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

twofold objective. on the one hand, it seeks to prevent or mitigate the emergence of systemic risks over the expansionary phase of the credit cycle, as well as to strengthen the resilience of financial institutions against these risks. this is typically carried out through countercyclical instruments, such as capital buffers, which should be accumulated over expansionary periods and, eventually, be released in downward phases in order to smooth total credit over the cycle. second, macroprudential policy is concerned with the structural features of the financial system. this is a notion that has to do with the impact on systemic risk arising from the size, 3 / 5 complexity and interconnections of certain financial institutions. it is essential that financial institutions duly internalise the impact of their decisions on the whole system, which is generally greater for larger, more complex, more interconnected and less substitutable financial institutions. capital buffers specifically tailored to the most systemic banks have been introduced in recent years in many countries, within the framework of the g20, the financial stability board and the basel committee on banking supervision initiatives, precisely to address this issue. another interesting tool for financial stability, of potential macroprudential use, are the stress test exercises. notwithstanding their current limitations, stress tests represent a major effort by supervisory authorities to assess the impact of different adverse scenarios on the financial system, to convey its state of resilience to the public and to inform the necessary follow - up actions. summing up, the macroprudential policy toolkit has significantly expanded in recent years. this is a change in the right direction because, beyond conferring new powers to central banks and supervisory authorities, it requires the adoption of a system - wide perspective in policy - making. this new set of powers has been introduced rather quickly – over a few short years – and this leaves us with a number of questions still awaiting answers. we need to better understand the effectiveness of the new instruments in improving the resilience of the financial system, in reducing systemic risks, and the trade - offs between different policy options. we also need to understand how macroprudential policies can affect risk - taking attitudes by different agents and to what extent the provision of credit to the real economy may be affected, especially during difficult periods. after a thorough analysis, it might be the case that the current macroprudential toolkit is still insufficient or incomplete. the european union ’ s macroprudential framework