Introduction

The ECB's monetary policy response to the crisis is displaying its effects, and the recovery of the euro area has evolved since mid-2014. There is no simple way to recount the ECB's measures during such a prolonged and mutating crisis. This paper explains the events as they unfolded against the backdrop of a changing institutional framework, and governance reforms. No encompassing study of such an exceptional period exists. The architecture of the European Economic and Monetary Union has also been changing. We also report several studies of the monetary measures during the prolonged crisis, as well as diverse criticisms of the ECB actions.

The crisis started as a Financial Turmoil in August 2007, followed by the Global Financial Crisis in September 2008, and the Great Recession in 2009-2010. These events exacerbated several imbalances that had already been emerging in the euro area not long after the launch of the euro. The financial governance could not deter them and financial market discipline was weak. Flaws in EMU's architecture became apparent. Then, in early 2010 the Sovereign Debt Crisis of the euro area was triggered by unsustainable fiscal positions and overleveraged banks in diverse countries. Financial backstops for either sovereigns or banks lacked. At the peak of this phase, there was financial fragmentation and a disruption in monetary transmission.

During the mutating crisis, the policy toolkit of the ECB has expanded to also encompass: the provision of liquidity on demand at a fixed rate and with full allotment since October 2008; a series of longer-term refinancing operations (LTROs) providing liquidity to banks against a set of collateral that was broadened; the Outright Monetary Transactions (OMTs) programme; enhanced monetary policy communication through forward guidance (on both policy rates and asset purchases); a large-scale private and public asset purchase programme (CBPP, SMP and APP); and the use of negative interest rates. In the euro area, banks play a predominant role in the financial system. Thus, a feature of the ECB's responses is that they have supported banks' credit provision throughout the crisis.

The effects of the ECB's monetary policy responses to the prolonged crisis have been showing through in the euro area's recovery since mid-2014. Monetary policy has been accompanied by exceptional policy responses by national governments, strengthening of European institutions, building a crisis management framework with fiscal backstops, launching the single supervisory mechanism (SSM), and various other reforms. These milestones are also noted in the chronology.

Several criticisms of the euro, the ECB and the single monetary policy have been put forward in recent years. In fact, such criticisms started even before the launch of the euro. For example, Paul Krugman and Joe Feldstein argued that the euro area was not an Optimum Currency Area and a crisis was a matter of time. Stiglitz (2016) revisits these arguments in a recent book. (1) Yet others questioned the fiscal dimension of exceptional monetary policies as well as swelling TARGET system (Sinn 2011, 2012; Sinn and Wollmershauser 2011), the handling of sovereign crisis by "Troikas" (also Stiglitz 2016), the "too low interest rates, for too long" like from BIS researchers (Borio et al. 2016, 2017).

This article is organised as follows. "Financial Turmoil: August 2007 to September 2008" section describes the financial turmoil that marked the beginning of the crisis in August 2007. "The Global Financial Crisis and the Great Recession: September 2008 to May 2010" section reviews the global financial crisis that started in September 2008 and the Great Recession of 2009-2010. "Euro Area Sovereign Debt Crisis: May 2010 to 2nd Half 2013" section covers the euro area sovereign debt crisis that began in early 2010. "The Low Inflation Phase: Starting in 2nd Half of 2013" section discusses the policy responses during the low inflation phase of the crisis starting in the second half of 2013. "A Recap of the Policy Responses to the Crisis" section groups the non-standard monetary policy measures into four main clusters. "Final Remarks" section offers some final remarks. The paper provides only a selective account until June 2018.

Financial Turmoil: August 2007 to September 2008

The ECB's monetary policy strategy rapidly unfolded after the launch of the euro. During the first decade, price stability was broadly achieved, despite various shocks. These included the burst of the dot-com bubble, sharp exchange rate fluctuations and the September 11 attack. (2) Overall, the unemployment rate in the euro area declined and trade in goods and services deepened. Money markets and sovereign bond markets rapidly integrated (see ECB 2008). Cross-border bank activity increased, but it consisted principally in short-term financial flows to the euro area "periphery" that turned into a credit-boom (Constancio 2013). The removal of cross-currency-matching restrictions enabled a rapid increase in cross-country holdings of public debt. Instead, integration was slow and uneven across other financial segments (e.g. equities and insurances). In hindsight, financial market discipline was inadequate. Moreover, EMU's architecture remained incomplete, control mechanisms were weak, and euro area governance was unable to contain persistent real imbalances and spur national reforms where needed (Brunnermeier 2009; Mackowiak et al. 2009).

Initially, the epicentre of the financial crisis was in the USA, not Europe. In fact, financial turbulences started in August 2007, when delinquencies on sub-prime financial products surged in the USA, impeding the correct pricing of the underlying assets. Financial market tensions then spilled over from the USA into Europe and beyond, setting in motion what was principally a liquidity crisis. In the money market, the spread between the unsecured interest rate (i.e. the EURIBOR) and the overnight index swap (OIS) rates started widening at all maturities (Fig. 1).

As a result of the turmoil, market participants grew increasingly concerned about access to market liquidity and possible non-repayment by counterparties. The ECB responded quickly by offering more frequent overnight fine-tuning operations to banks. These were both liquidity-providing and liquidity-absorbing and were offered in addition to the regular fine-tuning operation on the last day of the reserve maintenance period. In practice, the ECB facilitated the frontloading of the fulfilment of reserve requirements while steering very short-term interest rates closer to the MRO rate.

This approach was successful, and money market spreads briefly decreased in the latter part of 2007. The ECB reassured market participants affected by the financial turmoil by providing them with continued access to liquidity through more frequent refinancing operations. On average, balanced liquidity conditions were maintained over the reserve maintenance periods. (3)

However, money market calm was short-lived and longer-term repurchase agreements were soon required. When tensions re-emerged at the end of 2007, the ECB launched several supplementary three-month LTROs. Then, in March 2008, it introduced six-month LTROs. Liquidity provision in US dollars became available through a swap agreement with the Fed.

The euro area economy was still growing at a robust pace, and labour market conditions tightened. Inflation climbed steadily above the ECB's definition of price stability, reaching 4% on the back of a steep increase in global energy prices (Fig. 2). However, inflation expectations still remained well anchored. In July 2008, the Governing Council raised the key ECB interest rates by 25 basis points to counter risks of second-round effects stemming from higher energy and food prices (Fig. 3).

To sum up, the instruments of the ECB's monetary policy framework enabled a quick response to the Financial Turmoil. During most of this phase, policy rates were kept steady (until July 2008), but longer maturities were offered at refinancing operations. There was almost no excess liquidity, and net recourse to the standing facilities (the difference between the amounts in the MLF and the deposit facility) was relatively small. Policy responses at the European level were absent.

The Global Financial Crisis and the Great Recession: September 2008 to May 2010

After Lehman Brothers went bankrupt in September 2008, the financial crisis intensified and spread rapidly around the world becoming a global financial crisis. Solvency concerns rose steeply as several financial institution were perceived as vulnerable. The business model of these banks--relying on short-term funding, low capitalisation and high leverage ratios, and securitisation--was hit hard. In the euro area, whose economy is heavily dependent on banks, this imperilled the transmission of monetary policy impulses.

