In parallel, a “run on repo”, triggered by increased haircuts on collateral to guard against counterparty risk, pushed the shadow banking sectors in advanced economies to collapse. In the euro area, the sovereign debt crisis compounded these problems, causing some markets to splinter along national lines. Global reforms address the fault lines that caused this fiasco. New global standards for liquidity regulation are now in place including the Liquidity Coverage Ratio and Net Stable Funding Ratio. Bank capital standards now take into account exposures to shadow banks, including step-in risk, and through-the-cycle margining prevents Minsky cycles in secured lending. 1 2  See https://www.fsb.org/wp-content/uploads/R191118-1-1.pdf. See https://www.esma.europa.eu/sites/default/files/library/esma50_157_2025_asr_derivatives.pdf. 3  All speeches are available online at www.bankofengland.co.uk/news/speeches  3  These reforms are transforming banks’ approach to liquidity management and building the resilience of the system as a whole. For example, liquid assets – relative to liabilities that can readily run – are tenfold higher than before the crisis. However, the recent volatility in US dollar repo markets suggest there are still frictions that need to be addressed. Contrary to expectations, banks did not step into the market to lend cash, viewing the profit opportunity to be insufficient to offset the impact on perceived regulatory liquidity requirements. The Federal Reserve’s open market operations have since calmed the market, but term repo rates remain elevated, as dealers are pricing in a higher likelihood of similar spikes in future.
We at the ECB and other central banks have reacted swiftly, flexibly and decisively. The ECB took the lead with some exceptional decisions as early as 9 August 2007. We have, since then, modified our operational framework and used an exceptional set of non-standard policy tools. These tools, combined with the bold action taken by euro area governments over recent months, have played an essential role in preventing a collapse of the financial system and in bolstering confidence. I would like to emphasise that despite this upheaval and our exceptional measures, our objective remains unchanged: to preserve price stability over the medium term, and that’s what guides our policy. In so doing, we support the conditions for financial and economic stability. The crisis has not changed this objective. Interest rates As regards interest rates, the ECB’s Governing Council has reacted promptly and decisively to the intensification and broadening of the global financial turbulence. We have lowered our  2  BIS Review 66/2009  key interest rate by 325 basis points since October 2008. This is the largest cut ever decided over such a short period in Europe. These moves were fully in line with our strategy. The upside risks to price stability have indeed receded considerably over that period due to the sharp fall in oil and other commodity prices, and the abrupt slowdown in economic activity. As price stability is the needle in our compass, we took account of the easing of inflationary pressures and lowered interest rates.