As the cost of borrowing for certain governments increased, banks with exposures to this debt came under intense market pressure, ultimately leading to entire national banking systems losing market access. This development, in turn, resulted in financial fragmentation and a serious disruption to the monetary transmission mechanism.
In view of the implications that such dynamics could have for price stability, the ECB lowered interest rates. But these reductions were not being passed on to firms and households in a large part of the euro area. This signalled an unusual disconnect between expanding central bank liquidity and exceptionally stimulative monetary policy interest rates and contracted lending to non-financial corporations and households.