By arresting the potential collapse of transactions between banks and thus of financial intermediation more generally, the ''non-standard'' monetary policy measures implemented by the European Central Bank (ECB) after the failure of Lehman Brothers in 2008 played a key role in avoiding a more catastrophic outcome for the euro area.

That is the central conclusion of research by Domenico Giannone, Michele Lenza, Huw Pill and Lucrezia Reichlin, published in the November 2012 issue of the Economic Journal. Their study demonstrates that by ensuring banks maintained access to short-term financing, the ECB''s measures avoided a collapse of liquidity and credit. In turn, this helped to sustain economic activity.

More specifically, the research finds that bank loans to households and, in particular, to non-financial corporations were higher than would have been the case without the ECB''s intervention. In turn, the ECB''s support had a significant impact on economic activity: the study estimates that two and a half years after Lehman''s collapse, the level of industrial production was 2% higher – and the unemployment rate 0.6 percentage points lower – than would have been the case in the absence of the ECB''s measures.

Following Lehman''s bankruptcy owing to its exposure to sub-prime mortgage securities, concerns emerged about the creditworthiness of other banks, including those in the euro area. With banks fearing that their counterparts in the interbank market would default, they stopped trading with each other: as a result, the interbank money market seized up.

The interbank market is central to the entire financial system: in normal times, it is the main venue for banks to obtain short-term financing. The seizing up of the interbank market therefore threatened financial stability more widely. What''s more, through the effect of the interbank market on liquidity and credit availability, the performance of the wider economy was threatened.

To prevent these malicious effects, the ECB stepped in with a series of non-standard measures designed to allow banks to continue to obtain short-term finance even while the money market was dysfunctional. There were two crucial elements to these initiatives:

· First, the ECB adopted a ''fixed rate/full allotment'' tender procedure in its operations, which ensured that banks could get access to a potentially unlimited amount of financing from central bank operations at a low and predictable borrowing rate.

· Second, the ECB broadened the collateral eligible for those operations, so that asset-backed securities that were no longer trading in the market could be turned into cash.

The study characterises these measures as facilitating an expansion of the intermediation of bank-to-bank transactions across the ECB''s balance sheets, which could substitute for the normal transactions in the money market that were no longer taking place.

The researchers explore this substitution more directly than in previous work by exploiting data drawn from the aggregate Monetary and Financial Institutions (MFI) balance sheet. These data make it possible to identify both transactions between banks and transactions between banks and the ECB.

The study shows that transactions between banks and the ECB grew following the introduction of non-standard measures, while transactions between banks declined. The researchers then use this analysis to explore the macroeconomic implications of the ECB''s measures.

''The ECB and the Interbank Market'' by Domenico Giannone, Michele Lenza, Huw Pill and Lucrezia Reichlin is published in the November 2012 issue of the Economic Journal.