Cuts in interest rates were coordinated among major central banks--the ECB cut its three reference rates by a cumulative 125 basis points by the end of 2008. Market illiquidity, combined with concerns about the insolvency of other large US financial institutions, fuelled a confidence crisis. The prevailing fear was that, despite the interventions of central banks, available liquidity might not be sufficient to meet banks' liquidity needs (Cassola et al. 2011). This prompted a breakdown of all segments of the euro area money market by late September 2008 (Heider et al. 2015; Durre and Smets 2014).

The hoarding of liquidity gained pace. The challenge for the ECB was to foster an even transmission of monetary policy impulses across countries and banks, while helping fend off risks of a financial meltdown. It had to secure liquidity for money market participants that needed it, and counter a credit crunch. In October 2008, the ECB decided to offer unlimited liquidity at a fixed rate against collateral: a fixed rate full allotment tender procedures (FRFA). This was applied to all refinancing operations. The FRFA marked a turning point for the ECB's reverse lending operations and generated a substantial increase in overall excess liquidity, which was demand driven due to the crisis. Later on, with the APP, the increase in excess liquidity was instead supply driven.

In October 2008, the European Commission eased the EU's State Aid Rules of the European Union. This enabled several European governments to reassure markets and intensify direct measures of support for their domestic banking systems. Despite these policy responses, tensions spilled over from the financial sector into the real economy, leading to the Great Recession. It hit the USA from the last quarter of 2007 until first quarter of 2009, and the euro area a few months later. Lehman Brothers' collapse hit trade financing, and global trade plummeted by one-third in the fourth quarter of 2008. Global economic confidence plunged, driving down production, investment and consumption.

Within a few months, the euro area had entered its own severe recession, which lasted from the second quarter of 2008 until the second quarter of 2009. In response, numerous policy measures were deployed across Europe, such as a fiscal loosening via automatic stabilisers, as well as bank rescues in some countries.

Then, in November 2008, the European Commission formulated a 200 billion [euro] concerted European Economic Recovery Plan to boost demand and stimulate confidence across the EU. The Stability and Growth Pact was revised and softened, and the Macroeconomic Imbalances Procedures (MIP) were launched.

The collapse in money market activity and soaring spreads prevented rate cuts from being passed through to banks and the economy. In addition to the FRFA, the ECB launched a series of standard and non-standard monetary policy measures: Policy rates--namely, the fixed rate on the MROs--were cut sequentially from 4.25% on the eve of Lehman Brothers' bankruptcy (on 15 September 2008), eventually reaching 1.00% (on 13 May 2009). The interest rate corridor defined by the standing facilities was reduced to 100 basis points between October 2008 and January 2009; liquidity in certain foreign currencies continued to be provided by the ECB, and international coordination with other major central banks was strengthened; and eligibility criteria for collateral were temporarily extended.

The "separation principle" was also formulated at this time. In a regime of FRFA, banks could borrow the liquidity that they needed, but only against adequate collateral subject to varying haircuts and only if they were financially sound. This switch marked the beginning of the ECB's non-standard monetary policy measures.

Thus, central bank intermediation stepped in as a substitute for impaired private intermediation. At the same time, safeguards were observed. Eligibility for Eurosystem monetary policy operations was restricted to credit institutions supervised according to harmonised EU, or equivalent, standards. The national central bank could provide emergency liquidity assistance (ELA) on a temporary basis, provided the financial institution was deemed solvent and could provide adequate collateral, and as long as the ECB's Governing Council did not object (see Linzert and Smets 2015).

The ECB acquired a "market functioning support role" by carrying out the first outright purchase programme. Securitised activities were hit during the crisis. Most transactions in structured financial instruments, such as asset-backed securities, certificates of deposit, commercial papers and covered bonds, also ceased. There was a general mistrust about the quality of underlying assets. Moreover, market activity in the sovereign bond markets of stressed countries froze up. To address these tensions, in July 2009 the ECB launched a 60 billion [euro] covered bond purchase programme (CBPP) to be implemented over the following 12 months. The CBPP was the first outright purchase programme carried out by the ECB. Its aim was to revive this funding channel for banks and support their credit intermediation. This would, in turn, alleviate the impaired monetary transmission.

The combination of these standard and non-standard monetary policy responses had a beneficial impact. It succeeded in reducing interest rate spreads between the unsecured and secured segments of the money market. In September 2009, spreads reached their lowest level since the start of the crisis in August 2007, bringing some short-lived improvements in euro area money market conditions. This window of opportunity was used to promote diverse institutional reforms at the European level.

Plans for a new European System of Financial Supervision (EFSF) were launched in June 2009, becoming effective in January 2011. The first pillar of the EFSF is represented by the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA) and the European Securities and Markets Authority (ESMA). The second pillar of the EFSF is dedicated to macroprudential supervision and centred on the European Systemic Risk Board (ESRB), which has a mandate to identify systemic risks. The European Council of June 2009 also recommended establishing a "European Single Rulebook" applicable to all financial institutions in the Single Market. (4)

To sum up, the combination of exceptional monetary and non-monetary policies facilitated an initial economic and financial recovery from the Great Recession. Yet, despite the impact of these policy responses and a strengthened EU institutional framework, new challenges were looming. Attention started shifting to debt overhangs. Fiscal fundamentals rapidly weakened in several euro area countries. The global financial crisis and the Great Recession exacerbated euro area imbalances and put substantial pressure on several euro area governments (Mongelli 2013). Thus, the market began questioning the sustainability of public finances in a growing number of euro area countries due to rising deficits and swelling public debt.

Euro Area Sovereign Debt Crisis: May 2010 to 2nd Half 2013

Greece became a focal point of the financial crisis and contagion spread to other vulnerable countries following the negative news about Greece's public finances. Market concerns regarding the sustainability of the Greek public debt were amplified by its large-scale revisions in fiscal statistics. In April 2010, faced with a lack of market access, the Greek government, the European Commission and the IMF signed a Memorandum of Understanding on a programme to deal with the country's fiscal, structural and macroeconomic imbalances. The programme was funded via bilateral loans provided by the euro area Member States and then EU/EFSF/IMF support which was conditional on compliance with an agreed adjustment programme. On 10 May 2010, the 10-year yield spread between Greek and German government bonds reached the then-historical high of around 1000 basis points.

With each euro area adjustment programme, starting with Greece, the ECB acted in liaison with the European Commission and the IMF to assess the fulfilment of the conditions attached to the financial assistance programme. This cooperation became known as "troika". At that time, there was no framework in place to negotiate and monitor adjustment programmes. "Member states then asked the IMF, the Commission and the ECB to contribute with their expertise at the time when help was most needed. [] The ECB is subject to criticism for having interfered too much in matters of national sovereignty". (5) In recent years, however, the lack of financial backstops for sovereigns and banks has been addressed. Later on, in the paper we describe the creation of the permanent European Stability Mechanism and the launch of the Single Supervisory Mechanism and a Single Resolution Mechanism for banks.

Concerns regarding the sustainability of public finances also arose in Ireland, Portugal and, later, Spain and Italy. Sovereign bond spreads for several euro area countries soared (see Fig. 4). Financial contagion had a negative impact on market liquidity and the market for new and existing sovereign debt. For example, Ang and Longstaff (2013) compare credit default swap rates in the euro area with those across individual states in the USA and find evidence of a larger common factor.

Negative feedback loops between vulnerable banks, indebted sovereigns and weak economies took hold in several countries (Shambaugh et al. 2012). After an already prolonged crisis, a sequence of sovereign rating downgrades was accompanied almost simultaneously by downgrades of most marketable securities issued by financial institutions headquartered in countries affected by the sovereign debt crisis. This, in turn, led to further downgrades across a broad range of assets in the private securities markets. The decreasing prices of these assets weakened the balance sheets of financial institutions, while their recapitalisation through equity issuance and/or government support appeared less and less likely (given the fiscal consolidation needed in most countries to restore confidence in sovereign debt markets).

