Compared with standard practices, non-standard instruments of policy are arcane tools which are difficult to describe and interpret. Today I will try to illustrate how the ECB has fulfilled its mandate in an environment in which our traditional instruments have been tested to their limits. As you know, this situation led us – and many other major central banks – to vastly expand our toolkit of policy initiatives. Communication and the accountability of policies involving non-standard measures need to be intensified during a crisis such as the current one. In this vein, I will explain how to interpret the latest decision to conduct outright monetary transactions (OMTs) in secondary markets for sovereign bonds. I will conclude with some remarks on the democratic accountability of the central bank in these testing conditions. Mandate and strategy of the central bank A central bank receives legitimacy when it is assigned a clear mandate by the people in its jurisdiction. A mandate is a simple statement of duty. The Treaty on the Functioning of the European Union, for example, assigns the ECB the pursuit of a “primary objective of price stability over the medium term”. This formulation establishes – at nothing less than international Treaty level – a hierarchy of priorities. First, the ECB has to ensure that price stability is accomplished over the medium term. Price stability is, by the way, the most important contribution that monetary policy can make to achieving high levels of economic activity and employment.
Secondly, Estonia has avoided volatile short-term capital flows due to strong fiscal stance. While these "soft" policy principles support crisis prevention by providing relatively stable and transparent environment, the resilience of the system depends ultimately on the actions of market participants themselves. The task of the authorities is to provide an adequate regulatory framework and to undertake maximum effort for the supervision of the implementation of these regulations. There is another interesting, albeit still debated issue – to what extent should the supervisors rely on banks' internal risk control models and ratings. Estonian banking supervisors have taken relatively forward-looking approach in that respect by increasingly relying on risk-based approach of supervision. At the same time, and having in mind rapidly developing economy and currency board arrangement, we believe that our banking system should have also robust liquidity buffers as well as sufficient capital to withstand the fluctuation of asset prices. Therefore, we have set relatively high reserve requirement half of what the banks can meet by the holdings of high-rated foreign assets. We will further adjust the system of reserve requirements in the future as monetary policy framework will converge towards the eurosystem principles. Finally, I would like to stress that as an essential element of the safety net, the Deposit Insurance Fund is functioning well and has proved its usefulness already two years ago. The immediate task for Estonian authorities is to introduce the investor protection scheme for the other parts of the financial system.