The role of monetary policy in addressing the crisis in the euro area

Furthermore, in order to give banks sufficient reassurance that access to liquidity will not be a problem over a relevant planning horizon we have extended the maturity of our lending. The longest maturity of our long-term refinancing operations (LTROs) has been raised from the standard 3 months before the crisis to 6 months after the post-Lehman cataclysm, to one year by mid-2009, and to three years at the end of 2011.

More recently, we have announced the Outright Monetary Transactions (OMTs), in order to eliminate the pricing of un-warranted tail risks in the bond markets. OMTs entail interventions in government bonds with a remaining maturity of up to three years. OMTs have a number of characteristics: they require the government concerned to accept a programme involving support by the European Stability Mechanism that entails strong and effective conditionality. Such conditionality is important in particular to preserve monetary policy independence. Interventions would be ex ante unlimited, which is essential to ensure their effectiveness. All interventions would be sterilised so as to ensure that there is no impact from these measures on the overall monetary policy stance. There would be transparency as the stock of securities acquired under the OMT programme would be published regularly, together with the average duration.

Like previous non-standard liquidity operations, OMT cope with extraordinary risk premia that markets require when self-fulfilling expectations of catastrophic events prevail. In 2008, the dominant fear had originated from the collapse of the payment system following the Lehman bankruptcy. In the first half of 2012, the prevailing fear had been caused by unfounded doubts about the continued existence of the euro.
There is another parallel between our early liquidity operations with banks and OMTs. In providing liquidity to our banking counterparties, we cannot and do not want to subsidise banks that are failing. Our liquidity support is not and should not be equity support. Likewise, in pricing out break-up risk in sovereign debt securities, we cannot and do not want to subsidise governments.

Placing the ECB's monetary policy in the broader context of central bank non-standard measures
Let me briefly digress to put our monetary policy and its impact on borrowing conditions in the context of unconventional monetary policies deployed by central banks more generally.

To begin with, the remuneration that investors demand on a long-dated security should be at least as large as the expected return from a strategy of rolling over short-term instruments and the risk premia that investors demand over and above the return from the rolling over strategy. Premia, in turn, are a composite object. They compensate investors for different risks attached to term investments:

©RIPRODUZIONE RISERVATA