In May 2010, the ECB expanded its monetary policy outright portfolio through secondary market purchases from credit institutions in euro area public and private debt securities markets under the Securities Markets Programme (SMP). The SMP was introduced after Greece had received the first bilateral support and then EU/EFSF/IMF conditional support: following the programme agreement. Although the SMP was not subject to explicit conditionally, the ECB (2010) took note of the commitments taken by the countries benefitting from the SMP purchases to accelerate fiscal consolidation and ensure the sustainability of their public finances.

The SMP ran until the end of December 2012 and reached an outstanding nominal amount of around 218 billion [euro]. The extra liquidity resulting from these purchases was sterilised by offering banks fixed-term deposits with a 1-week maturity on a weekly basis. Bonds purchased under the SMP were retained until maturity.

How effective was the SMP? While estimates vary, the evidence is that SMP interventions countered upward pressures on spreads and lowered the volatility of sovereign yields for most stressed countries. The exception was Greece due to its long-term fiscal sustainability issues (see Ghysels et al. 2017). A counterfactual exercise suggests that purchases of Italian and Spanish bonds lowered 2-year yields by 320 and 180 basis points, respectively, and 10-year yields by 230 basis points for both countries (see Eser and Schwaab 2016).

At the European level, new institutions were created as a financial backstop for sovereigns and, later, for banks. In October 2010, the leaders of France and Germany met in Deauville and publicly discussed the possibility of restructuring sovereign debt plus private sector involvement (PSI). As financial tensions escalated again and spilled over to sovereign debt markets beyond Greece, it was announced that two additional sources of financial assistance to countries--subject to conditionality--would be established: the European Financial Stabilisation Mechanism (EFSM) and the European Financial Stability Facility (EFSF). The EFSM was an intergovernmental agreement with a maximum lending capacity of 60 billion [euro].

In December 2010, the European Council agreed to create a permanent mechanism for the provision of financial assistance to countries, and thus the European Stability Mechanism (ESM) took over the tasks of the EFSF. This required some amendments to Article 136 of the Treaty on the Functioning of the European Union.

There was also a short-lived hike in interest rates. All three of the ECB's reference rates were raised by 25 basis points in April 2011 and again in July 2011, following almost 2 years of no changes. The euro area economy had grown by 0.8% in the first quarter of the year, and the economic analysis revealed some upside risks to price stability. In fact, inflation had risen to 2.6% in March 2011 (and actually reached 3% towards the end of the year). There were concerns about second-round effects in the setting of prices and wages, and a risk of inflation expectations becoming dis-anchored from the ECB's definition of price stability. With this interest rate increase, the ECB sent a signal to price-setters and social partners--that it was unwilling to accept second-round effects.

The EU's institutional framework was strengthened through various governance reforms. In order to strengthen the governance of the euro area, the "six-pack" was finalised in December 2011, which entailed a reform of the Stability and Growth Pact, minimum requirements for national fiscal frameworks and the launch of the macroeconomic imbalance procedure. A "Fiscal Compact" to promote prudent fiscal behaviour throughout the euro area was signed in March 2012 (becoming operational in January 2013). It was followed by a "two-pack" that strengthened coordination and monitoring of budgetary processes.

Meanwhile, most euro area countries started a process of fiscal consolidation. Fiscal consolidation started in 2011 and lasted until 2013. During this process of fiscal consolidation, revenue increases predominated over expenditure cuts. Approximately two-thirds of the 3.6 percentage points of potential GDP consolidation during 2011-2013 were revenue based (ECB 2017a, b).

The ECB had to counter acute financial fragmentation. The problem was that cross-border transactions within the banking system suddenly ground to a halt and funds flew out of stressed countries to national banking systems that were perceived as safer (see Constancio 2013; Altavilla and Giannone 2016).

By mid-July 2011, financial tensions intensified again. This time the driving factor was the worsening of public finances in several euro area countries and the restructuring of Greek sovereign debt. As a result, financial conditions tightened and economic confidence fell. Euro area economic activity contracted in the second half of 2011, in what is often referred to as the "double-dip recession".

Towards the end of 2011, high financial market uncertainty and banks' deleveraging contributed to a further reduction in money and credit growth. The banking system of several euro area countries was severely affected by escalating financial tensions and renewed fragmentation. This hampered funding of a significant portion of the banking sector in the euro area (which then had a knock-on effect on credit creation).

In this challenging environment, the ECB reversed the interest rate hikes of April and July 2011. Rates were cut in November and December 2011 by a total of 50 basis points. At the same time, the ECB introduced several new non-standard measures including: two LTROs of 12 months and 13 months were announced on 6 October 2011, as well as a second covered bond purchase programme (CBPP2) for an intended amount of 40 billion [euro]; and two 36-month very long-term refinancing operations (VLTROs), with the option of early repayment after 1 year, were conducted in December 2011 and February 2012, with a combined gross amount of 1.019 trillion [euro].

These VLTROs gave banks funding certainty, eased redemption of maturing bonds and helped them sustain credit lines with private customers. Moreover, on 8 December 2011, the ECB also enlarged the collateral list reduced the reserve ratio from 2 to 1%; and discontinued the fine-tuning operations carried out on the last day of each maintenance period.

These measures brought much needed financial support for banks' funding. The impact of the two VLTRO operations could be detected through a variety of indicators. First, risks of a major credit crunch in the euro area receded significantly in the first quarter of 2012, as shown by the stabilisation in the size of the balance sheets of euro area monetary financial institutions (MFIs). Second, the bank lending survey pointed to a stabilisation in the provision of credit to the economy. Third, several indicators of financial market volatility and risk premia also showed that financial markets were calmer in the first quarter of 2012 (see Kohler-Ulbrich et al. 2016).

In hindsight, the actions of the Eurosystem temporarily restored some measure of monetary policy transmission. The pass-through or monetary policy was supported by progress in fiscal consolidation, a series of EU/euro area summits, the above institutional and governance reforms, and some structural adjustments in several euro area countries. For a short interval, the negative feedback loop relented.

In early 2012, weak growth and news of fiscal slippages in several countries strained financial markets once more, and financial tensions rose again. A rise in redenomination risk premia of sovereign bond yields led again to a widening in the cost of funding for several stressed euro area countries. (6) It also meant that the proper transmission of the ECB's policy stance to the real economy was again being seriously hampered across the euro area.

On 27 June 2012, Spain requested financial support for its banking system and Cyprus requested a full adjustment programme. Two days later, on 29 June 2012, the European Council agreed to create a European banking supervision mechanism and a resolution mechanism. This was the first step towards the banking union which required a proposal by the European Commission.

On 11 July, the ECB lowered rates by 25 basis points, narrowing the corridor to 1.00%. The DFR reached 0% in July 2012 (and was then left unchanged for almost 2 years, despite gradual declines in the MRO and MLF rates). The ECB then suspended Greek bonds as collateral. (They had only been reaccepted as collateral in March 2012.)

Preserving the unity of the euro area became the defining challenge of the crisis. On 26 July 2012, ECB President Mario Draghi delivered a speech in London in which he gave the assurance that: "Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough". (7) This landmark speech is widely credited with calming markets.

