panel on ‘ the role of central banks and sustainability in the post - covid recovery ’ speech by l. federico signorini omfif global public investor virtual launch 29 july 2020 the extraordinary impact of the covid pandemic required an aggressive monetary policy response to avert the risk of financial meltdown and sustain economies worldwide. like all major central banks, the ecb reacted quickly. the measures taken are well known and need not be listed here. they led to further monetary accommodation and an additional, large injection of liquidity ; they were effective in calming markets, protecting monetary policy transmission, and preventing a financial crunch and a deflationary spiral. this time, besides monetary policy, other domains of public policy also became active immediately. fiscal policies responded vigorously and more or less simultaneously across the world, with measures to support households and firms. this included, to varying degrees, debt moratoria, loan guarantees, direct grants to firms, income support, and more. a third actor, namely banking regulation and supervision, also played a key role. however, the most important regulatory actions in my view were those taken before the pandemic, in response to the global financial crisis. thanks to basel iii ( and other actions ), when banks were hit by the pandemic crisis, they were considerably stronger than before 2008. this is true worldwide, but let me give you a few key figures on italy. between the start of 2007 and the start of 2020, the ratio of the highest - quality capital to risk - weighted assets almost doubled, reaching 14. 0 per cent. in march 2020, the mean liquidity coverage ratio stood at 174 per cent of the regulatory requirement ; it has increased further in the meantime. ( no liquidity requirement existed in 2007 ). furthermore, the weaknesses on italian banks ’ balance sheets caused by the sovereign debt crisis have largely been reabsorbed : in march, the net non - performing loan ratio had dropped by two thirds from its 2015 peak, i. e. from 9. 8 to 3. 2 per cent. given the strong position in which the banking system entered the crisis, banking authorities worldwide were in a position to encourage banks to use their capital and liquidity buffers. 1 buffers are designed to allow banks to withstand extraordinary stress due to exceptional events, and avoid credit crunches. so far, thanks also to enormous liquidity injections by central banks and ample state guarantees, there are few signs of the kind of credit

restrictions that played such a big role in amplifying the economic consequences of the last crisis. still, uncertainties abound. usable buffers are important to allow banks to absorb any losses without cutting credit abruptly. many supervisors, including the ssm and the bank of italy, have also asked intermediaries not to distribute dividends or buy back their own shares, and to be extremely careful in paying bonuses. 2 in sum, the overall short - term policy response was impressive, and quite effective in mitigating the consequences of an unprecedented crisis. of course, we shall not be able to say that we are safe until the pandemic has effectively ended. but let ’ s start looking ahead anyway. i shall make two points. first, one of the legacies of this crisis will be, inevitably, an increase in government debt / gdp ratios. this is manageable – and should be managed, in due course. continued fiscal support is essential at the current juncture. when the uncertainty recedes, we shall need to address macroeconomic stabilization and fiscal sustainability simultaneously. the long - term sustainability of the debt / gdp ratio depends both on the numerator and on the denominator. the recently agreed eu package is a key tool to allow member states, especially those hit hardest by the pandemic, to fund measures efficiently that increase the potential for growth. it must be put to full use. second, to avoid market dislocation during the pandemic shock, central banks have trodden unusual ground. action by the fed, for instance, included the commercial paper funding facility, the money market mutual fund liquidity facility, the municipal liquidity facility, the term asset - backed securities loan facility, the primary market corporate credit facility, the secondary market corporate credit facility and the main street lending program. i need not mention the numerous ecb programmes. while not all major central banks acted in quite the same way, they all expanded their market intervention tools well beyond the customary limits. this action has preserved stability in markets by reassuring market participants that disruption would not be permitted under the exceptional circumstances of the pandemic – a dramatic, fully exogenous shock. in the longer run, however, it is important that investors do not start seeing central banks as ‘ market makers of last resort ’, able to protect them against all sorts of disturbances, whatever their origin. the implications in terms of moral hazard would be vast. the bank of italy, in line with