Included here are physical risks, associated with the materialisation of an effective worsening of climate conditions 13  (e.g. more frequent and longer-lasting droughts, greater likelihood of fires), and transition risks, linked to the adoption of new regulations and taxes and to the transformation of the production process, aimed specifically at mitigating climate change. Intervention by fiscal and environmental authorities is key to achieving an orderly and predictable energy transition. But it is also important that the banking sector allows the financial risks present in the different stages of this process to be duly reflected. We financial supervisors must ensure that banks indeed correctly assess the risks, and promote the development of appropriate reporting standards and databases to measure them. Conclusions In view of the pandemic’s unprecedented economic impact, the Spanish banking sector has emerged as a mitigant of the shock and is called upon to play a key role in financing the recovery. This has been possible for two reasons. First, the sector's healthier starting position, following its restructuring, and the prudential regulations adopted after the global financial crisis. Second, the essential role played by the public support measures in mitigating the impact of the crisis on borrowers’ credit quality, thus preventing a financial crisis component that would have made it deeper and longer-lasting. That said, the crisis has had an adverse and heterogeneous impact on the sector’s profitability, although solvency and default rates have not suffered to date thanks to the support measures adopted.

However, this adverse result was influenced by the negative extraordinary adjustments made during the year at some of the system’s main institutions.3 Excluding these adjustments, the sector’s profitability would be positive, albeit considerably down on the previous year, with ROA standing at 0.3% and ROE at 4.3%. The decline in the sector’s return on ordinary activities essentially owed to the reduction in net interest income and fees and, particularly, the increased provisioning in anticipation of credit impairments. Meantime, the appreciation of the euro against other currencies, particularly those of some emerging countries, has lessened the contribution made to results by business abroad, whose figures, measured excluding the exchange rate effect, have been more stable. In the year as a whole, losses due to provisions for impairment losses on financial assets amounted to € billion, up on the 2019 figure. In any event, the bulk of this increase was recorded in the first half of the year,4 and slowed significantly from June. The sector’s results were positive in 2021 Q1, albeit largely conditioned by the positive extraordinary results arising from a merger.5 These extraordinary elements aside, the 3  In particular, the two largest institutions recorded adjustments to goodwill for an amount in excess of € billion, along with other adjustments such as those linked to tax assets € billion). As a result of the approval of its merger, another institution recorded a fair value adjustment for an amount exceeding € billion in its year-end accounts, in accordance with accounting regulations.