04.10.2022  The situation of Spanish banks in the new macro-financial environment* V Foro Banca/elEconomista Pablo Hernández de Cos Governor  *lEnglish translation from the original in Spanish. *  Good morning. Allow me to begin by thanking El Economista for inviting me to participate, once again, in this banking forum, which represents an excellent opportunity to discuss the present situation of the banking industry and the implications of the current macro-financial environment. Our societies have been hit by several global events (the pandemic, Russia’s invasion of Ukraine) in quick succession, generating a highly complex macro-financial environment in which the risks of a global cyclical downturn have been magnified by persistently high global inflation, the tightening of financing conditions stemming from the widespread normalisation of monetary policy and the heightened uncertainty prompted by a broad-based downward revision of growth forecasts. The question of how the banking industry could be affected by this complex setting is an important one. The starting point: a banking industry with lower non-performing loan ratios and profitability above cost of capital To answer that question, I should first emphasise that the Spanish banking sector started out from a relatively favourable position. Allow me to illustrate this point with a few figures. First, the quality of banks’ balance sheets continued to improve through to 2022 Q2. Nonperforming lending to the resident private sector fell by 12.4% in 2022 Q2, seeing the pace of correction return to pre-COVID-19 levels after easing to rates of 5% following the pandemic.

Nonetheless, the most recent data could suggest a change in trend in this market stemming from the macro-financial setting that I have described. Specifically, housing transactions contracted in July, which is significant given that this month usually has a positive seasonal component. Also, house prices ceased to accelerate in Q2, posting growth similar to the first three months of the year. In any event, we will have to wait for new information to assess this behaviour more accurately, meaning we will need to keep a close eye on this market. As for the public sector, fiscal policy has clearly played a key role since the outset of the pandemic to soften its impact on household and corporate income, thus avoiding more persistent negative effects. The corollary of this has been a significant increase in public debt relative to GDP, which was already high before the pandemic. This high government indebtedness and the likewise high structural budget deficit evidently represent vulnerabilities when faced with a tightening of financing conditions, as is the case at present, and reduce fiscal policy headroom to respond to future shocks. Mitigating factors include most notably the higher-than-initially-forecast reduction in public deficit in 2022 and the significant lengthening of the average government debt maturity in Spain, which stands at more than eight years and delays the impact of interest rate increases on the public debt burden. In any event, Spain’s annual public sector financing requirements stand at high levels, around 20 pp of GDP.