global financial markets. the traditional flight - to - quality behaviour among investors during stress episodes was followed by an unprecedented “ dash for cash ” in which even us treasuries became illiquid. the lockdown measures adopted in many countries in the following weeks halted economic activity in several sectors, triggering massive increases in ( observed and disguised ) unemployment and plummeting corporate sales. without policy intervention, a credit crunch would have unfolded and households ’ and firms ’ cash shortfalls would most likely have led to a large wave of defaults. the prompt and massive response of monetary and fiscal authorities prevented an immediate liquidity crisis, which would have had profound economic and financial stability consequences. central banks reacted swiftly to market turmoil in march by deploying a wide array of emergency liquidity facilities and new asset purchase programmes. further lending support was also provided through the introduction of funding facilities for banks conditional on them granting new loans to the real economy. most governments introduced measures to assuage firms ’ and households ’ liquidity needs, such as debt moratoriums and temporary lay - off assistance, and to facilitate their access to new financing, such as loan guarantee programmes. bank supervisors in turn used the flexibilities embedded in basel iii regulation and accounting standards to increase banks ’ headroom to absorb losses and continue financing the economy. 1 / 3 bis central bankers'speeches the policy response has been effective in achieving its short - term objectives. markets have stabilised. credit is flowing to firms and households, sustained to a large extent by exceptionally generous loan guarantee schemes. economic activity is recovering. growth forecasts have improved slightly, although there is still substantial uncertainty, driven mostly by the evolution of the global health crisis. but, while this crisis is not over, it has already created some “ legacies ” of its own, which could threaten financial stability in the medium term. first, authorities will soon have to make difficult decisions about the extension or phasing - out of some lending support measures. on the one hand, an early removal of lending support could have a destabilising cliff effect on credit supply conditions, holding back the pace of economic recovery. even viable firms, especially those with high leverage, could face credit rationing problems. on the other hand, the extension of support measures could give rise to an undesirable allocation of credit towards unviable firms, which will eventually weigh on growth prospects. this is a dynamic trade - off. at the current juncture, where

ignazio visco : financial stability implications of the pandemic welcome address by mr ignazio visco, governor of the bank of italy, at the 2nd bank of italy and bocconi university – baffi carefin conference “ financial stability and regulation ”, rome, 22 october 2020. * * * it is a pleasure for me to open the second conference on “ financial stability and regulation ” organised by banca d ’ italia and the baffi centre for applied research on international markets, banking, finance and regulation. this event could not take place in march in rome as we had all wished. but it is taking place today with its original programme, albeit in a virtual format. i want to thank the organisers at bocconi and at the bank for their efforts, the contributors to the five sessions, and the keynote speakers. the papers that will be presented today and tomorrow will cover financial stability and regulatory issues that have been hotly debated over recent years. the keynote lectures will address forward - looking issues on the implications of fintech competition on payment systems, the determinants of the low price - to - book ratios observed in the banking sector, and the challenges to central banking and financial stability created by climate change. in these brief remarks i will focus on the financial stability implications of the outbreak of the current pandemic. this is of course a topic not explicitly covered in the sessions of this conference. last november, when the call for papers was closed, nobody could have anticipated the events that would then unfold. but this does not mean that the discussions that will take place during this event will have no relevance to current financial and policy developments. on the contrary, many of the topics that will be covered in this conference – like the pro - cyclicality of loan loss provisioning requirements, the challenges associated with the rapid adoption of new technologies in the banking sector, the effects of bank dividend pay - out policies, or the implications of rising corporate solvency risk on banks ’ balance sheets – have been and will continue to be at the heart of the debate on the policy response to the covid - 19 crisis in the coming months. the spread of the covid - 19 disease and the necessary lockdown and social distancing measures adopted to contain it have triggered a contraction of the global economy of unparalleled magnitude. the reaction to the uncertainty and risks surrounding the initial stages of the covid - 19 outbreak led to serious liquidity strains in