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.