Fernando Restoy: Bank credit developments in Spain
Speech by Mr Fernando Restoy, Deputy Governor of the Bank of Spain, at the European
Association of Public Banks (EAPB) Annual Congress, Barcelona, 10 November 2015.
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1. Introduction
Good morning everyone. It is a pleasure for me to be here today participating in the Annual
Congress of the European Association of Public Banks, which is being held this year in
Barcelona. Allow me to thank the organisers and, in particular, the Institut Català de
Finances and its CEO, Josep-Ramon Sanromà, for his kind invitation.
I will focus my remarks on the developments in bank credit in Spain during the recent crisis
and the current recovery. I really cannot think of a more qualified audience to share my
reflections on these issues, given the active role played by national promotional banks in the
recent crisis in facilitating the flow of credit.
As is well known, bank credit flows have contracted markedly in many advanced countries
over much of the recent crisis. In Spain, the outstanding amount of bank lending to
households and firms has been decreasing, in real terms, since 2009. The current process of
deleveraging marks the sharpest contraction in bank credit in this country since the 1980s.
The persistency of the adjustment of the stock of credit is likewise remarkable. In particular,
even after emerging from the last recession in mid-2013, the outstanding stock of credit has
continued contracting, albeit at a rate that has moderated significantly in recent times.
The weakness of bank lending over the recent past has motivated much discussion on the
reasons behind this and on the best policies to deal with the situation. In order to define
these best policy measures, it is important first to fully understand the behaviour of this
phenomenon and to identify possible frictions in the credit market that may be hampering its
recovery. With this in mind, I will next provide an overview of the main factors explaining
recent credit developments in Spain: first, in the context of the crisis period, and then in the
current recovery phase. I will conclude with some reflections on possible policy
considerations.
2. The determinants of bank credit in Spain during the crisis
When analysing the factors behind the contraction of bank lending during the crisis it is
useful to distinguish between demand and supply elements, even after discounting the
practical difficulties in separating both components.
2.1. Demand-side factors
Starting with the demand side, several factors contributed to the sharp reduction in the
demand for credit during the crisis. First, loan demand fell sharply as a result of the
deterioration in economic conditions, which limited current and planned spending levels and,
hence, the need for new credit.
Second, the need of households and non-financial corporations to deleverage and rebuild a
sounder financial position is another factor behind the pronounced slowdown in credit
demand. To give you some figures, non-financial corporation debt ratios grew rapidly during
the last expansion up to close to 120% of GDP in mid-2010, clearly above the average
values in the euro area, which stood at around 80% of GDP at that time. Similarly, the
household debt-to-GDP ratio rose up to almost 85% in the same period, 20 pp above euro
area levels.
2.2. Supply-side frictions
Turning now to the supply side, there exist some frictions that tend to exacerbate the
negative pressure on credit exerted by the contractionary demand factors. One significant
friction in this regard is the existence of asymmetric information between lenders and
borrowers, a circumstance that limits the ability of the lenders to assess correctly the actual
level of risk posed by a given borrower or a project. This friction normally intensifies during
periods of crisis and, for reasons well known, is comparatively more relevant in the case of
small and medium-sized firms as opposed to large companies.
The comparative disadvantage of small firms in accessing financing relative to their larger
competitors has, in fact, been one of the most pervasive features of the recent crisis, despite
the mitigating impact provided by the special facilities activated by many of the public
institutions represented here today.
Another factor that significantly restrained credit supply conditions until recently was the
financial fragmentation of the euro area that emerged as a result of the tensions in the
European sovereign debt markets. In fact, one of the most visible consequences of financial
fragmentation was the strong sensitivity of funding costs to the borrowing agents' nationality
and not just to their creditworthiness.
Thus, drawing all the strands together, I think it is reasonable to conclude that the
unsustainable accumulation of debt over the previous expansion paved the way for the
subsequent credit contraction seen during the crisis. In my view, this contraction reflects
primarily the sizable and unavoidable downward adjustment in the demand for credit.
