What is the role played by the Eurosystem during the financial crisis ?

Since the onset of the financial crisis, the Eurosystem has cut interest rates on several occasions and has assumed an increasingly prominent role as a financial intermediary. It stepped up its lending to liquidity-constrained banks and at the same time gave cash-rich banks the opportunity to place their liquidity surpluses with a safe counterparty, the central bank. The Eurosystem acts as an intermediary not only for individual banks, but increasingly for national banking sectors as well, especially as a result of the sovereign debt turmoil and the close link between the financial situation of sovereigns and that of resident banking sectors. As a consequence, the Eurosystem’s balance sheet has expanded significantly and there has been dramatic growth in the TARGET2 positions of national central banks. The Eurosystem’s accommodative monetary policy is not without risks, however. The policy entails both financial risks for the central bank and possible negative macro-economic side effects. Nor do these actions offer a solution for all the challenges that the euro area is facing today. In order to tackle these challenges, structural measures and adjustments are needed. However, through its increased role as a financial intermediary the Eurosystem can buy the necessary time for the relevant actors to implement these measures in an orderly way.