For this part, I will refer back to work conducted by the Basel Committee on Payment and Settlement Systems (CPSS) in 2010 when it examined the extent to which the market infrastructure for repos added to the uncertainty or instability evident in some repo markets. I will take up two issues identified in the related report published by the CPSS 2 and which can be considered relevant for the smooth functioning of euro money markets, i.e. the role of market infrastructures in providing adequate protection against counterparty risk as well as the efficient use of collateral. In so doing, I will also discuss some tensions which have emerged recently relating to a particular development at market infrastructure level, where it is important to quickly address the underlying issues in order to move forward. 1. Secured and unsecured money markets: developments in the euro area  Well-functioning money markets are an essential component of the financial system. When money markets do not function, financial stability and the transmission of monetary policy are at risk, with potentially severe adverse consequences for the real economy. Deep and liquid money markets insure banks against liquidity risk, a risk that arises naturally in banking, where maturity mismatch is the nature of the business. Unsecured money markets exert a useful disciplinary effect on banks. Money markets also are the starting point for the redistribution of the liquidity provided by central banks and hence the starting point for the transmission of monetary policy.
This combination – a more robust and resilient LIBOR for transactions that require a reference rate with a bank credit risk component and the development of an alternative reference rate for transactions like interest rate derivatives that don’t – will strengthen our financial system and help undo some of the damage caused by earlier transgressions. But this is only a necessary and not a sufficient set of conditions. To achieve the outcome desired, financial institutions also need to have in place the appropriate incentives and controls. Thank you for your attention. I would be happy to take a few questions. BIS central bankers’ speeches  7