However, a number of frictions related to the supply of credit, such as those discussed
earlier, have also played a relevant role.
3. Recent developments in bank credit and its determinants
Let me now turn to the recent developments in bank credit. The latest data show that the
stock of credit to the private sector in Spain continues to fall, but the rate of decline has
tended to slow gradually since the second half of 2013, in parallel with the recovery in GDP.
This slow pace of recovery of the credit cycle is consistent with historical regularities during
previous similar episodes. In fact, there is a well-established branch in the economics
literature that has coined this phenomenon "creditless recoveries", and there are abundant
studies showing that these episodes are not exceptional either in emerging or in advanced
economies, especially in the aftermath of a recession accompanied by a banking crisis.
The moderation in the contraction of the aggregate stock of credit points to an increase of
new lending operations, which is consistent with the economic recovery. In fact, the
information available on new credit transactions suggests that the segment of lending to
SMEs has started to recover. And in the most recent period, this trend has gradually spread
to the other credit categories, such as in the case of credit extended for house purchases.
What are the determinants behind these recent developments? In my view, demand-side
factors are playing a relevant role in the incipient recovery in credit flows. The improvement
in growth and employment prospects and the reduction in aggregate uncertainty have all
resulted in an increase in current and expected income, expanding the willingness of agents
to spend and their ability to take on new debts while reducing the risk perceived by lenders.
In parallel with the recovery in the demand for investment, we have witnessed an
improvement in the financial position of borrowers. Specifically, from the peak observed in
mid-2010, the gap between debt ratios in Spain and the euro area average has fallen from
37 pp to 9 pp in the case of corporates and from 20 pp to 9 pp in the case of households.
But credit flows are also being stimulated in the current juncture by several factors more
directly connected with the supply side. First, the strengthening of the capital position of
banks, following the conclusion of the cleaning-up, recapitalisation and restructuring of the
financial system, is contributing to enhancing their capacity to finance the economy. The
Comprehensive Assessment carried out last year at the European level also contributed
notably to restoring investors' confidence in the Spanish banking industry.
The increasing reintegration of European financial markets since 2013, stemming from
various actions taken both at the national and European level, does also facilitate the
normalisation of the economy ́s financial flows. These initiatives include the adoption by the
Eurosystem of a number of bold, unconventional monetary policy measures, including the
introduction of new long-term operations linked to new lending (the so called TLTROs) and
the purchase of public and private sector securities.
The ongoing improvements to euro area governance arrangements are also operating in the
right direction, helping stabilise European financial markets and reducing their fragmentation.
One key development in this field is the Banking Union, which, though still incomplete, marks
an unprecedented step towards a genuine European common mechanism of rules and
procedures for supervising and resolving banks and protecting their depositors.
All in all, the recent normalisation in European financial markets has contributed to a
significant easing in financing conditions in those jurisdictions that were previously under
higher macrofinancial pressure, including Spain. As a result, the cost of lending in these
countries has tended to converge gradually to the lower levels observed in the core euro
area.
At the same time, some measures recently introduced at the national level have also
supported the availability of bank financing to SMEs. Specifically, the regulatory definition of
an SME has been significantly widened, bringing it in line with that predominating at the
European level and so extending the benefits of the lower capital requirements associated
with loans to such firms.
As a result of the conjunction of the previous developments, most quantitative and qualitative
indicators point to a higher dynamism in credit flows in Spain which is linked both to supply
and demand factors. For instance, data from the Central Credit Register show an upward
trend in the number of credit transactions with non-financial corporations which has been
driven by an increase in both loan applications and their approval rates. This evidence is
moreover consistent with the results of the survey on the access to finance of firms
conducted by the ECB on the basis of a sample of European companies. In particular, since
the end of 2013, Spanish SMEs have reported an improvement in their perception of access
to credit, a signal which is consistent with that from the Bank Lending Survey.
4. Policy considerations on SME's financing
Allow me to say now a few words on policy considerations regarding the specific case of
small firms' financing. Undoubtedly, the crisis has been a painful reminder for us that the
access of SMEs to finance may deteriorate suddenly and sharply in periods of high
uncertainty.
