marja nykanen : how can banks help covid - 19 resilience and recovery? keynote speech by ms marja nykanen, deputy governor of the bank of finland, at the sustainable investment forum europe 2021, virtual, 22 april 2021. * * * ladies and gentlemen! it is an honour to be invited to give this keynote speech on such an important topic in such an interesting forum. last spring, giving a virtual keynote speech in an online conference was something new and exciting. today, over a year later, it is not like that anymore. hopefully, it won ’ t be too long before we get back to a bit more of a normal situation again. today, in this virtual contribution, i will be talking first about the reaction of the authorities to the economic shock from the covid - 19 pandemic. then i will talk about how banks have been a part of the solution. finally, i will conclude by looking at the future and talk about how increasing the role of the capital markets can help to increase the resilience of the eu economy. central banks, supervisors and public authorities support bank lending in the early spring of 2020, the effects of covid - 19 started to become clearer, and, for a brief moment, it seemed as if the economy would go into freefall. however, the public authorities responded swiftly and decisively in order to minimize the social and economic costs of the pandemic and the lockdowns. central banks were among the first responders, with the ecb pandemic emergency purchase programme, pepp, now standing at 1, 850 billion euro. in addition, the ecb has been offering a significant amount of financing to banks through targeted longer - term refinancing operations. fiscal authorities around the world made emergency payments and gave support for companies and households. the eu even reached an agreement where the eu itself would secure 750 billion euro from the markets and distribute it among the member states. in addition to direct financing, countries in europe made changes to insolvency laws to prevent companies going bankrupt. in several countries a moratorium was put in place to help households and companies with debt repayments. furthermore, public guarantees were extended to bank loans to ensure that companies could attain credit. supervisors used the flexibility built into the legislative framework and relaxed the available capital buffers, further enabling banks to keep lending. and these are just some of the examples of how the public sector has supported the economy amid co

the banks ’ situation even more difficult. loan losses reduced bank capital, which led to banking crises in many countries. problems in the banking sector led to further problems in the real sector of the economy. crises in the financial and real sectors have had adverse effects on public finances, as tax revenues have plummeted and public expenditures have risen. this means that in many cases financial and economic crises have been followed by crises of the public finances, as we are now seeing in europe. the nature of the crisis has reminded us of a basic fact, perhaps overlooked in the previous years. liquidity is extremely important. this means that the tasks of the central banks as liquidity creators and providers have come into focus. this has happened everywhere, russia included. for its part, the bank of russia acted quickly to ensure the liquidity of russian banking sector, as did other central banks in their own economies. in fact, we have been reminded of some very old lessons in economic policy - making. already in 1873 walter bagehot told us that central banks should lend freely to illiquid but solvent banks if they have adequate collateral to offer. what are then the broader lessons for policy - makers? how should economic policy be designed in the new era of globalization? it is clear that even if countries have become dependent on each other, economic policies still matter. moreover, national economic policies have international dimensions and international repercussions. during the current, very difficult crisis, central banks have been able to ensure the functioning of the banking systems. for sure, there have been problems in many private financial institutions, and some of them have failed, but functioning of the whole financial systems has been preserved. actually, successful liquidity policies have only been possible through broad international cooperation. if there is anything positive about this crisis, it is the proven capacity of central banks to act in cooperation with each other. fiscal policies have been loosened significantly, globally, and this has supported the level of overall demand although the private sector has turned to consolidating its balance sheets. the countries which entered the crisis with sound public finances have been in much better position. i am glad to note that during the upswing years, russia was able to save for the rainy day through its stabilization fund and by paying off its debts. this has made reacting to the crisis much easier. also in finland, the pre - crisis years witnessed large public surpluses, which allowed the fiscal policy to be loosened when the crisis hit. however