francois villeroy de galhau : central banks ’ response to the “ tragedy on the horizon ” speech by mr francois villeroy de galhau, governor of the bank of france, at the suerf – online conference, 14 october 2020. * * * ladies and gentlemen, i am very happy to join you today for this discussion that, although virtual, will be very real in terms of the strength of the ideas put forward. i am grateful to michala marcussen for offering me the opportunity to give this speech on such a dense topic : central banks ’ response to the “ tragedy on the horizon ”. faced with an unpredictable shock, the past eight months have driven the global economy into uncharted territory. however, one danger is certainly looming larger at the moment : our lasting addiction to public debt. let me be clear : in the face of the unprecedented covid - shock, a massive and one - off recourse to public debt financing was both inevitable and desirable. however, we have entered this crisis with public debt levels, which were already very high in most countries, with few notable exceptions. the continuous rise of public debt, along with climate change, represent two of the main long - run challenges that we face today. in his famous 2015 speech, mark carney spoke of climate change as the “ tragedy of the horizon ”. with this, he meant that this tragedy is inevitable if we do not act, but it is in the long term, possibly leading to a “ status quo bias ”. public debt is of a somewhat different nature : we do not know if nor when the tragedy – a major confidence shock, for instance – may happen. but we know for sure that rising public debt is a growing risk hanging over us, and still more over our children and grandchildren. let us therefore call it a “ tragedy on the horizon ” : a moving horizon – indeed nobody knows precisely where geographically the horizon lies –, but it will not be any less threatening. so what would our best response to this possible tragedy on the horizon be? and what can we do to avoid it? let me elaborate somewhat on a simple triptych ( i ) monetary policy ( ii ) fiscal policy and ( iii ) their renewed interactions. i. monetary policy and the ecb mandate in order to address this unprecedented covid crisis, the ecb acted boldly and rapidly, using all the tools at our disposal and inventing new ones such as the pepp. by doing

need to reinforce the value of impairments by €861 million, around 2. 2 % of the overall amount of exposures assessed. in 2013, banco de portugal ran a new exercise focused on credit portfolio impairment assessment and on the fair value calculation of the participation units held in restructuring funds. it was directed to credit granted by banks to all segments, with the exception of mortgage and consumer credit ( which are assessed by collective impairment models ) and of credit to public sector entities. the credit portfolio assessed amounted to €93 billion, bis central bankers ’ speeches representing 23 % of total assets. as a result of the exercise, it was considered necessary a reinforcement of €1. 1 billion of the value of impairments, approximately 2. 1 % of the overall amount of exposures assessed. in all exercises, the valuation of the credit portfolio was performed by independent external auditing firms ( ernst & young audit & associados – sociedade de revisores oficiais de contas, s. a. and pricewaterhousecoopers & associados – sroc, lda ) without any relation with the inspected institution. moreover, a strict governance structure was defined to monitor the exercises. a steering committee was created, chaired by the banco de portugal and comprising experts appointed by the ec, ecb and imf, by three euro area supervisory authorities ( banco de espana, national bank of belgium, banque de france / acp ) and by banco de portugal. it goes without saying that all these exercises have been subject to close scrutiny by the troika. it is also worth mentioning that the asset quality review of european banks recently announced by the ecb will follow the same type of approach that we have followed in our horizontal inspections. other instruments worth mentioning include : • the adoption of a new, more stringent, non - performing loans ( npl ) ratio, based on international best practice. it is more comprehensive than the concept used previously, as it incorporates the possibility of debtors with payments in arrears continuing to fail to meet their credit commitments. it is in line with the npl definition used by the imf, reinforcing the comparability and transparency of information on credit quality. the new non - performing loans concept is more conservative than the european average ( collateral is not deducted from the npl ratio ). • the adoption of measures to discourage evergreening. in particular, banco de portugal required banks to earmark