Several days later, on 2 August 2012, the ECB's Governing Council announced the outright monetary transactions (OMTs). OMTs consist of purchasing sovereign bonds in secondary markets under strict conditions with the aim of "... safeguarding an appropriate monetary policy transmission and the singleness of the monetary policy". The technical framework of OMTs was announced on 6 September 2012 and, on the same day, the SMP was terminated. A necessary requirement for OMTs was strict and effective conditionality attached to an appropriate EFSF/ESM programme. Moreover, the liquidity created through OMTs would be fully sterilised and aggregate OMT holdings and their market values would be published on a weekly basis.

The impact of the OMTs announcement was immediate and sovereign bond spreads started to contract. Market participants gained confidence that stressed sovereigns could apply for financial support, satisfy the necessary conditions and enable the ECB to intervene in their secondary bond markets (see Altavilla and Giannone 2016).

In September 2012, the European Commission published a proposal for a Single Supervisory Mechanism (SSM) for banks in the euro area. The aim was to harmonise banking supervision practices and ensure that single market rules were applied consistently across banks. In December 2012, four European Presidents outlined a roadmap towards a genuine Economic and Monetary Union. One year later, on 12 September 2013, the European Parliament voted in favour of creating the SSM, with the ECB at its centre. In preparation, a comprehensive assessment of 130 significant banks' balance sheets was launched in October 2013. It was completed ahead of the SSM assuming its official supervisory role on 1 November 2014.

In the meantime, forward guidance and the need to anchor expectations acquired an ever greater importance. On 8 May 2013, the ECB lowered rates and further narrowed the interest rate corridor, meaning that room for further cuts in interest rates was increasingly limited. Then, on 4 July 2013, the ECB introduced forward guidance about the future path of key interest rates, e.g. announcing that they would remain at present or lower levels for an extended period of time. (8) The aim was to anchor policy expectations and influence the shape of the yield curve.

The ECB's forward guidance is of a qualitative nature and contingent on the outlook for price stability. There were no quantitative criteria that would trigger changes of policy rates. The stabilising effect on financial markets was apparent immediately. The level of the money market yield curve, uncertainty about future policy rates, the nervousness of financial markets and the responsiveness of short-term yields to macroeconomic news all declined immediately after the announcement (Fig. 5).

To sum up, as contagion spread from Greece to other vulnerable countries, the main challenge for the ECB was to counter acute financial fragmentation and preserve the singleness of monetary policy. Following the negative news about Greece's public finances, negative feedback loops between vulnerable banks, indebted sovereigns and weak economies took hold in several euro area countries. At the European level, new institutions were created to provide a financial backstop for sovereigns. The ECB meanwhile announced the OMT programme of sovereign bond purchases in secondary bond markets, conditional on an adjustment programme, which calmed tensions in financial markets. Upon the launch of the SSM, the ECB acquired the additional responsibility of single supervision and a shared role for financial stability in the euro area (see Smets 2014).

The Low Inflation Phase: Starting in 2nd Half of 2013

In the second half of 2013 headline inflation began to fall once more, raising fears of deflation. (9) Inflation fell from 1.5% in July-August 2013, to -0.7% in January 2015 (see Fig. 6). Inflation expectations, which up until then had remained well anchored, started to decline. Concerns of a prolonged period of low inflation grew, which led the ECB to lower rates again on 11 November 2013.

During this period, monetary policy transmission became impaired and uneven. While some lags in the transmission of monetary policy impulses are normal, in June 2014 it was observed that the bulk of the reduction in ECB key policy rates, a cumulative 125 basis points between September 2011 and June 2014, had not yet been transmitted to households and firms in stressed euro area countries. Hence, the monetary policy stance had in fact tightened in these countries, as real interest rates were subject to upward pressures induced by falling inflation. At the same time, the medium-term outlook for inflation continued worsening, while the exchange rate of the euro strengthened. Thus, there was a need to extend the range of non-standard instruments that the ECB could employ. (10)

One such measure was negative interest rates, which the ECB introduced in June 2014, before lowering rates still further in September 2014. When the DFR was brought below zero it marked the first occasion on which a major central bank had lowered a key policy rate into negative territory. With low inflation and a declining natural rate of interest, slightly negative rates were aimed at restoring the signalling capacity of the central bank by breaching the Zero Lower Bound (see Coeure 2016; Constancio 2016; Rostagno et al. 2016). Real rates adjust downward compensating for low inflation and contributing to a significant flattening of the yield curve. Inflation expectations are corrected upward with the rise in aggregate demand (see Lemke et al. 2017). Banks holding excess reserves have an incentive to increase lending to the economy.

Additional credit easing measures were also added to revive the provision of credit to the economy. The ECB announced a renewed round of credit easing with a series of targeted longer-term refinancing operations (TLTROs) fixed at the MRO rate plus 10 basis points. However, this surcharge was abolished in January 2015. The maximum maturity for the TLTROs was set to September 2018, and the initial allowance amounted to 7% of outstanding loans to the euro area non-financial private sector. The ECB sought to actively relieve credit conditions across financial markets and support the bank lending channel.

Evidence from the bidding behaviour in the TLTRO, from banks located in formerly stressed euro area countries highlights that those banks which have participated in at least one of the first four TLTROs have thereafter lowered their lending rates: they could replace more expensive unsecured debt funding.

These credit easing measures were complemented by the ECB's asset-backed securities purchase programme (ABSPP). This programme is based on purchases of simple and transparent asset-backed securities issued by the non-financial private sector, i.e. claims against the euro area non-financial private sector, whose market had shrunk during the crisis. Then, in September 2014, the ECB announced a third covered bond purchase programme (CBPP3) consisting of purchases of eurodenominated covered bonds issued by MFIs in the euro area. These programmes began to have a sizeable impact on the ECB's balance sheet (see "Final Remarks" section).

There were synergies. Ever longer reverse lending operations were reinforced by CBPPs that reduced corporate bond spreads and revitalised this market segment. These measures insured banks against the risks associated with short-term refinancing in money markets enabling them to then charge lower lending rates. Strained banks facing financing difficulties and/or high funding costs benefitted the most (see Alvarez et al. 2017; Darracq-Paries and De Santis 2015, and recent Bank Lending Survey (BLS) on ECB website).

The cumulative effect of standard and non-standard measures started to be felt, and bank lending rates fell. Between June 2014 and September 2015, bank lending rates for euro area non-financial corporations fell by approximately 80 basis points. In stressed countries, these rates fell by about 110-140 basis points, suggesting that the pass-through of the ECB's policy stance strengthened most in the countries hit hardest by the crisis. Yet, despite improved financing conditions, economic growth remained subdued, downside risks increased and inflation dynamics remained weak, with significant downside risks and even deflation. Given this mixed outcome, a new round of measures became necessary.

In January 2015, the ECB announced an expanded APP, with average monthly purchases of public and private sector securities of 60 billion [euro]. APP purchases are intended to be carried out until at least September 2016 and in any case until the Governing Council sees a sustained adjustment in the path of inflation that is consistent with returning to price stability over the medium term.

The expanded APP would operate through diverse transmission channels. One is the portfolio rebalancing channel--APP-related purchases reduce the average duration of securities held by the public and raise liquidity holdings by financial institutions, which encourages them to acquire a broader range of other assets. This lowers their yields and, in turn, lowers the cost of external financing for firms and households. There is then the direct impact on cost of financing for private sector programmes. Another channel is the policy signalling commensurate with the size of the central bank's balance sheet and the perception of its commitment to its mandate. Signalling also supports the anchoring of market expectations of future interest rates, and wage and price-setting. APP purchases lower lending rates, and last there is the foreign exchange channel.

