pablo hernandez de cos : how to preserve pandemic - struck viable firms for a stronger recovery introductory remarks by mr pablo hernandez de cos, governor of the bank of spain and chair of the basel committee on banking supervision, at the european systemic risk board ( esrb ) virtual seminar on “ corporate insolvencies and public support measures ”, 29 april 2021. * * * many thanks to the esrb secretariat for organising this seminar. and let me also thank and welcome all participants to this event. i will devote these brief opening remarks to outline why, at the esrb, we consider the topic of the seminar “ corporate insolvencies and public support measures ” a very relevant and timely one. the starting point is our perception that, in the context of the current crisis, even if the macrofinancial outlook has improved, uncertainty remains high. and one of the main elements of this uncertainty is precisely related to the extent of the damage inflicted by the crisis on the corporate sector, whose magnitude will be a key determinant of the persistence of the crisis and the strength of the economic recovery. therefore, we need to measure this risk carefully and be ready to adapt our policies to mitigate it to the extent possible. and this is particularly relevant in the current phase of the crisis. in the first phase, the crisis generated a significant decline in firms ’ revenues relative to fixed costs ( such as supplies, rentals, labour costs ) that led to an increase in firms ’ liquidity needs on top of those derived from the amortisation of pre - existing debt. in turn, this raised the risk that some of these corporates would not be able to meet their payment obligations ( liquidity risk ) together with a non - negligible probability of negative spillovers to other companies. the decisive and forceful action of economic policies has helped mitigate this risk to a great extent, so that a large proportion of these firms with liquidity needs were able to cover them. key measures included, for example, furlough schemes that help to alleviate fix costs, and also public guarantees for business financing that have allowed for the liquidity needs to be financed. however, as the crisis unfolds, concern is shifting from liquidity risk to the deterioration of the solvency position of firms, associated with the combination of higher levels of debt as a result of the crisis with still low profitability expectations for the coming quarters, especially in sectors most impacted by the crisis and

than 3 per cent from peak to trough and more than 400, 000 jobs were lost. we have now recouped those lost jobs, but not the lost momentum and opportunities the crisis left behind. after living through this, how can we ignore the obvious links between the economy and finance? the short answer is that when times are good, we can make the mistake of becoming complacent. the economy and finance have been meeting for a long time as i said at the outset, the economy and finance have a long and eventful history. when financial markets are functioning well, they play a background role in the overall behaviour of the real economy. at the same time, when the economy is stable, macroeconomic considerations might appear to play a more secondary role in the functioning of financial markets. taken together, this suggests that in stable times it might be tempting to analyze the behaviour of the real economy and financial markets separately, each of them being a black box to the other, not worth opening. this approach is also convenient : economists can build economic models without introducing too many financial details ; financial wizards can price assets without thinking too much about macroeconomic risks ; and business schools can build curricula where economics and finance are taught with little reference to each other. this is all very well in a stable world. but a stable world is not a perfect world. and imperfections can eventually break the stability. it has long been understood that imperfections in the financial market can generate and amplify economic fluctuations, driving the dynamics of a crisis. these imperfections typically stem from transaction costs or asymmetric information. this is economist jargon, but let me give you an example. an entrepreneur who needs to borrow funds typically knows more about the quality of her project than the lender. moreover, the success of the project – and the likelihood of the loan being repaid – will depend on the behaviour of the entrepreneur. this information gap is an imperfection that the financial system needs to address. financial intermediaries – for instance, banks – play an important role in partly bridging this information gap through screening and monitoring of prospective borrowers. another way is for the borrower to put some skin in the game by pledging collateral – for example, real estate – which becomes a key determinant of borrowing capacity. appreciating the role of information and the importance of collateral helps to explain how a financial crisis, such as the great depression, can unfold by