luis m linde : presentation of the bank of spain ’ s annual report for 2014 testimony by mr luis m linde, governor of the bank of spain, before the parliamentary committee on economic affairs and competitiveness, madrid, 24 june 2015. * * * ladies and gentlemen, i appear before this committee on the occasion of the presentation of the banco de espana annual report for 2014. let me begin by reviewing developments in the spanish economy, the factors underpinning its recovery and the economic policy challenges of strengthening recovery. i shall then address aspects relating to the start - up of the banking union and the situation of, and outlook for, the spanish banking system. economic situation and outlook in mid - 2013, the spanish economy initiated a recovery phase that firmed last year and has continued to do so in 2015 to date. in 2014, gdp grew at a rate of 1. 4 % while employment did so at 1. 2 %, the first positive figure since the start of the crisis. in its quarterly report to be published tomorrow, the banco de espana will present a new set of macroeconomic projections. according to these, the spanish economy will grow at a rate of 3. 1 % on average in 2015, an upward revision of 0. 3 pp on the projections published in march. on the basis of this change, activity is performing better than projected three months back. following quarter - on - quarter growth in gdp of 0. 9 % in the first quarter, the latest information indicates that activity is expected to maintain a strong rate of expansion, whereby a further slight quickening in output is estimated in the second quarter, to 1 % in quarterly terms. average growth in the first half of the year, in annualised terms, is thus expected to be around 4 %. the projections for the rest of 2015 and for next year point to continuing dynamism, with spain clearly outpacing most of its euro area partners. however, this momentum might be slightly contained by the weakening of some of the expansionary impulses, such as the fall in oil prices and the depreciation of the euro. for 2016, the projections estimate average growth of 2. 7 %, with greater uncertainty naturally accompanying the longer time ahead involved. in terms of the composition of spending, the most recent phase of the recovery has been marked by the growing weight of national demand, which has replaced external demand as the main net contributor to growth. foreseeably, in the near future, this pattern will

. needless to say, banks face the challenge of re - forging their image before the public at large and their reputation with customers. as regards reputation, banks are hostages to their past, as has occurred with the credit crisis. the economic and reputational losses they have incurred are directly related to past actions and behaviour. here, we must accept that it is very difficult to combat the sector ’ s negative image while cases from the past are cropping up. i believe the lesson here is the same as that for bank solvency : we must draw a line in the sand. we must move forward, and change behaviour and the relationship with customers to construct a viable business model for the medium and long term. four years back the banco de espana reinforced its conduct - related supervisory activity. we have observed how, in general, banks have been striving to set in place the measures needed to correct behavioural practices. but much remains to be done. i stated once that we should be fair to the financial sector and acknowledge that customerprotection regulations have changed significantly in recent years. true, society has also evolved, and with it the demands in respect of the transparency, diligence, rigour and integrity expected of banks. a good reflection of this new manner of conduct is in the recent real estate credit legislation. the financial crisis has given rise to more demanding legislation that calls on banks not only to inform but also to act impartially, transparently and professionally, taking into account the rights, interests and needs of their customers. it may be said that the regulations now transcend mere transparency in form. one very positive aspect of the legislation is the improvement in legal certainty. clearly, by properly protecting the customer, the risks of litigation are being significantly reduced. and such risks are one of the main costs the sector has been bearing. let us not forget that the cost of litigation far exceeds any potential benefit that some banks might have obtained in the short term through questionable conduct. moreover, improper conduct does not only affect those banks guilty of it, but the reputation of the sector as a whole. to conclude, this new type of customer - bank relationship must be the starting point for any sustainable banking business model. naturally, if it is to be successfully set in place, a topto - bottom cultural change is essential in the organisation. this change will be headed for 10 / 13 failure if the bank ’ s senior officers and management do not offer their resolute support