as a whole. the ecb ’ s monetary policy response to these developments was twofold. first, to ensure that banks had access to longer - term funding, two three - year refinancing operations were undertaken at the end of 2011 and beginning of 2012. second, in the summer of 2012, the announcement of outright monetary transactions served as a powerful circuit breaker. however, by then, the sovereign debt crisis had already left a trail of destruction in its wake, paving the way for the third phase of the crisis. in the third phase, banks in many parts of the euro area started to deleverage, substantially reducing their lending to the private sector. towards the end of 2013 lending was falling by more than 2 % per year and another credit crunch was looming. by mid - 2014, the economic recovery was losing momentum and the weakness in aggregate demand was starting to depress inflation expectations. additional policy accommodation was needed to maintain price stability, but the rate on the ecb deposit facility had already been reduced to zero in july 2012. to address this challenge, the ecb sought to affect the whole range of interest rates that are relevant for private sector financing conditions through a strategy consisting of three elements. the first was the launch of a negative interest rate policy, which began with a cut in the deposit interest rate to – 0. 1 % in june 2014. this provided additional stimulus, as it extended the scope of conventional monetary policy. the second element was the introduction of a credit easing package, which included targeted longer - term refinancing operations designed to support bank lending to the private sector, a third covered bond purchase programme and an asset - backed securities purchase programme. these measures improved the pass - through of liquidity injected into the financial system to private sector borrowing costs. the third was the addition of a public sector purchase programme to the ecb ’ s asset purchase programme ( app ) to reinforce the accommodative monetary policy stance, further compressing term premia all along the yield curve. these instruments were complemented by the use of forward guidance, through which we started to communicate our expectations of future policy, along with the conditions that would warrant a change in the policy stance. forward guidance was intended to make our measures 2 / 4 bis central bankers'speeches as effective as possible, in particular by ensuring that the impact of asset purchases on term premia was not counteracted by false expectations of interest rate increases. over time, our measures have boosted the

were a legacy of carry trade and capital inflows amounted to around 40 % of gdp, and where a large fiscal deficit that had to be financed in the domestic market had developed. the capital controls therefore gave monetary policy more scope to help stabilise and turn around the real economy once inflation came down. subsequently, they shielded the eocnomy from the financial spillover effects of the crisis in the eurozone. bis central bankers ’ speeches but the problem is that they are still in place, over five years after the climax of iceland´s financial crisis. the reason is that iceland is still facing a balance of payments crisis that is a legacy of former capital inflows and the unwinding of these big cross - border banks. there are three elements to this, as is described in this slide : contractual foreign debt payments in the next few years, well in excess of reasonable expectations of the size of the current account surplus ; offshore kronur, a legacy of the carry trade, which still amount to 20 % of gdp ; and potential krona payments, from the old banks to foreign residents, amounting to another 25 % of gdp. we can see from the icelandic case, and indeed many others, that although financial integration can offer many benefits to small, open economies, it also potentially entails significant risks that can turn into a nightmare if left unchecked. in iceland ’ s case, it was a pretty dramatic. what are the lessons, then? in the interest of time, i will briefly mention a select few. the first issue that i would like to mention is the need to monitor closely both net capital flows that immediately affect the economy – especially credit growth, asset prices, and domestic demand – and the developments of gross external assets and liabilities that might not affect the economy until risks materialise and banks are undergoing the transformation from being international in life to being national in death. during the financial crisis, there have been numerous cases of vulnerabilities in gross positions coming home to roost, such as the dollar - denominated parts of european banks ’ balance sheets. in iceland and similar cases there is also a statistical issue here that needs to be acknowledged : the distinction between flows that actually entered or left the country at the time and those that were simply flowing offshore in both directions but were booked through the icelandic headquarters and thus recorded in the country ’ s bp and iip. the second lesson relates to the eu framework for cross - border banking,