In the case of the Eurosystem, the ECB balance sheet accounted for 12% of euro area GDP before the crisis and now stands at approximately 40%, around € trillion. Supervisory policy, for its part, has had to face the challenge of macrofinancial instability in a context of highly interconnected markets at the global level. In this area, the response has been three-pronged. First, the strengthening of microprudential regulation, with the new Basel III Accord, which includes greater capital requirements and a stricter framework for systemically important financial institutions. Second, the development of a new instrument, macroprudential policy, which addresses systemic risk and the procyclical behaviour of the financial system as a whole. And, third, the greater international coordination of regulation, which is necessary given the reality of globalised financial markets. Notable in terms of coordination has been the creation of the Financial Stability Board and, in the case of the European Union, the activation of the Banking Union, beginning with the SSM and the Single Resolution Mechanism. The new monetary policy I shall now turn to the challenges central banks face. The first is, evidently, identifying what is understood by the “new normal”. One question on which economic policy discussions are focusing is whether the advanced economies are in a new situation of secular stagnation, a “new normal” characterised by low growth, low inflation and low interest rates. We are seeing how, despite lower unemployment rates and the closing of the gap between potential and real output, inflation rates remain persistently low.
PEPP – a flexible instrument to fight the crisis within our mandate I would now like to take a closer look at the legality of our most far-reaching and exceptional monetary policy decision, the launch of the PEPP. Let me first look at its features. The PEPP was established to act first as a backstop to potential market disruption. In short, it 1/5  BIS central bankers' speeches  has had a stabilising effect to counteract the market fragmentation that was unwarranted on the basis of the underlying economic fundamentals, and to safeguard the transmission mechanism. The PEPP also reinforces the ECB’s monetary policy stance. In so doing, the PEPP is a direct and targeted response to an “extraordinary and acute economic crisis”1 and aims to ensure the ECB’s ability to fulfil its mandate under the circumstances. Notably however, “Due to these exceptional, fast-evolving…circumstances, the PEPP requires a high degree of flexibility in its design and implementation” as set out in the Decision implementing the PEPP.2 Purchases under the PEPP continue to be guided by the capital key of the national central banks as for the APP. But the PEPP allows for fluctuations in the distribution of purchases over time, across asset classes and among jurisdictions. This flexibility has allowed us to effectively stave off risks to the smooth transmission of monetary policy. In view of the pandemic’s exceptional nature, we decided not to apply to the PEPP the same selfimposed public purchase limits that apply to the sovereign purchases under the APP.