Fernando Restoy: Europe in the aftermath of the crisis
Closing address by Mr Fernando Restoy, Deputy Governor of the Bank of Spain, at the
seminar "Europe in the aftermath of the crisis", organised by the Association of Economic
Information Journalists (APIE), at the Menéndez Pelayo International University (UIMP),
Santander, 20 June 2014.
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Introduction
Thank you very much, Miguel Ángel, for your introduction. And thanks again for inviting me to
close the course organised by APIE at the UIMP. As in previous years, it is a real pleasure to
be among you.
I will take the opportunity to offer some thoughts on the situation of the Spanish banking
system and the challenges it has ahead, two years after the approval of the financial
assistance programme for Spain, and five months after the conclusion of this programme
once its objectives were met.
In particular, after discussing the macroeconomic environment and reviewing the
transformation of the banking sector over the past two years, I shall focus on the public cost
the process has entailed and highlight the main challenges facing both the financial industry
and the financial authorities.
1. Progressive recovery in the Spanish economy
Allow me to begin with a brief overview of the current situation of the Spanish economy,
which is far different from that two years ago, when the extreme tensions on the capital
markets derived from the institutional crisis of the euro area, the vulnerability of public
finances and of part of the banking system, and the recession under way drove the Spanish
government to apply for financial assistance.
At present, the economy, after beginning to show moderately positive growth rates in the
second half of 2013, is set on a path of recovery. The information available indicates that
year-on-year growth rates might draw close to 2% late next year.
Positive figures can likewise be seen in the labour market. Following a process of job
destruction that ran for over five years, the incipient recovery in the market observed in the
closing months of 2013 has gained in momentum in the first half of 2014, providing for a
slight reduction in the unemployment rate which, however, remains at unacceptably high
levels.
The firming of the improvement in the labour market is crucial for driving the expansion of
domestic demand and, thereby, making the incipient path of recovery sustainable.
Contributing factors here must also include the adjustments made by the economy, which
have seen an appreciable moderation of the main imbalances in public finances, the external
balance, private-sector debt and the real estate market. The measures recently announced
by the European Central Bank (ECB), aimed at containing the risk of the euro area running
an excessively low inflation rate over a prolonged period, likewise contribute to bolstering the
growth outlook for our economy and assisting the adjustment under way.
But let us not forget that the crisis - complete with double-dip recession - in the Spanish
economy has had a most severe impact on employment and income levels, and has caused
a most pronounced setback in terms of real convergence with Europe. Merely restoring
pre-crisis levels of well-being will take several years. Evidently, here, maintaining the reform
drive is crucial for speeding the process of recovery of the levels of economic prosperity lost
due to the crisis.
2. Banking sector: situation following the reform
The Spanish banking sector has concluded a far-reaching transformation, entailing the
cleanup, restructuring and recapitalisation of the most vulnerable banks, all resulting from the
transformation of the former savings banks. The consequences of this reform have been
reviewed on various occasions, so I need not detail them here. Allow me merely to
summarise the three key elements of the process.
i) Firstly, the reform has driven an intense restructuring and re-sizing of the banking
industry, enabling its excess capacity to be corrected.
Of note has been the integration of savings banks into existing or newly created banking
groups, which has enabled the number of credit institutions to be reduced by over 30. Banks
have in the past two years also stepped up the process of re-sizing initiated at the onset of
the crisis. Overall, in the last six years, the sector has reduced numbers of offices and
employees by around 25%. This has appreciably strengthened the average operational
efficiency of the sector.
ii) Secondly, bank balance sheets have been subject to an intense clean-up. This has
enabled one of the main sources of vulnerability of the Spanish banking sector,
namely its excessive exposure to the real estate sector, to be defused. In particular,
claims on the real estate sector, including loans and foreclosures net of provisions,
declined by close to 60% from December 2011 to December 2013.
