It is likely that regulatory policy would need to be in a constant state of alert for risks emerging in the financial shadows, which could trip up regulators and the financial system. In other words, regulatory fine-tuning could become the rule, not the exception. In this world, macro-prudential policy to lean against the financial cycle could become more, not less, important over time. With more risk residing on non-bank balance sheets that are marked-to-market, it is possible that cycles in financial assets would be amplified, not dampened, relative to the old world. Their transmission to the wider economy may also be more potent and frequent. The demands on macro-prudential policy, to stabilise these financial fluctuations and hence the macro-economy, could thereby grow. In this world, central banks’ operational policies would be likely to remain expansive. Nonbank counterparties would grow in importance, not shrink. So too, potentially, would more exotic forms of collateral taken in central banks’ operations. Market-making, in a wider class of financial instruments, could become a more standard part of the central bank toolkit, to mitigate the effects of temporary market illiquidity droughts in the non-bank sector. In this world, central banks’ words and actions would be unlikely to diminish in importance. Their role in shaping the fortunes of financial markets and financial firms more likely would rise. Central banks’ every word would remain forensically scrutinised. And there would be an accompanying demand for ever-greater amounts of central bank transparency. Central banks would rarely be far from the front pages. Which path?

In terms of the financial account, the resident sectors’ improved terms of access to external funding from 2013 enabled the outflow of funds from the rest of the world at the height of the euro area sovereign debt crisis to be reversed. The progressive normalisation of the euro area’s capital markets, as from the final stretch of 2012, significantly reduced the need for Spanish credit institutions to finance themselves through the central bank. Subsequently, the abundant liquidity resulting from the ECB’s quantitative easing measures has once again given rise to net fund outflows in the Spanish economy. These have, however, come about in a very different way to those resulting from the 2012 balance of payments crisis. Indeed, net fund outflows are not, as was then the case, the outcome of a worsening in economic sentiment regarding the Spanish economy. They are rather the result of a redistribution between institutions and countries of the abundant liquidity injected by the Eurosystem. As to instruments, the funding raised abroad in the most recent phase has preferentially taken the form of stable flows, such as foreign direct investment, equity and investment fund shares, and long-term government debt securities. This composition reveals international investors’ confidence in our economy, to which the structural gains in competitiveness and the recovery in output and domestic demand have been conducive. In the specific case of foreign direct investment in Spain, these flows have accounted for around 2.6% of annual average GDP in the 2013-2019 period.