Reinforcing transparency and strengthening communication. In January 2015 the ECB Governing Council started releasing the accounts of the Governing Council meetings: i.e. 4-weeks after the monetary policy meetings. At the same time the frequency of these meetings was switched from monthly to 8-times per year.

The expanded APP succeeded in putting downward pressure on long-term interest rates, and flattening the term structure of interest rates. Not long thereafter, the financial cycle began to turn as a result of the staggered effects of the TLTROs and the expanded APP. In July 2015, the bank lending survey showed that year-on-year contraction had stopped and loans had started to grow at a very modest rate of just above zero. The gradual recovery in credit markets is illustrated in Figs. 7 and 8.

Inflation forecasts for 2016 and 2017 were revised downwards. Growth remained weak (albeit still positive since second quarter of 2013) and unemployment declined slowly, but steadily, from high levels. Thus, considerable economic slack remained, although estimates differed widely. Moreover, price pressures remained on the downside as manufacturer prices and input costs continued falling, but at a slower pace. Despite the deflation risk subsiding, the correlation between core and headline inflation was increasing over time. This raised a new concern--that persistently below-target inflation could become entrenched, i.e. embedded in second-round effects. There was less and less room to absorb any further shocks from falling global demand.

On 9 December 2015, the ECB lowered interest rates further and announced a recalibration of the APP, which was also prolonged until March 2017, or beyond if necessary. The purpose was to attain a sustained adjustment in the path of inflation consistent with the Governing Council's aim of achieving inflation rates below, but close to, 2% over the medium term. (11) This APP recalibration I was accompanied by several more actions, such as reinvesting principal payments and extending the list of APP-eligible assets to include securities issued by regional and local governments. Interest rates on sovereign bonds, corporate bonds and loans all fell. The euro reversed the appreciation it had been experiencing since summer 2015, and equity prices edged higher.

In mid-2015, the 2012 plan for a genuine EMU was revamped by the Five Presidents' Report. This report set the goal of completing four unions in three stages by 2025 (12): a fiscal union to establish a framework for sound and integrated fiscal policies; an economic union to promote convergence, prosperity and social cohesion; a financial union that would add a capital markets union to the banking union; and a political union promoting democratic accountability and the strengthening of institutions (see European Commission 2014; Dorrucci et al. 2015). Hence, elements of a new "constitutional framework" for the euro area are gradually starting to emerge.

On 10 March 2016, the ECB lowered rates again, bringing the interest rate corridor down to 65 basis points. The interest rate on the MROs was lowered by 5 basis points to 0.00%, the interest rate on the MLF by 5 basis points to 0.25%, and the interest rate on the deposit facility by 10 basis points to -0.40%. At the same time, a considerable expansion of the APP was announced, with average monthly purchases increased to 80 billion [euro] (APP recalibration II). The ECB also launched a corporate sector purchase programme (CSPP) as an integral part of the APP. As part of the CSPP, in June 2016 the Eurosystem started purchasing investment-grade eurodenominated bonds issued by non-bank corporations established in the euro area. (13)

Four new targeted longer-term refinancing operations (TLTRO II), each with a maturity of 4 years, were also announced, starting in June 2016 and running until March 2017. A new feature was that borrowing rates for these operations could be as low as the interest rate on the deposit facility. Banks exceeding the lending benchmark would be able to borrow at the DFR, meaning that their cost of funding would be negative and they would be receiving a de facto subsidy. The aim of this TLTRO II is to incentivise lending to the real economy and reinforce the pass-through of the asset purchases to the financing conditions of the real economy and provide additional monetary stimulus to return to price stability.

On 8 December 2016, the ECB decided to continue its purchases under the APP at the pace of 80 billion [euro] per month, on average, until the end of March 2017 {APP recalibration III). Then, from April 2017, net asset purchases under the APP would be brought back to an average of 60 billion [euro] per month until the end of 2017 and would continue at that pace until a sustained adjustment in the path of inflation towards price stability was seen. There were two important parameter changes: the maturity range of public sector purchases was broadened by decreasing the minimum remaining maturity for eligible securities from 2 to 1 year, and purchases of securities under the APP at a yield to maturity below the interest rate on the ECB's deposit facility would be allowed. There was also an enhancement of the PSPP securities lending facilities with a possibility to use cash as collateral (with an overall limit of 50 billion for the Eurosystem), and pricing linked to the deposit facility rate.

On 26 October 2017, the asset purchase programme saw an extension of the programme until September 2018 with a monthly pace of purchases of 30 billion starting from January 2018. The main refinancing operations and the three-month longer-term refinancing operations will continue to be conducted as fixed rate tender procedures with full allotment for as long as necessary, and at least until the end of the last reserve maintenance period of 2019.

On 14 June 2018, the asset purchase programme was extended until December 2018 with a monthly pace of purchases reduced to 15 billion [euro] starting from October 2018. This APP recalibration is conditional on incoming data on medium-term inflation outlook. This represents an announcement of the end of the net asset purchases at the end of December 2018. At the same time, the Governing Council announced that it expects the key ECB interest rates to remain at their present levels at least through the summer of 2019.

To sum up, there is evidence that the cumulative effect of standard and nonstandard monetary policy measures has been working. They have generated strong downward pressure on financing costs, with rates falling steeply across asset classes, maturities and countries, as well as across different categories of borrowers. Recent ECB bank lending surveys confirm that demand for loans and credit has rebounded and that financing conditions are converging (see Kohler-Ulbrich et al. 2016). While the economic expansion actually accelerated in the first half of 2017 (across countries and sectors), this has yet to translate into stronger inflation (HICP inflation was around 1.5% in August 2017).

Andrade et al. (2016) find that the announcement of the APP in January 2015 was effective in reducing sovereign yields on long-term bonds and raising the share prices of banks holding relatively higher shares of sovereign bonds in their portfolios. This is consistent with versions of the portfolio rebalancing channel acting through the removal of duration risk and the relaxation of leverage constraints for financial intermediaries.

There was also a "signalling effect". After the announcement of the programme, market expectations of future short-term interest rates edged down, while inflation expectations tended to increase. The introduction of the APP also helped the ECB guide long-term inflation expectations closer to its price stability objective by reducing private sector uncertainty about the length of the horizon over which price stability will be restored (see Coenen and Schmidt 2016).

A Recap of the Policy Responses to the Crisis

Monetary Policy Responses to the Crisis

Since the onset of the crisis, the interest rate instrument has been used to its fullest extent, and the ECB is the only major central bank to have lowered one of its policy rates--the deposit facility rate (DFR)--into negative territory. Overall, since mid-2008 the MRO rate has been reduced by a cumulative 4.75%, the DFR by 5.2% and the MLF rate also by 5.2%. Further, since early 2009 the EONIA has always been close to the DFR and thus has mostly been in negative territory since mid-2014. Lowering the DFR to below zero is itself a non-standard measure.

In hindsight, slightly negative interest rates have so far had a positive effect on the economy, helping to lower bank funding costs and boosting asset prices (Jobst and Lin 2016). Negative rates have also enhanced the signalling effect of the ECB's monetary stance strengthening its forward guidance. Moreover, there have been synergies with other NSMs as the lower deposit rate has also supported the portfolio rebalancing channel of the Asset Purchase Program by encouraging banks to substitute investment in riskier assets for excess reserves (van Riet 2017a, b; Reis 2016). Thus, NIRP has supported accommodative financing conditions to an extent that would not have been possible otherwise.

