2 According to this theory, the pass-through of changes in monetary policy interest rates to the real sector of the economy is influenced by banks’ ability to provide credit to firms. This applies, in particular, to banks with less liquid balance sheets, often the smaller banks. 3 With a bank lending channel, the effects of monetary tightening on the supply of credit becomes more pronounced. The European banking sector has undergone a phase of some structural changes over the past years. In particular, as in other parts of the world, the European market for structured financial products, such as asset-backed securities or Collateralized Debt Obligations, has grown rapidly over the last decade. For instance, the quarterly issuance of euro-denominated asset-backed securities increased from just under € billion at the beginning of the present decade to above € billion in the second quarter of this year. 4 These developments potentially influence banks’ ability to grant credit. 5 Such changes are important for the conduct of monetary policy because, first, they affect monetary analysis (one of the pillars of the ECB’s monetary policy strategy), and second, because they are likely to affect the monetary transmission mechanism. On the one hand, increased securitisation is expected to weaken the effects of the bank lending channel by dampening the effect of monetary tightening on the supply of credit. Indeed, some evidence points to the fact that the supply of loans is positively affected by securitisation.
The continuation of the market turmoil does not allow me to talk to you with the benefit of detachment and the comfort of an ex-post assessment. However, I should like to take advantage of the occasion to share with you some considerations on the ECB’s response to the market turmoil drawing on the experience of the past year. 1  I am very grateful to Cornelia Holthausen for her valuable contributions. BIS Review 116/2008  1  2. The separation between monetary policy formulation and its implementation  Central bankers have, naturally, eyed the developments of the past year of financial turmoil – and, particularly, their recent intensification – with great concern, as they have the potential to influence adversely the ability of central banks to steer monetary policy rates, affect the transmission mechanism of monetary policy and, more generally, may pose a threat to financial stability. Once the credit concerns that had built up in the sub-prime mortgage market segment started to affect interest rates and traded volumes in the euro area money market, the ECB responded to these highly unusual market events by timely and forcefully adjusting its liquidity policy. I will not deal with the specificities of the ECB’s liquidity management over the past year – this will be carried out by the ECB staff in tomorrow’s session on “The Experience with Crisis Management” – but I would like to stress one fundamental principle underlying our response to the turmoil: “the separation principle”.