23.06.2023  The Spanish banking industry: developments and challenges against a backdrop of uncertainty 40th APIE Seminar (Spanish Financial Press Association) Santander Pablo Hernández de Cos Governor  I would like to thank the Spanish Financial Press Association (APIE) for once again inviting me to take part in this event, thus giving me the opportunity to share with you the Banco de España’s view of developments in the Spanish banking industry and the challenges ahead. To set this analysis in context, I will first outline the economic outlook and the most recent decisions taken by the European Central Bank (ECB). The global and European context Global economic activity has performed relatively favourably in 2023 to date, supported by a notable easing of energy prices and fewer disruptions to global value chains. Moreover, the services sector has continued to benefit from the end of the health crisis, while strong labour markets and fiscal policy support have helped sustain the strength of activity. That said, some signs of weakness have also been discerned in the most recent period, especially in manufacturing. In the euro area, GDP contracted slightly in the last two quarters. In particular, 2023 Q1 saw private consumption decline and net exports make a positive contribution, mainly as a result of the contraction in imports prompted by weak demand and lower energy consumption. According to the latest Eurosystem projections, in Q2 growth will recover to around 0.3% quarter-on-quarter, although the most recent data suggest that this figure could be somewhat lower.

Our estimates show that a 400 bp increase in market interest rates, similar to that observed in the 3-month EURIBOR since December 2021,16 could drive up non-financial corporations’ median gross interest burden by between 2.9 pp and 6.8 pp,17 and the percentage of corporate debt held by corporations under high financial pressure18 by between 6.5 pp and 8.9 pp, compared with end-2021 levels. For households, a 450 bp increase, in line with that observed in the 12-month EURIBOR19 since end-2021, would raise the percentage of households with a high net interest burden20 by 3.9 pp. This effect would tend to be more marked among lower-income indebted households, which are also being harder hit by rising inflation. In this regard, the reform in late 2022 of the Code of Good Banking Practice (CGP) focuses precisely on providing for orderly debt restructuring for household segments with a high degree of socio-economic vulnerability. How different banks and financial systems are positioned against these risks will determine their level of resilience. In this respect, amid such high uncertainty, including that surrounding the degree of monetary policy tightening, Spanish banks must implement a prudent provisioning and capital planning policy. A policy that earmarks part of the higher profits obtained in the short term to bolster banks’ resilience would mean they would be better placed to absorb any potential losses should the worst risk scenarios materialise. From a European standpoint, a smoother-functioning euro area with improved governance would contribute hugely to making the European financial system less vulnerable.