Notwithstanding well-diversified portfolios at these larger banks, the loss of their highest-quality borrowers has elevated the aggregate risks in their portfolios. To be sure, borrowers are affected by the business cycle. But though the earnings of high-quality borrowers may fluctuate, even widely fluctuate, with the business cycle, the range of default probabilities tends to be more muted than that for other borrowers.
Therefore, it is all the more important for the central bank to provide the price stability anchor to the market.3 Moreover, the zero bound on the nominal interest rate erodes the market mechanism in the financial market as well as market discipline, thereby distorting the allocation of funds on the market.