Higher provisioning and, especially, the non-recurring adjustment to goodwill, both as a result of the expected downturn in economic conditions on account of the pandemic, were the main causes of lower profits. The losses were concentrated at the two banks with the largest international presence but profits decreased by two thirds at the other banks. In any event, banks’ recurring business has only been affected modestly to date and this is being offset partly by an adjustment to operating expenses and, consequently, they continue to gain in efficiency. 11  Therefore, the price-to-book (P/B) ratio — which compares listed banks’ market capitalisation and their book value — contracted notably in Spain, as in other European countries, by declining to levels of around 0.4, although it subsequently recovered somewhat. 12  One way of illustrating the risks to financial stability posed by the current episode is through simulation exercises which assess prospectively banks’ resilience to adverse macroeconomic scenarios. Accordingly, the ECB conducted a so-called “vulnerability” analysis – to underline their limitations compared with the usual stress tests – in order to measure European banks’ resilience to the strains triggered by the coronavirus. The results published last July show some of the risks identified.7 Specifically, based on these results, the euro area banking sector overall is positioned to withstand pandemic-induced stress, although the reduction in banks’ solvency under the most adverse macroeconomic scenarios would be significant. Furthermore, the results of this exercise show significant heterogeneity across banks.

Two, be more tolerant of inflation outcomes close to zero. Masaaki Shirakawa draws on Japan’s experience to suggest that the risks to economic activity associated with very low inflation did not warrant ultra loose monetary policy stances that undermine financial stability. [14] However, a more flexible approach to implementing inflation targeting can potentially be misinterpreted as reducing the commitment to price stability. It therefore needs to be accompanied by clear communication on the consistency between taking financial stability into account while pursuing price stability as the primary objective. FISCAL POLICY Fourth and final proposition: fiscal policy plays an important role in helping to secure both price stability and financial stability. The best contribution that fiscal policy can make to both price stability and financial stability is to ensure the sustainability of public debt. The role of fiscal policy in an integrated policy framework has not received as much attention as it probably deserves. Let me offer two reasons why it should. Sound public finances reduce the risk of fiscal dominance, enabling monetary policy to operate more freely to pursue its price stability mandate. Quantitative easing by major central banks through the purchase of massive amounts of government debt was a necessary response to the strong deflationary pressures unleashed by the Global Financial Crisis. But as government spending continued to grow long after the crisis and central banks continued to purchase government debt, the risk of fiscal dominance grew: the concern that normalising, let alone tightening, monetary policy would create fiscal problems.