This has led to growing concern about conduct risk in the social, political and supervisory domains, and naturally in the industry itself. This concern is also shared internationally, as reflected in the recent work of the Financial Stability Board to strengthen the governance and remuneration frameworks in order to mitigate the risk of misconduct. The Banco de España strengthened its supervisory activity in relation to conduct four years ago. This greater supervisory presence, along with regulatory requirements, the need to adapt to new and more demanding customers and judicial rulings in defence of consumers, is prompting banks to react, and they are making efforts to implement the measures needed to correct these practices. However, much remains to be done. Banks must be more proactive in developing a strong culture that is not only oriented towards complying with customer transparency regulations, but also fundamentally towards identifying and satisfying customer interests. This requires the involvement and commitment of governing bodies and the spread of these values throughout the institution; especially to the sales network, which must have an incentive mechanism that does not give rise to perverse or counter-productive incentives. In short, banks must incorporate the customer protection perspective into their risk appetite framework, making it a cornerstone of their governance and decision-making processes. For this process to be successful, the control of regulatory compliance in the marketing and management of banking products and services needs to be strengthened.

The total capital ratio, meanwhile, has increased by 1.7 percentage points over the last four years, and the leverage and liquidity ratios are above the European averages. Indeed, the recent stress tests carried out by the European Banking Authority (EBA) and the Banco de España show the considerable resilience of Spanish banks’ solvency under adverse scenarios. However, while recognising the significant progress made in recent years, the Spanish banking industry continues to face significant challenges, which are largely shared by other euro area banking systems. Notable among them are: i) the need for further progress in reducing unproductive assets which remain at high levels; ii) raising profitability; iii) strengthening the industry’s reputation by preventing misconduct; iv) adapting to the new regulatory framework and strengthening the highest-quality capital ratios; and v) competing in a new financial environment arising from technological progress and the emergence of new players (see Chart 2). Reducing unproductive assets As I have already said, the reduction in non-performing loans and foreclosed assets from the peak levels they reached during the crisis has been significant. Private-sector nonperforming loans, which have fallen by 60% from their peak in 2013, currently stand at the same level as in 2009. Foreclosed assets have followed a similar pattern, falling by 40% from their peak in 2012. The economic recovery has certainly contributed to this process, but it has also been driven by credit institutions’ management of troubled assets and by supervisory pressure.