Banks severely limited the maturity, the scale and the number of counterparties to whom they would lend. This liquidity freeze further deteriorated after the bankruptcy of Lehman in September 2008. Central banks intervened massively in order to tame the liquidity crisis and prevent its spill over to the real economy. This intervention took various forms across countries, reflecting the specificity local financial markets. In the Euro area financial intermediation occurs mainly through the banking system. Most of our actions, therefore, aimed at providing banks with sufficient liquidity through repo operations to ensure that the flow of credit to the economy would not be severely disrupted. We have been fortunate to enter the crisis with a very appropriate set of tools. From the outset, our operational framework was based on a very broad list of eligible counterparties and collateral. So, we could adjust to the shocks in money and credit markets without creating new facilities, with the small exceptions of the covered bonds and, more recently, government bonds purchases. Doing so, we have been able to maintain a clear separation between monetary policy and liquidity provision. A major step was taken in October 2008 when we moved to a regime called in our jargon “full allotment fixed rate”, which basically means that banks were given unlimited access to liquidity at the prevailing policy rate. Over the course of the crisis, we made several downward adjustments to that policy rate. But we never committed to any specific path or trend.
The development of securitisation has spurred the demand for new types of instruments. This demand led the financial system to generate new assets even at the cost of extending credit to ever riskier sub-prime borrowers. This, for a time, helped sustain a rapid increase of real estate prices which in turn stimulated the growth of mortgages. BIS Review 76/2010  1  The main causes of the crisis therefore lie in the growing “real” imbalances and the uncontrolled development of financial innovations. Overall, these combined evolutions led to a generalized increase in leverage and financial fragility. Against this background, it is quite unlikely that too accommodative monetary policies played a central role in the crisis. Some analysts have pointed out to what they see as an “asymmetric response” by monetary authorities to asset price increases: Central Banks would not lean against asset price bubbles, but were prepared to clean the consequences after they burst. However, we need to ask ourselves whether the unusually rapid credit growth in the years preceding the crisis should not rather have called for complementary policy actions on the supervision side. Some attempts were made in the Eurosystem. In particular, the Bank of Spain enforced dynamic provisioning to curb domestic credit expansion. But the crisis hit globally nevertheless and it raises several challenges for authorities in charge of macroeconomic policies. II –Managing the crisis Starting in august 2007, Central Banks were confronted with major and unprecedented tensions. Increasing uncertainty led to liquidity hoarding by financial institutions.