When rumours about some European banks’ exposure to the US subprime market in August 2007 strongly affected money market interest rates and trading volumes within just a few hours, the ECB reacted by providing liquidity to the banking sector on a short-term basis – first overnight, then for slightly longer maturities. This served to ensure that solvent banks would obtain the liquidity that was disappearing from other sources. The first overnight provision of liquidity by the ECB of almost € 100 billion was demand-driven and revealed the  3  See Allen, F, Chui, M., and A. Maddaloni, A., 2004. “Financial Systems in Europe, the U.S.A. and Asia.” Oxford Review of Economic Policy 20(4):490–508. BIS central bankers’ speeches  3  high uncertainty within the banking sector on the ability to obtain funding from private sources. In general, during the first year of the crisis, there was a high degree of uncertainty on individual exposures, but not yet a very strong perception of more severe problems in the banking sector as a whole. Central bank liquidity provision thus aimed at stabilising interest rates, and ensured that temporary liquidity problems of banks would not create problems for bank solvency. The Eurosystem was able to deal with these tensions by only slightly altering its operations under the standard operational framework. This was due to the fact that the number of counterparties to monetary policy operations has historically been very large in the euro area, and because the standard framework offers quite some flexibility.
Lending rates for small and medium-sized enterprises, which provide two-thirds of total private sector employment in the euro area, have declined by over 180 basis points. The sharp reduction in bank lending rates has been accompanied by easier access to funding, as recent ECB surveys on bank lending and access to finance have shown. But it is not just lending rates that are more favourable. Bank lending volumes have also been gradually recovering since early 2014. Annual growth in credit to euro area households increased in January to 2.2% and growth in credit to businesses remained at 2.3% – the highest growth rates in more than four years. Market-based funding conditions, too, have improved significantly in response to the corporate sector purchase programme launched in June 2016. While monetary policy has been the mainstay of the recovery, there are other potential sources of macroeconomic stabilisation. Given the heterogeneity of countries across the euro area, the lack of synchronisation of business cycles, and the absence of fiscal transfers between Member States, capital markets play an important role in mitigating the income effects of region-specific shocks. For example, evidence suggests that capital markets and credit markets together help smooth around two-thirds of a shock to regional GDP in the United States, dwarfing the 13% contribution of federal transfers. In comparison, the overall contribution of markets to risk sharing in the euro area has, on average, been limited.