The other non-standard monetary policy measures can be grouped into four main clusters. As the financial turmoil hit in August 2007, the first cluster of nonstandard measures were longer "reverse repurchase operations" (see Table 1). This table does not reflect an official classification by the ECB. For example, MROs at fixed rate full allotment are arbitrarily listed as providing credit easing, and TLTROs are classified under the "conventional" instruments, but in reality they are non-standard measures. The innovation consisted in extending the credit operation maturities. Initially, ample refinancing through the MROs and LTROs, as well as some additional operations (including short-term operations with full allotment), was sufficient.

Yet, as tensions in funding markets grew, the ECB moved from variable rate ten'ders to fixed rate full allotment for all credit operations in October 2008. This led to the provision of unlimited liquidity at fixed interest rates. The maturity of LTROs was gradually extended from 3 to 6 months (in March 2008), then to 1 year (at the end of 2011) and finally to 3 years (in early 2012 through the VLTROs). Then, starting in June 2014 a series of TLTROs was launched. A second series (TLTRO II) was launched in June 2016 and ran until March 2017, with maturities of 4 years.

The second cluster of non-standard measures was a group of "ad hoc non-standard operations". These included foreign exchange repurchase agreements and swaps with foreign central banks to lighten funding constraints for European banks in foreign currencies and foreign banks in euro, and ad hoc money market interventions to provide or drain extra liquidity in order to adjust money market conditions. Finetuning operations remained part of the toolkit and continued to function as overnight liquidity-providing or liquidity-absorbing operations as needed. Until early 2012, they were carried out at the end of the reserve maintenance periods.

The third cluster consisted of an array of "outright purchase operations". These were all "non-standard" monetary policy measures, meaning that they were new in terms of the toolkit of the ECB/Eurosystem. They were initially mainly aimed at repairing the monetary policy transmission and the improving the functioning of certain financial market segments. The first set of outright purchase operations is represented by selective purchases of private sector securities, such as the covered bond purchase programmes starting in July 2009 (CBPP1), November 2011 (CBPP2) and September 2014 (CBPP3). A second set of outright operations is represented by selective purchases of public sector securities, for instance the SMP between 2010 and 2012 and the OMTs.

The aim of outright operations changed in mid-2014, with the start of "quantitative easing" policy in order to provide further monetary stimulus. These purchases mainly aimed at providing more monetary policy accommodation whilst being at or close to the lower bound for short-term interest rates. They included purchases of private sector securities, under the ABSPP and CBPP3 which started in June and September 2014 and the CSPP which started in June 2016, and purchases of public sector securities under the PSPP launched in January 2015. Together, these programmes form the APP.

The CSPP is facilitating NFCs' access to external finance. Remarkably, there is evidence that CSPPs purchases are benefitting not only large companies with access to direct financing, but also smaller enterprises: leaving more room in banks' balance sheet to provide loans to SMEs (Abidi et al. 2017). Moreover, lower bond market rates reduce the funding cost of banks allowing them to provide cheaper funding to SMEs. Steady improvements in the access of SMEs to bank finance are shown by recent Surveys on the Access to Finance of Enterprises (SAFE).

In recent years, central bank communication and various types of verbal commitments have surged in importance (see Blinder et al. 2016). Thus, the fourth cluster of non-standard measures was "enhanced communication", beginning in July 2013 with forward guidance. The ECB's guidance is of a qualitative nature, as it entails a commitment about the future path of policy rates that is contingent on the outlook for price stability, with the goal of anchoring inflation expectations. Enhanced communication was strengthened by a negative interest rate policy. A case in point was the commitments towards the active use of non-standard measures in April 2014, and the balance sheet expansion in November 2014.

There is evidence that central banks' pledges can promote an earlier and more vigorous recovery by increasing agents' valuation of longer-term assets and improving their expectations of future economic activity and prices (see Altavilla and Giannone 2016; Altavilla et al. 2015). This then leads to higher consumption, business investment and prices than otherwise would be observed. Private sector forecasts were gradually revised-up in response to the ECB's responsiveness to economic slack and low inflation, thus supporting a sustainable recovery and in curbing undesirable disinflationary pressures.

Non-monetary Policy Responses to the Crisis

Non-monetary policy responses to the protracted and mutating crisis began already with the Financial Turmoil in August 2007. They gained pace during the Global Financial Crisis, especially the euro area crisis. While several were listed in the chronology, it may be useful to cast a birds-eye view. At the risk of oversimplifying, they can be organised in three overlapping clusters: direct intervention measures, strengthening of the institutional framework, and regulatory reforms (see Table 2).

Early on in the financial crisis, policy responses took primarily the form of fiscal stimulus, guarantee schemes for bank deposits and bonds, and direct injections of funds in exchange for equity (recapitalisation). In mid-2009, there was an acceleration of regulatory reforms to strengthen the financial system (e.g. Single Rulebook and CACs), ease sovereign debt tensions and promote a level playing field for financial services. In mid-2009, there was also a start of institutional reforms with the launch of three new authorities (EBA, EIOPA and ESMA) plus the ESRB, then the ESM and SRM, and then governance reform (e.g. "Six-Pack", Fiscal Compact, "Two-Pack", and later the 4/5-Presidents Report). On the need to complete national structural reforms see Draghi (2017).

Final Remarks

When the crisis began in 2007, the ECB's monetary policy framework enabled a rapid response to the financial turmoil. The ECB was able to provide market participants with immediate access to liquidity through more frequent refinancing operations. As the crisis mutated and deepened, the monetary policy framework had to evolve to counter varying threats to the unity of the single monetary policy of the euro area. Conventional monetary policy instruments were augmented to correct specific impairments in monetary policy transmission and allow for further accommodation when the room for interest rate cuts shrank.

The ECB has learned several lessons from the crisis. Both the economic and monetary analyses are now based upon a richer analytical framework with a broader variety of data. Central banks also realised the importance of financial stability in assessing threats to price stability. The ECB's analytical framework now examines threats to financial stability. Monetary policy implementation in crisis times requires ever more prudence and responsibility. Moreover, the crisis has shown that completing EMU is essential for a smooth pass-through of monetary impulses and the functioning of monetary transmission; other major central banks did not face this challenge.

During the crisis the importance of communication increased, and the ECB has enhanced its efforts to be clear and consistent. With forward guidance, ECB communication has itself become a monetary policy instrument. Since mid-2014, the monetary policy stance has been determined by the combination of three types of interventions: low policy interest rates, asset purchases in financial markets and TLTROs for banks. Forward guidance is provided for both these interventions.

In hindsight, exceptional monetary policies helped maintaining price stability and reverting financial fragmentation and impairments in monetary policy transmission. They also provided time for policy makers to tackle the shortcomings in EMU's institutional framework and governance. Without such bold initiatives, it is likely that the crisis would have hit the euro area with far more severe consequences than were experienced. An open issue at present is to fathom the future shape of monetary policies on the path to a "new normal" (see Reis 2016; van Riet 2017a).

The latter decade was also characterised by exceptional policy responses by governments, the strengthening of several European institutions, the building of a crisis management framework with financial backstops, the launch of the SSM and various other reforms. This institutional transformation needs to be completed in coming years. Moreover, accommodating monetary policy is not a substitute to complete necessary national structural reforms.

