from the crisis ”. bis central bankers ’ speeches stressed and non - stressed countries. these developments were eventually mirrored in the target balances of the eurosystem the large differences in financing conditions across countries translated into a very high fragmentation of credit growth across the national dimension. the ability of banks in some countries to deleverage is heavily complicated by the adverse market conditions. not only do banks in the affected countries often need to deleverage more than others, but also their portfolios consist of less liquid assets ( such as domestic sovereign bonds ) and they face, ceteris paribus, higher funding costs than their peers in other euro area countries. often they are even completely cut off from traditional private sources of funding. with the deepening of the sovereign debt crisis, the eurosystem undertook additional measures, with a particular view to mitigating the increased heterogeneities in the euro area financial conditions. in 2010, the securities markets programme was launched, aimed at certain important segments of the financial market that were dysfunctional, but vital for the transmission of monetary policy signals. additionally, in december 2011, the eurosystem announced further enhanced credit support in the form of two repo operations with maturity of up to three years. there are indications that especially these three - year longer - term refinancing operations ( ltro ) have proven effective in preventing an abrupt deleveraging. they significantly helped in restoring confidence in financial markets by providing insurance on the ability for banks to rely on ecb liquidity. this has taken pressure off banks to fire - sell assets or to shrink their loan book. in fact, there is some evidence that banks who bid for liquidity at the three - year operations used this liquidity to address the roll - over risk implied by the issuance of debt securities or other funding instruments that will mature over the next few years. at the same time, there is some first evidence that the provision of long - term liquidity has helped in supporting credit provisions, especially in countries more affected by the sovereign debt crisis, therefore helping to address impairments in the transmission of monetary policy. the ecb has recently announced the details of outright monetary transactions ( omt ) in secondary markets for sovereign bonds in the euro area in order to address severe distortions in government bond markets which in particular originate in unfounded fears on the part of investors of the reversibility of the euro. omt also aims to safeguard the monetary policy transmission mechanism in all

short space of time. on the other hand, if deleveraging pressures are mainly related to capital positions, banks have an incentive to shed more capital - intensive assets to induce the largest reduction in risk - weighted assets. abrupt adjustments of the asset side of the balance sheet can lead to a credit crunch, if they are made by many banks simultaneously. rational behaviour at the level of an individual bank ( and investor ) can impose externalities on other players in the financial system through fire sales and financial contagion. 1 this can set a self - sustained process in motion that ultimately brings the whole financial system to collapse. see v. acharya and s. viswanathan, ( 2011 ) “ leverage, moral hazard and liquidity ”, journal of finance, vol. 66, no 1 ; f. allen and d. gale, ( 2000 ) “ financial contagion ”, journal of political economy, vol. 108, bis central bankers ’ speeches alternatively, if banks prefer to keep a certain portfolio of assets, they have to make an adjustment on the liability side. banks can recapitalise by issuing equity, or there can be the activation of bail - in measures. or banks can try to tap alternative sources of funding in case deleveraging pressures come from the inability to roll over existing liabilities. the mix of actions on the asset and liability side that banks may choose to take is not necessarily optimal from a welfare point of view. for instance, given the reluctance of shareholders to issue equity and dilute the value of their shares, banks may prefer to shed assets or cut lending rather than increase capital. this creates a role for authorities in trying to steer the process towards certain courses of action in which banks ’ choices are better aligned with economic welfare. for instance, the supervisory authority may put pressure on banks to increase the level of capital – for example, through upward adjustment of capital requirements under the basel iii framework. in addition, authorities may resort to bail - in measures whereby a bank ’ s existing debt holders would be forced to convert parts of their debt into bank equity or to accept a ( partial ) write - down of their claims. of course, authorities face several constraints, due to the lack of specific powers to force resolutions, for example, or incentive problems leading to delayed action. for instance, bail - in measures may take some time to administer because of the complexity of large banking groups and the various legal issues involved. in this context, europe faces specific challenges