This has been possible mainly thanks to three fundamental factors: i) the increase in
provisioning requirements established in 2012 by royal decree-law, ii) the revision of the
classification and level of provisioning of restructured and refinanced loans in light of the
related guidelines issued by the Banco de España in 2013 and iii) the transfer of real estate
assets to Sareb by the banks that received public aid under the financial assistance
programme.
iii) Lastly, bank solvency ratios have been notably strengthened thanks to the
recapitalisation of vulnerable institutions under the financial assistance programme.
The remaining banks have also made appreciable improvements to their levels of
own funds through various means such as the issuance of capital instruments, asset
disposals or retained earnings, in line with the recommendations on dividend
pay-outs made by the Banco de España over the past two years.
3. Cost of the reform of the banking sector
At this stage we might ask what the necessary total cost has been to ensure the stability of
the banking system and how it has been distributed among the various parties involved. And,
specifically, we can ask what the taxpayer has contributed in this process.
An accurate reply to these questions is no easy task, as two factors combine to complicate
the estimations required. First, not all aid has already been disbursed; rather, it consists of
guarantees covering against future losses that only have a certain likelihood of occurring.
Second, not all aid disbursed will entail a loss for the public coffers, insofar as it may be
partly or fully recouped through its return by the recipient banks themselves or from the
proceeds of the sale of State stakes in these banks.
That said, a good starting point to disentangle the matter is the note published last week by
the Banco de España,1 which included an update of the different types of public financial
assistance provided to the banking sector in the period 2009-2013.
Essentially, three different types of public financial assistance have been made available.
The first and most significant type have been the contributions of funds in the form of
subscription of capital instruments, whether ordinary shares or contingently convertible
bonds. These amounted to a total of €61,495 million, of which €1,760 million have already
been recouped, and encompassed actions both by the FROB and the Deposit Guarantee
Fund (DGF) which, despite being financed by contributions from the banking industry, is
included for National Accounts purposes under the public sector.
We might also add here the acquisition by the DGF of shares valued at €1,803 million of
Nova Caixa Galicia Banco Catalunya Banc held by minority investors in these banks
following the burden-sharing exercises undertaken, and the subscription by the FROB of
capital and subordinated debt instruments of Sareb for a total of €2,192 million.
The second type of public financial aid refers to the so-called Asset Protection Schemes
(APSs) or other guarantees offered by the DGF or the FROB under resolution or
restructuring processes.
APSs consist of the assumption by the guarantor of a majority portion of the risk associated
with specific portfolios of the beneficiary bank. These APSs, therefore, involve a cost that
depends on the actual losses incurred whose real amount will only be known at the end of
the period over which the guarantee is in force. In any event, the expected value of this cost
shall be regularly evaluated by independent experts so that the guarantor agency (the FROB
or the DGF) may make the related provision in its financial statements.
Finally, the third type of public aid comprises State-backed guarantees of debt issues by
certain banks and the extraordinary credit facilities offered to provide liquidity to the sector.
As regards these guarantees, no loss from these contingencies is expected to arise for the
State, which will in turn receive revenue in the form of fees and commissions. Currently,2
69% of the guarantees granted have been returned and the termination process is expected
to continue in accordance with the redemption of the issues. Likewise, all amounts drawn
down on the credit facilities were duly repaid and the other available facilities have been
settled following the recapitalisation or, where appropriate, disposal of the recipient banks.
As of today, therefore, the public assistance granted is essentially in the form of the capital
contributions made and the guarantees offered. That said, not all of the public assistance
granted that I have described involves a direct cost to the taxpayer, since the banking
industry has also contributed via the DGF.
Hence, to estimate the direct cost to the taxpayer of the aid provided to banks, we should
first consider the amounts paid out by the FROB to these banks, add this to the expected
cost of the APSs extended by the FROB (at Banco de Valencia and Caja Sur) and of other
guarantees and coverage offered by it in connection with resolution processes, and subtract
the amounts recouped or expected to be recouped.
That is to say, we should firstly calculate the funds paid out by the FROB to purchase shares
or contingently convertible bonds, which amount to €53,553 million, adding these to the
estimated cost of the APSs and other guarantees granted in resolution processes which, on
the latest valuations available, account for €2,087 million.
