) collateral. in that way, banks transform illiquid and lower - quality assets into high - quality liquid assets in a process known as collateral transformation. the opportunity cost of this trade is currently 50 basis points : the spread between the main refinancing rate and the deposit facility rate. banks thus have a solid financial incentive to self - insure against liquidity risk in the market. lowering the spread to 15 basis points has the potential to reduce the opportunity cost and provide incentives to shift from market to central bank funding. the good thing is : we have enough time to observe how market activity evolves over the coming years. in particular, we have to evaluate the trade - off between the potential reduction of volatility and less market activity with possibly higher collateral transformation. 5 closing remarks ladies and gentlemen, let me conclude. while our balance sheet will gradually shrink, excess liquidity will remain significant over the coming years. accordingly, while some volatility cannot be ruled out, short - term money market interest rates are expected to continue evolving in the vicinity of the deposit facility rate. over the next two years, we will closely monitor three key aspects until our next sched ‐ uled review : first, we will assess the development of money market activity, including in the medium - term segment. second, we will analyse possible fluctuations of short - term interest rates and their influence on the transmission of monetary policy. and third, we will scrutinise the degree of collateral transformation. let me be crystal clear : an adjustment of our operational framework was necessary to reflect structural market changes. is that framework now set in stone? i don ’ t know yet. but in the past, we have shown our capability and flexibility to adapt to changing market conditions. let ’ s be open to this, now and in the future. 1. see fratianni, m. and j. von hagen ( 2001 ), the konstanz seminar on monetary theory and policy at 30, european journal of political economy, vol. 17, pp. 641664, for a full account of the history of the konstanz seminar. 2. borio c. and p. disyatat ( 2010 ), unconventional monetary policies : an appraisal, manchester school, university of manchester, vol. 78 ( s1 ), pp. 53 - 89, september. 3. bindseil, u. ( 2004 ), monetary policy implementation : theory, past,

and highly reliable funding sources to address this need. managing credit and liquidity risks requires effective governance. one important aspect of ccp governance is a commitment to transparency. clearing members bear primary responsibility for understanding the risks associated with participating in a ccp, including their potential exposures in the event of a default. this will require the ccp to provide relevant and even firm - specific information to facilitate the members ’ analysis. clearing bis central bankers ’ speeches members and their clients, regulators, and the broader public require transparency so that they can assess the adequacy of a ccp ’ s risk management and its overall risk profile. promoting the stability of central counterparty members so far, i have focused on ccps. now i would like to turn to the critical role played by clearing members of those ccps. a ccp ultimately draws its strength and resilience from that of its members. and it is not a one - way street, since strong ccps enable clearing members and their clients to significantly reduce their exposure to counterparty credit risk. effective risk management by both a ccp and its clearing members need to work in concert. as a general matter, enhanced capital and liquidity requirements have substantially improved the overall risk position of the banks that constitute many of the major clearing members. for example, tier 1 common equity capital ratios at the largest u. s. banks have nearly doubled since 2007. 9 in addition, new requirements address the specific interactions that banks have with ccps and derivatives markets in order to promote both the use of central clearing and strong ccp risk management. under basel iii, capital requirements for bank exposures to a ccp are sensitive to the risk management standards applied by the ccp. these requirements acknowledge that ccps that adhere to the pfmis present lower risks to their members. exposures to such qualifying ccps require less capital. 10 the capital rules also recognize that a ccp requiring more initial margin from its members exposes those members to less default risk, and therefore require less capital. on the liquidity front, the recently proposed liquidity coverage ratio ( lcr ) recognizes the liquidity - intensive nature of derivatives transactions. under the lcr, a bank is required to maintain high - quality liquid assets that are sufficient to withstand an extreme yet plausible margin call from its derivatives counterparties. 11 importantly, the liquidity requirement depends on the member ’ s net derivatives position with the ccp – if the position is hedged, the liquid