Financial institutions, such as those represented here, with a mandate to promote access to
financing for SMEs, can make an important contribution in this field. In any case, it is also
necessary to study ways to tackle directly the asymmetric information problems faced by
these firms. This in turn requires enhancing the quality and quantity of information available
on both the credit track record and the financial situation of companies. In this regard, it is
worth mentioning a new regulation recently approved in Spain that obliges banks, under
certain conditions, to pre-announce three months in advance should they decide not to roll
over existing credit lines or loans at maturity. Also, in those cases banks are obliged to
provide relevant information on the credit profile of their customers whose loans are not
rolled over. The Banco de España, in response to the mandate conferred to it under this new
regulation, is currently working on a Circular, which will specify the relevant information to be
provided to the SMEs in these circumstances, together with a methodology to produce a
standardised report on the SME credit assessment.
Other actions that could also help mitigate the possible frictions in the credit market during
crisis periods include those facilitating debt restructuring by improving the bankruptcy
legislation. These measures, if well-designed, could help to smooth the reallocation of
resources from non-viable firms to viable and productive firms. Spain has recently introduced
various reforms to improve the effectiveness of bankruptcy procedures, though it is still too
early to appreciate in full what additional reforms are needed to further improve those
procedures.
At the European level, I also welcome the Action Plan on Building a Capital Markets Union
recently approved by the European Commission. This project envisages some measures to
overcome information barriers that could inhibit SME lending. That includes, following the
Spanish example, the strengthening of the feedback given by banks declining SME
applications and the promotion of systems facilitating the availability for investors of
comprehensive information on SMEs.
Moreover, the Action Plan also foresees actions to reactivate securitisations markets. Let me
stress the importance of this specific set of measures.
For smaller firms, for which direct access to markets is not feasible due to problems of scale,
bank credit will remain the predominant financing source. Therefore, an adequate availability
of funds for SMEs requires banks to have sufficient means and capacity to properly conduct
their intermediation activity. In that regard, the development of the securitisation markets
seems a promising avenue to facilitate credit risk management by banks and, therefore, to
support lending. Indeed, securitisation markets activity was seriously impaired after the
subprime crisis due to the stigma attached to any kind of asset-backed securities, and the
lack of recognition by investors and regulators of the specific quality of each product. To
address some of these problems, the European Commission has recently published an
interesting proposal for amending the European regulation on prudential requirements for
credit institutions and investment firms that introduces a differentiated treatment for high
quality securitisations that meet stringent standards in terms of simplicity, transparency and
standardization.
5. Concluding remarks
Let me now conclude by highlighting what I think are the main lessons drawn from the recent
crisis in connection with credit developments. First, it seems clear that given the large
financial imbalances that emerged during the expansionary years, a protracted contraction in
credit demand seems not only unavoidable but also positive to restore the ability of the
economy to grow on a sustainable basis. Yet there is little doubt that frictions on the supply
side amplified the contractionary effects of weak demand and that those frictions merit bold
policy attention.
In any case, policy interventions aimed at revitalising credit during a crisis should be carefully
designed and calibrated, duly taking into account that credit flows should not be expected to
fully recover until lenders' and borrowers' balance sheets are on sufficiently firm ground.
In the case of Spain, some of the main constraints affecting credit developments for most of
the recent crisis have abated considerably as a result of the improvement in the
macroeconomic outlook, the bold banking sector reform and the introduction of various
measures at both the national and European level.
These positive developments, however, should not be taken as conclusive evidence that the
task is complete and that all relevant risks have been dispelled. Rather, the consolidation of
the recent positive signals in the macroeconomic and financial spheres requires resolve to
complete the reforms still pending on various relevant fronts. This should, in my opinion, be
the main priority in seeking to enhance economic growth prospects on a sustainable basis
and to mitigate the volatility of the financial and economic cycles.
Thank you very much for your attention.