pablo hernandez de cos : navigating through a storm - policy challenges in the current macro - economic environment introductory address ( via video ) by mr pablo hernandez de cos, governor of the bank of spain, at the pannel " navigating through a storm - policy challenges in the current macro - economic environment ", during the sixth european systemic risk board annual conference " addressing financial stability challenges ", frankfurt am main, 8 december 2022. * * * good afternoon everybody and welcome to this first discussion panel of the sixth annual conference of the european systemic risk board. in this roundtable, we will be discussing and sharing views on identified challenges affecting the conduct of policies in the current turbulent times, which are having important repercussions for the economic and financial environment. as noted by president lagarde, during her welcome address, in the course of this year we have witnessed an increase in financial stability risks. the appalling invasion of ukraine by russia, initiated as we were recovering the activity levels previous to the pandemic, has contributed to either fuel new or exacerbate existing systemic vulnerabilities in europe and beyond. spikes in energy and food prices, continued disruption of global supply chains and demand pressures have resulted in higher and more persistent inflation across the board. this has triggered a response of monetary policy, which is now normalising around the world, contributing to tighter global financial conditions and increased volatility and liquidity tensions. and it is the combination of the uncertainty derived from the war ( and more in general from geopolitical tensions ) with the increase of inflation and the rising interest rates that has generated, ultimately, a general deterioration of the economic outlook with, for example, one - year ahead recession probabilities having increased markedly, in both the euro area and other major advanced economies. this challenging financial stability outlook is well laid out in the warning on vulnerabilities in the eu financial system that the european systemic risk board issued last september. indeed, the esrb has alerted of the heightened uncertainty and the increased probability of tail - risk scenarios materialising. in particular, the esrb has warned of three severe systemic risks : 1 / 3 bis - central bankers'speeches ( i ) first, the deterioration in the macroeconomic outlook combined with the tightening of financing conditions, leading to negative consequences in terms of balance sheet stress for non - financial corporations and households, especially in sectors and member states that are most affected by rapidly increasing energy prices

response to an unquestionable substantive need : the downsizing of the spanish banking sector, following the excesses of the growth period prior to 2007. these factors left many institutions facing the challenge of a future far removed from the comforts that had characterised the previous period, namely : strong economic growth, abundant liquidity on international markets, extensive business margins and healthy assets. such comforts were viewed by many as a shield against underlying risks, and in some cases they prompted banks to lower their guard against the problems that were gathering. given the new playing field in place as from 2007, the responsibility of savings banks is clear : to act resolutely to change those structures that can be improved, in full awareness that other parts of the new situation are exogenous and therefore elude their management capabilities. hence the importance of taking decisions aimed at improving efficiency, through merger – or concentration – processes that position savings banks at a new set of size and rationality - based coordinates. faced with this need, the structuring of the new ips instrument ( new, at least, in terms of its current contours ) responds to the need to pave the way so that concentration agreements may be reached between a type of institution – savings banks – which, given its business form and complex governance arrangements, does not have the same flexibility as banks to conclude merger agreements. to smooth these concentration processes, the fund for the orderly restructuring of the banking sector was also created, a fund to which the initiators of the various projects can resort to strengthen their capital. this assistance adds further discipline in respect of compliance with the plans, since the condition imposed by the use of public funds is that the capacity of the banking system should be reduced and its efficiency increased. mergers and ipss are thus two alternatives available to savings banks to concentrate their business and restructure. the two options differ in terms of their legal form, but they coincide fully in their objectives and should be equivalent in terms of their results. let us turn to the second step of the evaluation process. the guiding principle of the design and legal construction of ipss has been the search for a concentration mechanism analogous to mergers in terms of practical results. in this connection, the ips has been structured on three basic pillars. the first entails the relinquishing by all participants to the central body of the ips of the capacity to determine and implement business strategies and internal risk control and management tools, in such a