In a nutshell, during this first phase of the crisis, the Eurosystem (1) more flexibly used its open market operations by changing the time-path of liquidity provision and employing fine-tuning operations, (2) lengthened the maturity structure of its open market operations (for instance, operations with a maturity of six months were introduced, whereas the maximum length had been three months before the crisis), and (3) coordinated with other central banks around the world to provide US Dollar funding.4 The failure of Lehman Brothers in September 2008 and the subsequent very severe financial market tensions led the Eurosystem to adopt further measures. Official interest rates were cut by 325 basis points in just a few months to the then-historically low level of 1 per cent by March 2009. Open market operations were conducted as tenders with a fixed rate and full allotment. This implied that the ECB no longer controlled the aggregate supply of liquidity to the banking sector, but that the aggregate demand by banks, subject to individual banks’ availability of adequate collateral, determined total liquidity provision. As a consequence, the Eurosystem’s balance sheet increased, and short-term money market interest rates dropped to levels close to the deposit facility rate. Moreover, the ECB further widened the set of eligible collateral. Finally, and importantly, the ECB introduced a limited number of open market operations with maturities of one year (three such operations were conducted in 2009). The objectives behind this second wave of measures differed from the first wave.
Removing barriers is one thing and if, for example, investment in green assets is being held back by excessively backward-looking forms of measurement of risk, then that is something we should change. But it is a fundamental pillar of the prudential regime that it be risk-based: disregarding the risk in individual investments is a recipe for an under-capitalized financial system that would not be a robust or sustainable source of investment. For example, we should make sure that we and firms have the best possible understanding of climate exposures, in order to make sure that firms can make the transition to net zero safely, and we should take account of this in capital where the evidence supports it. But the wider economic, environmental, and social benefits of investment in assets to support transition are in my view better recognised using other tools of public policy. Enhancing accountability Nonetheless, although I do not believe we will suddenly go rogue if given more rule-making powers I absolutely recognise the need for enhanced accountability arrangements to Parliament if our role expands somewhat as a result of Brexit. I hope you recognise that we already make policy in a transparent, engaged and consultative manner, encouraging input from stakeholders including industry rather than leaping straight to the solution. But to me it seems natural that if our rule-making role were expanded then Parliament might choose to expand the amount of time it spends examining our regulations.