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(1) "It was a mistake to create a single currency without creating a set of institutions that enabled a region of Europe's diversity to function effectively with a single currency." Hence, "it was almost inevitable that taking away two key adjustment mechanisms, the interest and exchange rates, without putting anything else in their place, would make macro adjustment difficult. Add to that a central bank mandated to focus on inflation and with countries still further constrained by limits on their fiscal deficits, the result would be excessively high unemployment and gross domestic product consistently below potential output. With countries borrowing in a currency not under their remit, and with no easy mechanism for controlling trade deficits, crises too were predictable" (Stiglitz 2016).

(2) The ECB makes monetary policy decisions on the basis of a strategy comprising two elements: a quantitative definition of price stability, and a two-pillar approach to analysing the risks to price stability--the economic and monetary analyses. The Governing Council clarified in 2003 that, in the pursuit of price stability, it aims to maintain inflation rates below, but close to, 2% over the medium term. Inflation is calculated based on changes in the Harmonised Index of Consumer Prices (HICP) for the euro area as a whole. The ECB conducts monetary policy by changing its three key reference interest rates: the rate on the main refinancing operations (MROs), which was originally called the minimum bid rate; the deposit facility rate (DFR); and the marginal lending facility (MLF) rate (see Bindseil et al. 2017).

(3) Its three main pillars are: the Capital Requirements Directive IV (CRD IV) and Capital Requirements Regulation (CRR), and the Bank recovery and Resolution Directive (BRRD. The CRD IV and CRR address the problem of insufficient capitalization of banks; the amended directive on Deposit Guarantee Schemes (DGS) endorsing the broadly agreed deposit guarantee of up to 100,000 [euro]; the BRRD introduced a "bail-in" mechanism.

(4) See European Parliament http://www.europarl.europa.eu/RegData/etudes/ATAG/2Ol6/57OOOO/IPOL ATA(2016)570000_EN.pdf.

(5) The euro redenomination risk is the risk that a euro asset will be redenominated into a devalued legacy currency. This event would follow a country leaving the euro area (De Santis 2015).

(6) The speech was delivered at the Global Investment Conference in London.

(7) See the article entitled "The ECB's forward guidance," Monthly Bulletin, ECB, April 2014; and Praet P. "Forward guidance and the ECB", column published on VoxEU.org. on 6 August 2013.

(8) See the box entitled "Risk of deflation?", Monthly Bulletin, ECB, June 2014, pp. 65-69; and Ciccarelli, M. and Osbat, C. (eds.), "Low inflation in the euro area: Causes and consequences", Occasional Paper Series, No 181, ECB, Frankfurt am Main, January 2017.

(9) For an extensive study of the interest rate pass-through channel in an environment of low, and declining, interest rates, see Camba-Mendez et al. (2016), and the article entitled "The transmission of the ECB's recent non-standard monetary policy measures," Economic Bulletin, Issue 7, ECB, 2015.

(10) Specifically, a return to genuine price stability requires the following three conditions to be satisfied: first, the euro area must be on a path towards price stability within a meaningful horizon; second, inflation must stabilise around price stability with sufficient confidence; and third, the trajectory must be maintained even under less supportive monetary policy conditions. Recent data are encouraging, but there is still a need for confidence, patience and persistence.

(11) See https://ec.europa.eu/priorities/sites/beta-political/files/5-presidents-report_en.pdf.

(12) Upon the announcement of the CSPP, the spread between yields on bonds issued by non-financial corporations and the risk-free rate declined sharply. Encouragingly, non-financial corporations started issuing more bonds.

(13) There were also ad hoc euro-denominated operations carried out in other cases, e.g. the full allotment liquidity-providing operations carried out on 9 August 2007 and the following days.

https://doi.org/10.1057/s41294-018-0074-4

Francesco Paolo Mongelli [1] (iD) * Gonzalo Camba-Mendez [1]

Published online: 31 October 2018

[mail] Francesco Paolo Mongelli

francesco.mongelli@ecb.int

[1] European Central Bank, Frankfurt, Germany

Caption: Fig. 1 Money market spreads at various maturities in the euro area. Note: EUR SPREAD for the various maturities (from 1 month (1M) to 12 months (12 M)) is the difference in percentage points between the unsecured (EURIBOR) and the secured (OIS) interest rates for each corresponding maturity. Source: Bloomberg

Caption: Fig. 2 HICP inflation and core inflation (2007-2018). Notes: Latest observation: June 2017. HICP: annual rate of change. HICP excluding energy and food, HICP energy and HICP food: contributions in percentage points. Sources: Eurostat and ECB calculations

Caption: Fig. 3 ECB interest rates and money market rates (2007-2018). Note: daily observations, percentages per annum. Sources: ECB and Thomson Reuters

Caption: Fig. 4 Ten-year government bond spreads versus Germany (2007-2018). Note: Daily observations, basis points. Sources: Thomson Reuters and authors' calculations

Caption: Fig. S Fiscal deterioration and then gradual recovery (2000-2016). Notes: The output gap is the gap between actual and potential gross domestic product at 2010 reference levels (expressed as a percentage of potential gross domestic product at constant prices). Annual data in percent. Latest observation 2016. Source: ECB calculations

Caption: Fig. 6 Euro area inflation rate and inflation expectations (percentages). Notes: I/L swap refers to the euro area inflation-linked swap. SPF refers to the ECB Survey of Professional Forecasters. Sources: Eurostat, ECB and Bloomberg

Caption: Fig. 7 Recovery in credit markets (2014-2018). Note: Composite bank lending conditions for households and firms. Source: ECB calculations

Caption: Fig. 8 Decline in bank lending rates (2014-2018). Notes: Latest observation: July 2017; composite bank lending. Source: ECB calculations

Table 1 ECB monetary policy instruments used as non-standard
measures (2007-2018). Sources: ECB website

                                                Conventional
                                                instruments 2/

                                                "Credit easing"

A. Reverse lending operations ("Repos"): 1/
Refinancing operations
  MPOs (Aug 2007 onward)                        x
  MROs at FRFA (Aug 2007 onward)                x
  LTROs (3 months) at FRFA (Aug 2007            x
    onward)
  LTROs (6 months) at FRFA (March 2008          x
    onward)
Supplementary LTROs at 1 year                   x
  Very long LTROs at 3 years (Nov 11 and Dec    x
    12)
  TLTROs (June 2014 and max maturity Sep.       x
    2018)
  TLTRO II: Targeted LTROs (June 2016-          x
    March 2017)
B. Ad hoc non-standard operations:
Forex Repos and Swaps (2008-2009)               x
Various ad hoc fine-tunings as needed           x
C. Outright operations
Purchases of private sector securities
  CBPP1 (July 2009)
  CBPP2 (November 2011)
CBPP3 (Sep. 2014)
Selective purchases of public sector
securities
  SMP (2010-2012) 5/
  OMT ("contingent balance sheet policy")
Large-scale purchases of private sector
securities
  ABSPP (June + Sep 2014)
  CSPP (March 2016)
Large-scale purchases of public sector
  securities
  APP/PSPP (January 2015)
  Expanded APP (March 2016)
D. Enhanced communication: 6/
Forward guidance (July 2013)
Commitment active use NSMs (April 2014)
Signal of balance sheet expansion (Nov. 2014)

                                                Unconventional
                                                instruments

                                                "Market
                                                support"
                                                3/

