Victoria Saporta: Emerging prudential lessons from the Covid stress

Speech by Ms Victoria Saporta, Executive Director for Prudential Policy of the Bank of England, at a Bank of England webinar, 21 July 2021.

The views expressed in this speech are those of the speaker and not the view of the BIS.

Good morning ladies and gentlemen.

It's a pleasure to be able to speak to you today on some emerging prudential lessons that I draw from our experience so far in managing the economic consequences of this terrible pandemic. I say "so far" because of course the tragic human consequences of the pandemic are ongoing, as is the economic fallout that followed it. And while we are not out of the woods yet, the progress made to date affords us space for reflection on how the prudential framework we put in place following the 2008 financial crisis has served us. And, to observe if there are parts of it that may not have worked as we expected. As the American philosopher and educational reformer John Dewey said: "We do not learn from experience-we learn from reflecting on experience".

Let me start by recalling the nature of the shock unleashed following the onset of the pandemic.

Context: the post-crisis reforms and the Covid stress

The turmoil caused by the Covid-19 global pandemic has been the toughest test of the financial system since the 2008 Global Financial Crisis. In a few weeks in early 2020, levels of economic activity and expectations of future economic prospects fell dramatically. Investors, corporates, banks and many households stockpiled cash and reduced their risk appetite. As a result, both risky asset prices and yields on safe assets fell (Chart 1), bank lending to businesses soared, as did provisions for expected credit losses.