01. 10. 2020 the role of the european central bank ’ s monetary policy in the covid - 19 crisis deusto business alumni meeting pablo hernandez de cos governor good morning, ladies and gentlemen. it is a pleasure for me to be able to participate in this meeting organised by deusto business alumni. i would like to take this opportunity to share firstly with you some thoughts on how money monetary policy has helped stave off some of the more serious consequences, at least from the economic standpoint, of the covid - 19 crisis. in the second part of my speech, i would also like to reflect on certain challenges that the gradual reduction in the so - called “ natural interest rate ” poses for monetary policy conduct in advanced economies. this is an issue which will be particularly significant in the context of the monetary policy review initiated at the european central bank ( ecb ). the monetary policy reaction during the crisis the outbreak of covid - 19 in europe in late february and early march was a shock of great magnitude which triggered an unprecedented economic impact due to the reduction in both the supply and demand for goods and services. the serious, temporary and global nature of the shock initially required powerful economic policy actions. the objective of this “ shock therapy ” was to avoid a temporary shock from generating effects which persist over time. fiscal policy is undoubtedly the most appropriate tool to act as the first line of defence in this setting, since it has the instruments to achieve this objective with immediate and targeted actions that are suited to a shock whose duration is uncertain and heterogeneous. the response of european governments has generally been commensurate with the challenges posed by this crisis. their response has also been resolutely backed by the european union ( eu ), especially following the approval of the european recovery fund by the european council. for its part, monetary policy should act, and has acted, very forcefully too. indeed, the economic shock triggered by the pandemic was accompanied by aa strong tightening of financial conditions in the euro area. as various governments, including spain ’ s, announced plans to contain the virus, financial markets began to discount heavy declines in economic activity and increases in public and private debt. this drove risk premia ( i. e. the compensation demanded by bond investors for the probability of borrowers defaulting ) higher. that resulted in an increase in the interest rate that governments, households and firms pay on their rising debts, which will necessarily amplify the

roger w ferguson, jr : back to the future in managing banking risk remarks by mr roger w ferguson, jr, vice chairman of the board of governors of the us federal reserve system, at washington and lee university, lexington, virginia, 4 march 2002. * * * good evening. i wish to start by acknowledging the contributions of h. parker willis, a leader in teaching economics and political science and a major contributor to the establishment of the federal reserve. i suspect he would be pleased to know that his contributions are remembered and that they have served national and academic interests so well. in his teachings, dr. willis recognized the relationship between monetary and fiscal policy, the role of banking, and their combined effects on economic growth. recent events have illustrated, once again, the cyclical nature of the u. s. and world economies and the direct effect that economic conditions can have on banks as intermediaries of credit. after nearly a decade of steady improvement, earnings from core bank operations and other measures of financial strength for the u. s. banking system have taken an inevitable turn. while concerns about these indicators of financial health continue to grow, the deterioration is not a source of alarm. since the end of 1999, for example, the growth of industry assets has far outpaced the rise in earnings ; nonperforming assets, though still relatively low, have expanded more than 70 percent ; and the number and the assets of unsatisfactory or problem banks have increased, again still remaining relatively low. fraud by bank employees has led to losses and even the closure of some banks recently. more broadly, after the failure of enron, the stock market has reacted as we might expect to the uncertainty created by opaque balance sheets by punishing firms, both banks and nonbanks, whose risk profiles are less easily understood. to be sure, the u. s. banking system remains strong by virtually any measure and is well positioned to support future economic growth. by historic standards, current profitability figures are robust ; and relative to the industry's equity, reserves, or asset size, nonperforming assets are still low. banks survive and prosper by accepting risk, which is their crucial economic role and the reason for their existence. nonetheless, risk must be well managed and at many institutions that task has become much more difficult and complex. indeed, in my remarks today, i want to discuss the changing nature of risk management in banking and its implications for bankers and bank supervisors.