A. Reverse lending operations ("Repos"): 1/
Refinancing operations
  MPOs (Aug 2007 onward)
  MROs at FRFA (Aug 2007 onward)
  LTROs (3 months) at FRFA (Aug 2007
    onward)
  LTROs (6 months) at FRFA (March 2008
    onward)
Supplementary LTROs at 1 year
  Very long LTROs at 3 years (Nov 11 and Dec
    12)
  TLTROs (June 2014 and max maturity Sep.
    2018)
  TLTRO II: Targeted LTROs (June 2016-
    March 2017)
B. Ad hoc non-standard operations:
Forex Repos and Swaps (2008-2009)
Various ad hoc fine-tunings as needed
C. Outright operations
Purchases of private sector securities
  CBPP1 (July 2009)                             x
  CBPP2 (November 2011)                         x
CBPP3 (Sep. 2014)                               x
Selective purchases of public sector
securities
  SMP (2010-2012) 5/                            x
  OMT ("contingent balance sheet policy")       x
Large-scale purchases of private sector
securities
  ABSPP (June + Sep 2014)                       x
  CSPP (March 2016)                             x
Large-scale purchases of public sector
  securities
  APP/PSPP (January 2015)                       x
  Expanded APP (March 2016)                     x
D. Enhanced communication: 6/
Forward guidance (July 2013)
Commitment active use NSMs (April 2014)
Signal of balance sheet expansion (Nov. 2014)

                                                "Quantitative
                                                easing"
                                                4/

A. Reverse lending operations ("Repos"): 1/
Refinancing operations
  MPOs (Aug 2007 onward)
  MROs at FRFA (Aug 2007 onward)
  LTROs (3 months) at FRFA (Aug 2007
    onward)
  LTROs (6 months) at FRFA (March 2008
    onward)
Supplementary LTROs at 1 year
  Very long LTROs at 3 years (Nov 11 and Dec
    12)
  TLTROs (June 2014 and max maturity Sep.
    2018)
  TLTRO II: Targeted LTROs (June 2016-
    March 2017)
B. Ad hoc non-standard operations:
Forex Repos and Swaps (2008-2009)
Various ad hoc fine-tunings as needed
C. Outright operations
Purchases of private sector securities
  CBPP1 (July 2009)
  CBPP2 (November 2011)
CBPP3 (Sep. 2014)
Selective purchases of public sector
securities
  SMP (2010-2012) 5/
  OMT ("contingent balance sheet policy")
Large-scale purchases of private sector
securities
  ABSPP (June + Sep 2014)                       x
  CSPP (March 2016)                             x
Large-scale purchases of public sector
  securities
  APP/PSPP (January 2015)                       x
  Expanded APP (March 2016)                     x
D. Enhanced communication: 6/
Forward guidance (July 2013)
Commitment active use NSMs (April 2014)
Signal of balance sheet expansion (Nov. 2014)

FRFA stands for fixed rate full allotment

(1) These operations are complemented by several expansions of the
collateral list, a relaxation of eligibility criteria for
collateral, an extension of the list of counterparties and a
reduction of the minimum reserve requirement

(2) This refers to n-standard use of a conventional instruments:
e.g. by extending maturities to relieve bank funding stress

(3) The role of market functioning support is to help restore
impaired monetary transmission across the euro area

(4) Quantitative easing aims to provide further monetary stimulus

(5) The SMP has an impact on market liquidity and the size of the
balance sheet after suspension of sterilisation

(6) This communication is of a qualitative nature--the commitment
about the future path of policy rates is contingent on the outlook
for price stability

Table 2 Non-monetary EU policy responses to the
financial crisis. Source: authors' elaboration

Policy responses                Date announced

I. Direct intervention
measures

1.1 Fiscal stimulus

  European recovery plan        26th Nov 2008

An investment plan for Europe   26th Nov 2014

1.2 Rescue interventions

Capital injections              From Aug 2008

Nationalisation of banks        From Sep 2008

Creation of bad bank schemes

Debt guarantees                 From Sep 2008

1.3 Regulatory interventions

Short sales prohibitions        From Sep-2008

2. Strengthening the
institutional framework

2.1 Coordination of financial
supervision

EBA, ESMA, EIOPA                18 th June 2009

ESRB                            18th June 2009

SSM & SRM                       12th Sept 2012

2.2 Financial back-up for
sovereign debt crisis

EFSM & EFSF                     10th May 2010

ESM                             25th March 2011

2.3 Governance reforms

"Six-Pack"                      From Dec 2011

Fiscal Compact                  Mar-12

"Two-Pack"

4/5-Presidents Report           From Dec-2012

3. Regulatory Reforms

3.1 For a robust financial
framework

A single rulebook (CRR, DGS,    18th June 2009
BRRD,...)

3.2 Sovereign debt tensions
and restructurings

Ban on naked positions on       15th Sept 2010
sovereign CDS

Introduction of collective      1st Feb 2012
action clauses

3.3 Other regulatory reforms

Softening EU framework to       25th Oct 2008
assess state aid

Short sales regulation          2nd June 2010

Policy responses                Purpose

I. Direct intervention
measures

1.1 Fiscal stimulus

  European recovery plan        Boost aggregate demand in
                                coordinated manner, support
                                confidence and reinforce long-term
                                competitiveness

An investment plan for Europe   Strengthen competiveness and
                                stimulate investment for purpose of
                                job creation

1.2 Rescue interventions

Capital injections              Address bank vulnerabilities and
                                avoid associated systemic risks

Nationalisation of banks        As above

Creation of bad bank schemes    As above

Debt guarantees                 As above

1.3 Regulatory interventions

Short sales prohibitions        Avoid risk of negative share price
                                spirals that can lead to systemic
                                risk

2. Strengthening the
institutional framework

2.1 Coordination of financial
supervision

EBA, ESMA, EIOPA                Upgrading the quality and
                                consistency of national supervision
                                and strengthening oversight of
                                cross-border groups

ESRB                            Monitor and assess potential
                                threats to financial stability
                                issuing risk warnings and
                                recommendations

SSM & SRM                       Restore confidence in banking
                                supervision, break doom-loop and
                                orderly resolution

2.2 Financial back-up for
sovereign debt crisis

EFSM & EFSF                     Provide financial assistance to
                                countries under financial stress

ESM                             As above, but permanent plus
                                mandatory CACs

2.3 Governance reforms

"Six-Pack"                      Including: reform SGP, requirements
                                for fiscal frameworks, and MIP

Fiscal Compact                  Provisions to guarantee prudent
                                fiscal behaviour

"Two-Pack"                      Strengthening coordination and
                                surveillance of budgetary processes

4/5-Presidents Report           Roadmap towards more genuine EMU:
                                fiscal, financial, economic and
                                political union by 2025

3. Regulatory Reforms

3.1 For a robust financial
framework

A single rulebook (CRR, DGS,    Promote sound financial regulation
BRRD, ...)                      and guarantee a level playing field
                                and an integrated single market for
                                financial services

3.2 Sovereign debt tensions
and restructurings

Ban on naked positions on       Prevent market fragmentation and
sovereign CDS                   ensure smooth functioning of
                                sovereign debt markets

Introduction of collective      Facilitate process of debt
action clauses                  restructuring when a government
                                faces the possibility of a default

3.3 Other regulatory reforms

Softening EU framework to       Enhance soundness and stability of
assess state aid                the banking sector

Short sales regulation          Increase transparency on short
                                positions held by investors