Although there is no consensus on how to define financial stability, financial stability can be defined as a condition in which the financial system – which comprises financial intermediaries, markets and market infrastructures – is capable of withstanding shocks and the unravelling of financial imbalance without giving way to cumulative processes, which impair the allocation of savings to investment opportunities and the processing of payments in the economy.
The coronavirus pandemic has brought huge social disruptions across the European Union and the globe and unprecedented economic and financial stability challenges. Central Banks and governments have taken a wide range of measures to sustain the supply of credit to the real economy, support financial intermediation, and preserve the resilience of the global financial system.
But this exogenous and global shock is placing the financial system under considerable strain and medium-term vulnerabilities have risen.
The Covid-19 outbreak is also a powerful amplification factor of a latent debt crisis. Indeed, lasting zero – and even negative – interest rates have allowed businesses, States and leveraged investors to take on unreasonable debts, making them vulnerable to deteriorating economic and market conditions. Liquidity issues experienced by some open-ended funds in March-April 2020 have moreover revived the debate about fund liquidity and more generally about the resilience of non-bank financial intermediation (NBFI), although the sector generally demonstrated resilience during this period in Europe.
Strong policy responses and international cooperation are required to tackle the financial stability challenges posed by the Covid-19 pandemic.
This section considers the financial stability implications of the pandemic taking into account of the financial vulnerabilities identified before the crisis, including those related to financial market functioning, debt sustainability, bank profitability and the non-bank financial sector.
Contributions to the policy debate
Extracted from the main Eurofi publications (Regulatory Updates, Views Magazines and Conference Summaries)
Addressing financial stability risks in the current monetary context - Ljubljana Financial Forum - September 2021
Major financial risks in the current monetary and macro-economic context - Lisbon Virtual Seminar - April 2021
Lessons from Covid on non-bank financial intermediation - Lisbon Virtual Seminar - April 2021
Should we be concerned about post-Covid financial stability? - Berlin Financial Forum - September 2020
Public and private
Public authority views
G. Cross - Central Bank of Ireland - Well calibrated policy responses required to mitigate potential vulnerabilities - April 2021
N. Delfas - Financial Conduct Authority (FCA) - How regulators can address financial stability concerns in non-bank financial intermediation (NBFI) - April 2021
F. Mazzaferro - European Systemic Risk Board (ESRB) - Financial stability implications of Covid-19 support measures - April 2021
F. Mazzaferro - European Systemic Risk Board (ESRB) - Liquidity mismatches in the NBFI sector should be addressed - April 2021
R. Ophèle - Autorité des Marchés Financiers (AMF) - NBFI put to the test by March/April 2020 events: the issue of money market funds - April 2021
L. F. Signorini - Banca d’Italia - Towards a more resilient NBFI sector - April 2021
R. Strauch - European Stability Mechanism (ESM) - The corporate-sovereign-bank nexus and future policy space - April 2021
B. Vujčić - Governor, Croatian National Bank - Escaping the paradox of thrift in the liquidity trap - April 2021
J. Cound - BlackRock - A lesson from Covid-19: liquidity risk management is central to open-ended funds - April 2021
T. Cuddihy - The Depository Trust & Clearing Corporation (DTCC) - Balancing act: maximizing potential, minimizing risk of NBFIs - April 2021
D. Gepp - Federated Hermes – International - The Global Health Crisis – A real-life stress test of MMF reform - April 2021
J. Gual - CaixaBank - Should the euro area worry about the US overheating? - April 2021
X. Larnaudie-Eiffel - CNP Assurances - The combined risk of ultra-low interest rates and too restrictive (future) regulation for life insurers:the economy needs a balanced Solvency 2 review - April 2021
A. Wilson - Moody’s Investors Service - Enormous policy challenges, but the financial sector is holding firm – for now - April 2021