This is associated with the adaptation to a more demanding regulatory framework that involves higher requirements in respect of own funds and liquid assets, along with other additional demands derived from the new resolution regulations. These regulatory changes, which have been introduced globally, are the response by the economic authorities to the shortcomings highlighted by the international financial crisis. Their essential aim is to increase banking systems’ resilience in the face of adverse shocks and to prevent taxpayers from having to bear the cost of the resolution of ailing banks. The first raft of reforms, known as Basel III, which was designed between 2010 and 2011, focused on increasing the volume of bank capital and improving its quality, and on the introduction of new minimum liquidity requirements and counterparty exposure limits, and of macroprudential instruments, such as the so-called countercyclical capital buffer. All these requirements will be effective, practically in their entirety, in late 2019. Spanish banks have already largely adapted to these new requirements, with their liquidity and capital ratios currently standing above the minimum levels stipulated. In any event, as 6/8  regards the CET 1 and Tier 1 solvency ratios, their aggregate levels – albeit with significant dispersion across banks – are, as at March 2018, low compared with those of the euro area banking systems, according to data from the European Banking Authority. This once again highlights the need for Spanish banks to adopt capital-strengthening strategies. With regard to the solvency regulatory measure, which does not take into account risk weightings, i.e.

Low interest rate levels have contributed to compressing banks’ net interest income given that, with zero proving an effective floor for the remuneration of most deposits, once that level is reached banks have not been able to continue reducing their funding costs in a setting in which risk-free returns have come to stand at negative values. In any event, the evidence available indicates that this negative effect on net interest income has been partly offset by a lesser pass-through of market movements to the interest rates on the outstanding balance of lending. It should be borne in mind, moreover, that the reduction in interest rates also has some positive effects on bank profits via various channels. On one hand, the expansionary monetary policy has a favourable impact on economic activity, boosting the demand for credit and for other banking services. On the other, the decline in the return on risk-free assets tends to raise the value of assets by reducing the discount factor implicit in their price, which translates into capital gains for the banks. Lastly, the decline in interest rates is conducive to a decline in loan default losses, as it reduces the debt burden and raises borrowers’ income as a result of the boost to economic activity it entails. Overall, the above points suggest that the net final impact of the low interest rate levels on bank profitability has been comparatively low compared with the other above-mentioned factors. I will now move on to the third major challenge the Spanish banking industry faces.