedicated to europe ’ s single currency : the euro. stage three of economic and monetary union began on 1 january 1999 with the irrevocable fixing of the exchange rates of the currencies of the 11 member states initially forming the euro area, and culminated on 1 january 2002 with the introduction of the euro banknotes and coins. since then, countries have continued to join the euro area, the latest, as you know, being estonia on 1 january this year. the euro banknotes and coins are therefore now legal tender in 17 of the 27 eu member states and are used by the 331 million citizens in an area stretching from cyprus to ireland and from portugal to finland. in fact, they have become one of the most visible symbols of europe and the euro is one of the main aspects shaping the european identity today. the introduction of the euro has brought many advantages – not only for citizens of the euro area countries, but also for citizens of other eu member states, such as romania. for example, when travelling within the euro area, romanian citizens can use the euro as a means of payment across borders and thus only need to exchange their currency once. furthermore, they can compare prices across the euro area countries much more easily. finally, romanian enterprises, for which the euro area is an important trading partner, can use one currency, namely the euro, in their transactions with business partners from the 17 euro area countries. in order to join the euro area, each eu country must meet a number of clearly defined criteria, namely : 1. it must not be subject to an eu council decision that an excessive budget deficit exists ;