The Covid-19 crisis is still affecting human lives and economic activity around the globe, causing unprecedented transformations which were not foreseen just before its onset. The crisis is not just a health crisis, but also a serious economic crisis. To what extent the crisis may further transform into a crisis for the financial sector is and has been a very controversial question.

In the early months of the crisis, the world seemed to be on the brink of collapse. Doom scenarios like that of a complete economic meltdown were put forward, and regulators were ready to prophylactically strengthen the banking sector at all cost—for example, by imposing restrictions on dividend payments and share buybacks, or by relaxing buffer requirements—to avoid a spillover from the real economy to financial firms. Our 2020 publication ‘Pandemic Crisis and Financial Stability’ explores many facets of these dynamic times that we saw back then.

By now, the dust has settled somewhat, and it is safe to say that we have not seen disaster striking, at least not so far. Unlike in the two previous, most recent economic crises, namely the 2007-2009 Global Financial Crisis (GFC) and the 2010-2018 sovereign debt crisis in the Eurozone, the impact on the stability of the EU financial system has been comparatively mild so far. This is due to several reasons: most importantly, the root-cause of the pandemic was not attributed to any sector of the financial system but originated in the real economy. Further, the financial regulatory framework had become much more robust in the meantime (albeit also much more complicated to comply with), credit institutions in particular are better capitalised now than in 2008, with (almost across the board) lower ratios of non-performing loans (NPLs) and significantly stronger liquidity, while financial supervision has also been enhanced and the macro-prudential financial framework adopted in the wake of the GFC was fully activated. Finally, many EU Member States and the EU itself acted decisively, and proactively pumped billions of Euros of support programmes into the real economy to prevent an economic meltdown.

During the last 15 months, national and EU institutions and agencies have orchestrated their efforts towards establishing an appropriate framework in order to primarily support those parts of the population and of the businesses most severely affected by the pandemic and to contain its negative effects. This included a combination of fiscal policy, monetary policy and financial policy measures; new instruments and rescue funds were introduced, flexibility in the application of several existing rules has been applied to the extent necessary and feasible, and some ‘quick-fix’ legislative actions supplemented the pandemic crisis management toolbox.

Reflecting the positive developments over the past year, the second edition of our e-book supports a more optimistic approach on the further evolution of the pandemic. Entitled ‘Financial stability amidst the pandemic crisis: On top of the wave’, the key assumption is that the various infection waves of the crisis will not be followed by another severe one, as we are gradually reaching a much-desired point of ‘new normality’. And yet, we are ‘on top of the wave’ of the crisis as a whole, as our book title suggests. Therefore, challenges in relation to financial stability should not be underestimated, especially in (but not limited to) the field of NPLs, a new wave of which is emerging due to the impact of the pandemic on the businesses and households mostly affected. Furthermore, accommodating monetary policy measures, conventional and unconventional, fiscal stimuli and temporary financial measures will be lifted as well, meaning that several safety-net components embedded during the pandemic in the institutional and regulatory framework will cease to support economic (including financial) activity in the steady state. In addition, the discussion on the challenges linked inter alia to climate change is in the current constellation more focused than ever before and the adoption of measures to mitigate the related risks is high on policymakers’ and financial supervisors’ agendas. We sincerely hope that this volume will contribute to this debate and may serve as a platform for dialogue to reflect on the right way forward.

The publication contains 17 articles, structured in 5 sections, and discussing all of the above considerations. They develop on various regulatory aspects arising from the prolonged pandemic and related to various aspects of financial stability, at a moment when the (potentially treacherous) perception is that we are close to returning to a new normal. The contributors also discuss the long-term implications for banking and financial markets, and/or arrangements for transitioning back to post-pandemic times.

The e-book is freely available here.

Wolf-Georg Ringe is Director of the Institute of Law & Economics at the University of Hamburg and Visiting Professor at the University of Oxford.

Christos Gortsos Professor of Public Economic Law at the Law School of the National and Kapodistrian University of Athens.