Banks and other financial institutions drastically reduced their exposure to the risks that they had imprudently accumulated during the phase of financial euphoria. Financial intermediation and loans to companies were curtailed in the wake of a forceful process of “deleveraging”. This was the point when important spillovers of the financial crisis set in. We saw the almost immediate spillover from the financial sector to the real economy. The credit squeeze and loss of confidence started to take a toll on the real economy, and a negative feedback loop developed between the financial sector and the real economy, and has since become a major feature of economic and financial developments. Almost simultaneously, the crisis that originated in the advanced economies spilled over to the emerging market economies. Since the fourth quarter of 2008, virtually all economies – both those of the industrialised countries and the emerging markets – have faced synchronised business cycles. Since half a year, we are facing a highly synchronised global economic downturn. The ECB’s response to the financial crisis Turning to the ECB’s response to the crisis, let me first insist that none of my remarks should be interpreted in terms of the future course of monetary policy. I stick rigorously to what I have said during my last press conference. We are indeed in the one-week “purdah period” before the next meeting of the Governing Council. Since the start of the financial turmoil, central banks around the globe face unprecedented challenges.
In particular, we needed to bear in mind that the euro area’s financial system is predominantly bank-based. Take the structures of private credit outstanding as an example: recourse to banks makes up more than 70% of non-equity external finance in the euro area. By comparison, in the US the equivalent proportion is only around 30%. This reflects the fact that the US financial system is primarily market-based. In the euro area, guaranteeing steady access to credit for households and companies largely means preserving the viability of the banking system. Banks play such a dominant role in our economy that it was appropriate to focus our non-standard measures on the banking sector. This profound contrast in financial and economic structures explains the different responses by central banks to the crisis as exemplified by the approaches of the ECB and the Federal Reserve System of the US. We rely on different channels as regards the transmission of our policy action. But these variations do not reflect conflicting views on fundamental principles or objectives. On the contrary: given the different structures, the approaches need to be different to achieve the same objective. Thus, I would strongly argue that central banks around the world are united in purpose. As I indicated before, the remarks I just made on the ECB’s response to the crisis did not contain any message concerning future monetary policy, and should not be interpreted as containing any such message.