These would include reforming the treatment of debt under corporate income tax, and advances in the capital markets union project that would help provide for the integration and development of capital markets in the EU. The growth of equity markets can afford various benefits to the business sector and the economy in general. The resort to equity funding strengthens the soundness of firms’ balance sheets, given that a greater proportion of these capital instruments reduces firms’ vulnerability to adverse shocks such as an increase in interest rates or a decline in revenues.8  8  See, for example, A. Kraus and R. H. Litzenberger, (1973): “A State-Preference Model of Optimal Financial Leverage”, Journal of Finance. 28: 911–922. 8  Conclusions  I should like to conclude by pointing out that the COVID-19 pandemic has prompted an unprecedented economic contraction in Spain and in other economies. Non-financial corporations have been seriously affected, although the forceful measures adopted by the national and supranational economic authorities have prevented the materialisation of a wave of defaults stemming from short-term liquidity problems. However, some firms have seen their solvency impaired as a result of a decline in their revenues and an increase in their debt. The current phase of the crisis, marked by an incomplete and uneven economic recovery, warrants continuing public support to firms. Nonetheless, these policies should be adjusted so as to focus more on firms in sectors that continue to be severely affected by the crisis, and through means other than the accumulation of greater debt.
But for system wide financial stability, we also need to think about the effects not just on individual banks, but collectively on the financial system. In this context I would like to touch briefly on four issues: procyclicality; overall capital; financial consolidation; and consistency of the capital framework for other financial intermediaries. (a)  Procyclicality  On the first I will be very brief indeed; the implications of risk sensitive capital requirements over the financial cycle is a subject which I and other commentators have raised on a number of occasions. But it is extremely relevant to a debate on systemic risk. It is a clear example of how rational and indeed prudent behaviour by individual banks – raising capital, including cutting back on credit granted if no other route is possible, in the light of perceived heightened risk – could collectively be damaging to the system. Some academics are indeed criticising the risk-sensitive capital requirements that we already have for market risk, on similar grounds. In the Asian crisis, for example, VaR measures of market risk, and their associated capital requirements, increased extremely sharply, leading banks to enforce loss limits which in turn exacerbated price falls. But I am not aware that anyone is suggesting that risk insensitive capital measures are the answer – they are associated with much more obvious and damaging pitfalls. Rather we need to ensure that, in so far as we can, we avoid sudden perceptions of changed risk.