01. 04. 2022 conference " rebuilding social capital : the role of central banks ” banco de portugal pablo hernandez de cos governor thank you very much pedro. thank you, mario for the invitation. and congratulations to all the staff of the banco de portugal for this commemoration. the banco de portugal has indeed built an excellent reputation among the central bank community over all these years. it is surely a good starting point for the banco de portugal to rebuild social capital here in portugal. as lucrezia said, the topic of the conference — the role of central banks in building social capital — is a rather complex question. i will try to simplify it a bit, perhaps too much. i will approach the topic from one angle, which is related to the reason for the specific institutional setting that we, central banks or supervisors in general, have as compared to other public authorities, which is essentially one of independence, or autonomy, if you prefer. it is interesting to go back to the original reason why we want central banks and supervisors to be independent. this is based on the evidence that we have on the determinants of longterm growth, which points to the importance of the quality of institutions. good quality of institutions is important in particular to allow long - term considerations to be incorporated into the decision - making process. this is, for me, the most relevant argument justifying independence of central banks. independence should allow us to incorporate into our decision - making elements that are relevant for the welfare of citizens in the long run. it is much more difficult for politicians to do this, basically because, of course, they incorporate the political cycle into their decision - making. but, if this is the case, then the legitimacy of central bank´s independence is essentially based on utilitarian grounds, in the sense that we think, with this independence, we are in a better position to deliver on our mandate. the key e is how can we invest in this legitimacy in a better way. probably the best way to do so is to connect this need for delivering on our mandates to the controls, the transparency and the accountability that always needed to go hand in hand with independence. relate to the efficacy in delivering on our mandates, one thing that probably we have not done enough, and i will give an example of what the basel committee is doing, is to evaluate what we do, and in particular evaluating our own capacity to deliver. central banks do very often is to emphasise the need for

results. finally, another interesting finding is that the issue was not only one of quantity but also about prices. banks ’ proximity to buffers appears to have affected the cost of lending. the reasons behind this problem are unclear. it may have occurred because the level of uncertainty was very high for banks, and they were foreseeing that there might be losses in the future, and thus wanted to keep these buffers so they could be used to cover those losses. that is one possibility. the lack of formal guidance by supervisors on the rebuilding of these buffers might be another issue. low profitability may also be a reason for this result or market stigma. we are now in the process of trying to understand precisely the origin of this problem. closely related to this and a very important issue is the question of releasable buffers. in the basel framework there are some buffers, in particular the countercyclical buffer, that are intended to be activated in boom periods, precisely in order to make banks more resilient, and to be deactivated during recessions. here the analysis of the basel committee suggests that the release of such buffers had a positive effect on lending during the pandemic. the results, for example, specifically for the euro area, for which we had more microdata, suggest that banks are adjusting internal capital targets cyclically : in boom periods banks reduce their own internal capital targets, and they do the opposite when there is a recession. the evidence also points to the fact that macroprudential authorities have the ability to influence these internal capital targets by releasing or activating the ccyb ( countercyclical capital buffer ). this is precisely why the evidence points to the fact that the release of the capital buffer also generated a reduction in banks ’ internal capital targets and this ultimately allowed them to provide more credit to the economy. if i combine all this information, the one thing that is clear to me now, which i think we need to think more about it in the next stage, is that we need to consider whether there is sufficient releasable capital in the system. let me give two very concrete examples of why i think this is necessary. the best example is the covid - 19 crisis. in many jurisdictions,, we were observing the emergence of systemic risk in the economy before the crisis, and that is why many public macroprudential authorities decided to activate the ccyb. then a completely exogenous