has had on our banking system. what has changed, then, since 2012, when spain signed up to the financial assistance programme? naturally, much of the soundness gained by our financial system reflects the general improvement in economic conditions over the past two years, stemming from the stabilisation of international markets, the institutional changes and the monetary policy measures taken at the european level, along with the reforms to our economy ’ s productive sector. at the same time, however, i believe that the reforms in the financial sector have managed to significantly mitigate, if not eliminate, some of our banking system ’ s negative particularities, which made it especially vulnerable to the macroeconomic and financial shocks witnessed since the start of the crisis. in my view there were four such vulnerabilities. 1. firstly, the lack of sufficient capital at that time and, generally, of loss - absorption capacity in a significant part of the banking sector. correcting this shortcoming was, as you will recall, the main objective of the financial assistance programme. the capital shortfalls identified in the 2012 stress tests were corrected by recapitalisation measures that combined capital increases at some banks, burdensharing mechanisms and the contribution of public funds in eight banking groups that were unable to cover their needs by their own means. more recently, an appreciable number of banks have taken advantage of improved market conditions to issue various capital instruments ( for an amount of over €3. 7 billion since the start of the year ). moreover, banks have generally pursued a policy of containing dividend payouts and returns on deposits, following the recommendations made by the banco de espana. 2. the second main flaw in our financial system was a disproportionate exposure to assets with highly pro - cyclical credit quality and, in particular, to the real estate sector. this vulnerability was corrected through two main channels : by increasing the volume of development risk provisioning required in 2012 and, of course, by establishing sareb, the external asset management company to which all the real estate exposure of the most vulnerable institutions was transferred. more recently, the level of coverage of credit portfolio risk was reinforced by the review, by the banco de espana, of the criteria for classifying refinanced and restructured loans by risk and, therefore, of the level of provisioning required. all these steps, on top of the traditionally conservative provisioning policies followed in spain, reduced the latent risk on balance sheets and increased

these variables to more reasonable levels. this adjustment has begun in spain with households and corporations generally in a sound financial position. at the same time, the quality of bank balance sheets is high compared with other countries'banking systems. notwithstanding this, and as a natural consequence of credit growth in the past, and of a macroeconomic setting characterised by a cyclical turning point, we should expect continuing rises in bad debts in the coming months. this rise in bad debts should concern us, and indeed it would be alarming if bank regulators and supervisors were unconcerned ; but it does so only moderately, bearing in mind the resilience of the banking sector according to the stress tests performed by the banco de espana under assumptions in which extremely adverse scenarios materialise. nor will i be referring today to the problems that are common to all adjustment processes, the adjustment in the spanish economy having moreover begun before the turbulence emerged last summer. rather, i shall be focusing on what for me is the worst effect of this turbulence : the global financial market dysfunctions. so you may better understand my subsequent remarks, i would like to very briefly outline how, starting from a very limited segment of the us mortgage market ( the subprime mortgage segment ), we have reached a generalised situation of international financial market turbulence. the factors behind the current situation are complex. but in my opinion there are two key elements that explain such an intense process of propagation. first, and as already stated, low risk premiums and very low volatility led to a strong increase in leverage on international financial markets and a big appetite for risk in the search for high yields, a tendency in which certain financial institutions in some countries participated. also, and in relation to the foregoing, the development of a banking model focusing on the origination of loans for their subsequent distribution on the financial markets, underpinned by the securitisation of assets through certain complex structured products and by the use of off - balance sheet investment vehicles, introduced inappropriate incentives as regards the granting of financing and the subsequent management of the associated risks. in my view, it is these latter elements which explain the intensity and speed with which the turbulence has spread. starting from this idea, i shall draw five lessons which i consider highly relevant for the future. i will then evaluate the spanish banking system in relation to each of them in order, finally, to identify certain tasks which we should, each from our own area of responsibility, address so as to