Guidance that provides clarity around both short-term interest rates and the balance sheet might help to anchor interest rate expectations—for example by indicating while purchases continue that the central bank intends to maintain overnight interest rates at low levels even after the completion of asset purchases.38 Lesson 6: Focus on one tool during normalization Uncertainty associated with managing multiple tools and the degree of substitutability between them poses possible challenges in removing policy accommodation after a zero lower bound episode, as the central bank switches from conducting policy with one lever to another. It therefore seems prudent to take a gradual approach to normalization, emphasizing one tool at a time. The Fed’s adopted normalization approach has thus far been an effective one. Starting to raise rates first, and waiting to start reducing the balance sheet until normalization in the level of overnight rates is well underway, has helped to ensure that the economic recovery is sufficiently advanced before making changes to the balance sheet.39 This strategy has reduced the likelihood that an unexpected adverse shock to the economy not long after the start of policy tightening would have necessitated a return to the zero lower bound on the federal funds rate and 7 / 13  BIS central bankers' speeches  potentially a reversal in balance sheet normalization.
Their relationships with sponsor banks are sometimes very ambiguous. There may be a gap between the legal commitments taken by the banks through liquidity support and credit enhancements, and the “true” level of responsibility they felt obliged to take to protect their reputation. This conjunction of complexity and fragility may have been too much for the system to bear. So it is worth to pause and ask ourselves whether we can eliminate those vulnerabilities and still keep the benefits associated with securitization, especially in terms of financial innovation. One good starting point is to look at the economic and financial rationale for securitization. Securitization is meant to perform two functions: the first, and most "advertised" in recent years, is to allocate and distribute risks, hopefully to those agents and investors best equipped and most willing – to carry it. The "slicing and tranching" process allowed banks to offload credit risk from their balance sheets and transfer it to other financial investors. But, historically, securitization is borne out of the more simple desire to shortcut banking intermediation by using markets to directly match the needs of lenders and borrowers. Since both have different liquidity preferences, this usually involves the issuance of tradable – i.e. liquid-securities which can be sold to the ultimate investors. Thus, a well functioning securitized system would meet two characteristics: (1) allow for a permanent reallocation of risk between market participants according to their preferences, expectations and risk aversion; and (2) make liquidity (market liquidity) permanently available throughout the system.