Non-financial corporations (NFCs) faced this shock from a more favourable financial position than was the case before the global financial crisis. Specifically, in recent years 4  they had lowered their debt levels substantially, to below the European average at end2019, and had higher liquidity buffers. Moreover, the sectoral distribution of activity was more balanced than prior to the previous crisis. However, the information for the first half of the year shows that NFCs have seen their profitability plummet. Their return on assets (ROA) halved, falling from 4% to 2%, and the proportion of NFCs with low profitability increased. Simulations by the Banco de España point to a strong contraction in firms’ profitability in 2020 as a whole, with SMEs trending more unfavourably, especially those in hospitality and leisure, motor vehicles, wholesale and retail trade, and transport and storage. The simulations on firms’ liquidity, on the basis of the aforementioned macroeconomic scenarios and incorporating the impact of the economic policy measures implemented, anticipate that the percentage of firms with liquidity needs in the period spanning the second and fourth quarters of this year will increase as a result of the pandemic by almost 10 pp, to 70%. The information on bank lending shows that firms are resorting to this source of financing to cover a sizeable portion of their liquidity needs. Specifically, the outstanding balance of NFCs’ borrowing from national credit institutions increased at a record-high pace, shifting from an annual contraction of 1.1% in February to an annual expansion of 8.1% in June.

But the growth of financial firms active across different business lines and national boundaries does make designing policies to address systemic risks more challenging. Let me conclude by highlighting some actions we can take to guard against such risk. First, there is scope for more private and public sector cooperation on stress-testing. There is room to develop further our analysis of the combined effects of market and credit risk on the balance sheets of financial firms and at a system-wide level. And it is important that macroeconomic stress scenarios do not blindly extrapolate from the robust economic performance of recent years. The FSA is reviewing stress-testing practices of UK firms as part of a campaign to identify and encourage best practices. Of course each firm needs to tailor its tests to its own business, but I believe that there may also be merit in looking at a common set of plausible scenarios. This would help compare risk profiles and publishing these results could potentially strengthen market discipline. Second, efforts are underway to improve further liquidity risk management. The fundamental reforms to the sterling money market introduced in May should make for greater flexibility in the day-to-day management of sterling liquidity, and help ease potential liquidity bottlenecks in times of stress. 7 These changes build on the lessons of the Federal Reserve’s discount window in US dollars and the ECB’s marginal lending facility in euros. Handling potential liquidity pressures faced by LCFIs operating in multiple countries and currencies continues to be a focus of policy attention.