Risks to financial stability stem from the weaknesses and uncertainties threatening the economic recovery. The increase in public debt\u2014undoubtedly necessary in the short term to protect the most vulnerable and offset the loss of income caused by the pandemic\u2014is one of these threats. The record-high levels reached will require, in the future, the design of a medium- and long-term adjustment strategy to correct them. The behaviour of financial markets is also a factor of weakness, as in their eagerness to price in an uncertain future they swing between extremes. Expansionary monetary policy pushed to its limits has been essential for short-term market stability, although the authorities themselves warn of the risk of it becoming disconnected from the real economy\u2014especially if the future economic recovery is weaker than expected. <\/p>\n
Coordination among economic agents in Europe and globally has been key to mitigating the impact of the health crisis. Banks have helped implement the measures put in place by the economic authorities, have channelled central bank liquidity transparently and responsibly, and have also voluntarily adopted sector-wide measures more generous than those of the public sector. All of this has been possible because, at the start of the crisis, the sector had liquidity and capital buffers, thanks to the significant adjustments carried out over the past decade. Naturally, this does not make them immune to a prolonged scenario of uncertainty and economic weakness. Banks are aware of this and, while continuing to fulfil their ultimate objective\u2014providing financing and the best services to households and businesses\u2014they are striving to strengthen themselves and become more efficient. <\/p>\n
Extraordinary economic policy measures have stabilised financial markets, improving investor confidence, and have also helped maintain the flow of credit to the economy. They have been essential to prevent a greater deterioration of the economy due to the pandemic, which could have been exacerbated in a context of depreciation of financial assets. However, the lack of uniformity in market behaviour\u2014across different assets and internationally\u2014is also a reflection of their underlying weakness. In general, markets can behave in an irrational manner, with investors following the trend, reacting to the role of central banks, or simply overreacting to new information. Fear is rational, and too often synonymous with a lack of information. But panic and euphoria are not. The consequence in these cases, all too often, is that significant discrepancies arise between an asset\u2019s value and its market price, which must be assessed by the authorities and represent a risk to financial stability. Behavioural finance studies how investors, too frequently, make decisions driven by behavioural biases rather than through careful and reasoned analysis. <\/p>\n
In the future, the authorities will face the need to combine the continuation of short-term support measures with the risks to macro-financial stability in the medium term. Today\u2019s priorities will certainly not be the same in the future. <\/p>\n