Pablo Hernández de Cos: The financial system - current situation and challenges

Speech by Mr Pablo Hernández de Cos, Governor of the Bank of Spain, at the IE University-Bank of Spain-Federal Reserve Bank of Saint Louis Conference "Current Challenges in Economics & Finance", Madrid, 11 May 2023.

Central bank speech  | 
15 May 2023

Thank you very much to the organisers for inviting me to this conference. Today, I will be addressing you in my capacity as Chair of the Advisory Technical Committee of the European Systemic Risk Board (ESRB), a role which brings a deep EU-oriented perspective, complementary to my regular responsibilities as Governor of the Banco de España and member of the Governing Council of the European Central Bank.

The macrofinancial risk landscape and the banking sector

The macrofinancial risk landscape has changed in recent months and continues to evolve. In a relatively short period of time we have moved from low inflation and low interest rates to persistent high inflation and rising interest rates. This shift poses new and enhanced risks to financial stability. To heighten awareness of these risks the ESRB adopted a Warning on vulnerabilities in the EU financial system in September 2022. This is the first general warning (i.e. addressed to all EU Member States) that has been issued by the ESRB since its establishment in 2010.

Over the last seven months some economic developments have surprised to the upside, while some vulnerabilities timely identified in the Warning have come to the fore. On the positive side, the EU economy proved to be more resilient than expected in the face of the large negative terms-of-trade shock from Russia's war in Ukraine and growth forecasts for 2023 were revised upwards. However, developments last autumn in the UK gilt market and, more recently, in the US and Swiss banking sectors remind us of the need to remain vigilant in regard to vulnerabilities in a challenging and rapidly changing macro-financial environment.