From this amount it would be necessary to subtract the recovery of the amounts disbursed
through the redemption of convertible bonds subscribed by the FROB or the disposal of the
FROB's shareholdings in the banks receiving aid. Here, the €1,760 million from the sale of
NCG and the return of the aid granted to Banca Cívica by Caixabank3 should be recorded.
Further, the convertible bonds subscribed by the FROB in Caja3 (absorbed by Ibercaja),
CEISS (absorbed by Unicaja) and Liberbank, are highly likely to be redeemed before 2017,
entailing the return of €1,135 million.
The most uncertain element of the recoverable amounts is the estimation of the outcome of
the sale of Catalunya Banc, currently under way, and of the divestment of BFA/Bankia and
BMN. However, it is likely that these disposals will entail an appreciable lessening of the cost
that the restructuring of the financial system has involved for taxpayers.
In any event, the figures are sizeable. However, in terms of GDP they are not higher than
those recorded in other European countries during the financial crisis despite the fact that, in
most of them, banks have not had to face a real shock with an impact on the scale of that of
the collapse of the real estate sector in Spain.
As discussed earlier, the banking industry - via the Deposit Guarantee Fund - has also
contributed notably to stabilising the financial sector. This contribution has been possible
thanks to the maintenance at all times, despite the severity of the economic and financial
crisis, of appreciable financial soundness at most institutions, representing more than 80% of
the sector as a whole.
The DGF's support was in the specific form of direct injections into CAM, UNNIM and CCM
(for a value of €7,942 million), the APSs granted to these institutions (whose estimated cost
as at 31.12.2013 was €6,898 million at present value) and the potential losses caused by the
acquisition of shares in NCG and CX, provisionally evaluated at €754 million.
4. The new challenges for the sector and the authorities
Having reviewed the transformation of the Spanish banking sector and its consequences in
terms of costs for the public coffers, I have some thoughts I would like to add on the outlook
for the sector. In particular, moreover, I wish to analyse the consequences, both for banks
and public authorities, of the regulatory reforms agreed in response to the financial crisis.
As I said earlier, the banking industry has been strengthened considerably in terms of asset
quality, efficiency and solvency. This has been the result of the restructuring undertaken, the
independent measures of the banks themselves, the regulatory changes made and the
proper application of the demanding accounting rules laid down by the Banco de España. I
trust this will all come to light in the assessment exercise which, as you know, is being
conducted at the European level as part of the groundwork for the start-up of the Single
Supervisory Mechanism (SSM) in November this year.
However, the challenges ahead are significant. The current environment, marked by still-
weak macroeconomic conditions and very low interest rate levels, continues to exert
pressure on banks' turnover and margins. While the recovery under way is being felt and
there are discernible signs of credit stabilising and non-performing loans declining, it is likely
that banks' recurring income - in line with developments in the rest of Europe - will remain at
still-low levels for some time.
In addition, the new regulatory changes, both prudential and resolution policy-related, require
not only the availability of ample capital levels but also, moreover, of other liabilities-side
instruments able to be converted into capital if needed. Taking advantage of the foreseeable
improvement in economic conditions to raise the return on equity, while responding to new
regulatory requirements, is a notable challenge for the financial system.
The path pursued by the sector as a whole - to contain financial and operating expenses
while combining diversification with the harnessing of competitive advantages and
moderating dividend pay-outs and remuneration - is an appropriate one for adjusting to the
new competitive, regulatory and supervisory environment within the framework of the SSM.
Turning to what are essentially institutional matters, several challenges remain. I would like
to indicate three of these.
First, to conclude the reform of the Spanish banking sector, it is necessary to complete the
adaptation of savings banks to the new arrangements stipulated in Law 26/2013 of
27 December 2013 on savings banks and bank foundations. This Law is a fundamental step
for ensuring that all credit institutions are managed independently and professionally so that
the governance problems which contributed to destabilising part of our financial system are
diffused once and for all.
