BIS Review 16/2009  3  Five different sets of measures have been implemented: First, central banks have supplied liquidity to banks on a much larger scale than usual and providing loans with longer maturities. Central banks are also providing foreign currency loans to their banks. Second, key rates have been aggressively cut. The US entered the downturn first and had already reduced the key rate in early autumn 2007. And as the crisis developed, the Federal Reserve continued to lower its key rate. Here in Europe, key rates rose up to summer 2008 before being lowered substantially from October. Third, credit policy instruments have been introduced. Several countries are guaranteeing loans to banks. The Federal Reserve is buying mortgage-backed securities, asset-backed securities collateralised by student loans, credit card loans and loans to small businesses, as well as commercial paper issued directly by large businesses, a measure the central banks in Japan and the UK also intend to implement. The UK government has announced that they will guarantee loans to small and medium-sized firms. 4  BIS Review 16/2009  Fourth, the authorities in a number of countries felt compelled to supply risk capital to banks. Some governments have assumed ownership of financial institutions. In the UK, the government is now a majority stakeholder in the Royal Bank of Scotland and owns over 40 per cent of Lloyds. In Germany, the government is increasing its stake in Commerzbank, which is acquiring Dresdner Bank.
The flow of liquidity has improved slightly, and interbank rates have fallen. In the US and Europe, these rates were more than 2 percentage points above the key rate in October last year, but now the gap has been halved. As a result, the low rates set by central banks are having a greater effect. In the US, mortgages and corporate loans have become cheaper after the Federal Reserve began to purchase bonds and commercial paper issued by mortgage banks and firms. In Germany, Sweden and Denmark, mortgage rates have decreased markedly. And in Norway, borrowing rates have fallen and credit to homebuyers is flowing again. Equity and commodity prices are still fluctuating widely, but the decline is no longer steep. BIS Review 16/2009  9  Lower key rates, higher public expenditure and reduced taxes will push up demand for goods and services, gradually stabilising output and employment and preventing inflation from becoming too low. There are also strong self-regulating mechanisms in market economies that can easily be underestimated when times are at their bleakest. Corporate profitability is being squeezed, but the rise in unemployment will result in lower wage growth, which will curb the impact on earnings. Investment is falling sharply, but there will in time be a need for new houses and commercial buildings and to replace obsolete machinery. Households all over the world are now increasing their saving and reducing debt. When debt eventually reaches a sustainable level, consumption will pick up.