As regards the sector’s capacity and the size of banks, staff and office numbers fell by around 12%, standing at similar figures to those as at end-2004, and the average size of banks in terms of their assets increased twofold. Yet this progress was not enough to restore investors’ confidence in the soundness of our banking system. Given the double-dip recession, the insufficient reduction in the budget deficit and the continuing effects of the sovereign debt crisis, doubts persisted about the quality of construction and real estate development-related assets. In an attempt to dispel this uncertainty, various measures were adopted in the first half of 2012. Furthering the principles that have governed the ongoing restructuring of the financial system, the measures addressed accelerating the clean-up of bank balance sheets, reinforcing their solvency, boosting integration processes and promoting transparency. RDL 2/2012, approved in February, stipulated an increase in provisioning for construction and real estate development-related assets, and the creation of a capital buffer to cover potential losses arising on problem loans associated with land and ongoing developments. More recently, in May 2012, the Government approved RDL 18/2012, on the clean-up and sale of financial-sector real estate assets. The aim was to dispel doubts over the quality of Spanish credit institutions’ non-doubtful real estate portfolio. To do this, provisions for construction and real estate development-related assets not classified as troubled have been raised substantially, bringing forward the impact of potential additional impairment to this portfolio.

Since 2009, the measures in this area have adhered to a set of common principles, although changes in economic conditions and in the markets have meant governments have had to adjust them. These principles include most notably to limit as far as possible use of public funds and to minimise the length of time the State has a stake in the banks; to promote integration and restructuring processes to counter the excessive fragmentation and size of the sector; to pursue the clean-up of bank balance sheets to withstand asset quality impairment; to reinforce bank solvency; to resolve the structural weaknesses of the savings bank model, and to promote transparency. Among the measures adopted in 2011 to which the Annual Report refers is Royal Decree-Law (RDL) 2/2011 on the strengthening of the financial system. This legislation raised core capital requirements to 8% generally, and to 10% for unlisted banks with a high dependence on wholesale funding, which were those on which doubts were greatest. To ensure that all banks could meet these requirements, it was decided that the Fund for the Orderly Restructuring of the Banking Sector (FROB) should act as a backstop. Further, the RDL stipulated the obligation for those institutions requiring public aid to operate as banks, with the aim of reinforcing their fund-raising capacity, and transparency towards investors. These measures, along with pension reform, contributed most positively to the easing of market tensions witnessed in the first half of 2011, with the risk premium falling at one point below 200 bp.