In practical terms, this year should see the completion of the transformation of virtually all of
the savings banks - those still existing as such - into ordinary foundations or bank
foundations. For this purpose, and as it is legally conferred to do, the Banco de España is
drafting a Circular. This Circular will regulate the core aspects of the functioning of bank
foundations in order to safeguard the healthy and prudent exercise of the dividend and voting
rights corresponding to them as the shareholders of credit institutions, thereby ensuring the
professional management of such credit institutions. The Circular will specify aspects such
as: (i) the content of the protocol governing bank foundations' management of their
ownership interest in the credit institution; (ii) the financial plan, which will envisage how they
must meet the possible capital needs of the institution in which they have an ownership
interest; and (iii) the requirements which the reserve fund must fulfil as regards its funding,
target volume and possible uses; all the foregoing in cases where, given the percentage of
ownership they hold in the credit institutions, these requirements must be met. Similarly, the
Circular will determine the circumstances in which bank foundations will be compelled to
diversify their investments and, if appropriate, to relinquish control of the credit institutions
which they own through the corresponding divestment. I trust that the period for public
consultation of the Circular will open shortly.
Second, the new European framework of resolution is already prompting, in most national
jurisdictions, reflection on the institutional architecture of bank resolution.
In the past, resolution agreements have required close collaboration between the various
authorities involved in the process; namely, the supervisor, the resolution authority, if any,
and the governments concerned insofar as the resolution has habitually required the use of
substantial public funds.
The experience in our country has been no exception. The current distribution of functions
between the Banco de España and the FROB - whose Governing Committee includes
representatives of the Ministry of Economic Affairs and Competitiveness, the Ministry of
Financial Affairs and Public Administration, and the Banco de España - has required that the
two institutions were intensely involved in the resolution processes. Thus, while the
supervisor is responsible for initiating the resolution process of an institution and approving
the resolution plans, the FROB must prepare these plans, put them into practice and, in sum,
manage the State's ownership interest in those institutions that received financial aid,
including any future divestment. Consequently, the coordination between the Banco de
España and the FROB has been pivotal in ensuring effective management of the crisis.
The Single Resolution Mechanism, whose regulation will be published shortly, includes the
delegation of the resolution powers in relation to significant institutions to a new European
agency (the Single Resolution Board). At the same time, as a result of the new Recovery and
Resolution Directive, the combination of significant requirements governing the "bail-in" of
bank creditors to cover the potential capital shortfalls of non-viable institutions and the
availability of a common resolution fund wholly funded by the industry will considerably
reduce the need to resort to using public funds in bank resolution processes. Consequently,
the changes introduced by the new European resolution framework could require some
adjustments to national arrangements which affect the nature of the resolution authority, its
relationship with the supervisor and the degree of direct involvement of government
authorities.
Finally, I think the time is right to reflect on possible regulatory changes that may help to
maintain the strength of other areas of the financial sector, such as credit cooperatives, in the
new regulatory and competitive setting.
The cooperative sector in Spain, unlike other countries, barely represents 6% of credit
activity in Spain, but it plays an important role in specific fields such as rural areas. The
sector, in most cases, is well-capitalised with comfortable liquidity positions as a result of
pursuing prudent, retail customer-focused management and of scant exposure to the real
estate development business. This has enabled it to avoid the problems experienced by
other types of institutions.
That said, regulatory changes and competitive pressure also pose an important challenge for
these institutions which will require them to maintain sufficient levels of operational
effectiveness, effective control of risk concentration and, especially, sound foundations for
ensuring that regulatory capital is preserved and, if necessary, increased.
Consequently, in line with the recent announcement made by the Minister of Economic
Affairs and Competitiveness, possible regulatory adjustments need to be studied which,
while conserving the essential core of the current business model of credit cooperatives and
without calling their identity into question, ensure the soundness of the sector in a more
demanding environment. I think that the organisation of credit cooperatives in other
advanced economies, where they represent a larger share of the banking business than in
Spain, are a useful reference for the reflection I referred to earlier.
Thank you very much.