miguel fernandez ordonez : reflections on the spanish banking sector and economy opening remarks by mr miguel fernandez ordonez, governor of the bank of spain, at the “ xviii encuentro del sector financiero ”, organised by deloitte - abc, madrid, 5 april 2011. * * * good morning, i am most grateful to deloitte and to abc for giving me this opportunity to share with you some reflections on the banking sector and economy of our country. in my talk i am going to take a hopeful view of the future of our economy and our banking system, based on the extent of the adjustment already under way and the progress made with fiscal consolidation and structural reforms. let no one be mistaken, i am speaking about the future, because the present continues to be dominated by an overwhelming statistic : the more than four million who are unemployed. until this number is significantly reduced, nobody is entitled to even hint at the slightest satisfaction. but it is true that, for the first time since imbalances began to build up in the late 1990s, spanish society seems to be prepared to change and to undertake reforms that are absolutely essential, not just for growth, but for solid and sustained growth. and such change, perceived and appreciated by the markets, is the main base for a hopeful view of the future, although there is clearly still much to be done and no time for any let - up in our efforts. what has been done so far i shall begin by examining progress to date. at the time of the outbreak of the international financial crisis the spanish economy and banking system had seen more than ten years of real estate expansion, excessive private indebtedness and continual competitiveness losses. such imbalances had been generated in an environment characterised by very low interest rates and dominated by the absence of any significant structural reforms in relation to public spending, pensions, the labour market or savings banks. after ten years building up imbalances it was inevitable that the economy would have to adjust and reforms were essential to restore growth and employment as soon as possible. if we examine what has happened during the two and a half years since the collapse of lehman brothers, it is clear that our country ’ s economy and banking system have both made considerable progress in terms of adjustment and restructuring. the private sector has made progress in reducing its imbalances at a faster rate than in other countries with similar problems : the external deficit fell from 10 % of gdp at the beginning

of the approval of its merger, another institution recorded a fair value adjustment for an amount exceeding €5. 5 billion in its year - end accounts, in accordance with accounting regulations. provisions had already increased by €7. 6 billion between june 2019 and june 2020. as a result of its merger with bankia, in march 2021 caixabank recorded positive extraordinary results of €4, 272 million ( €4, 300 million in negative goodwill less €28 million in extraordinary expenses ). increase in profit in the first quarter was essentially explained by a significant reduction in provisioning, which stood at pre - pandemic levels. fourth, the unfavourable profitability performance in 2020 did not translate into a worsening of the sector ’ s solvency. quite the contrary : capital ratios increased. the reasons for this are : i ) the aforementioned negative extraordinary factors on profitability affected balance sheet items that have no bearing on prudential solvency ( for instance, goodwill ) ; and ii ) the authorities implemented various measures to shore up institutions ’ cet1 ratio, most notably the european union ’ s regulatory reform ( “ quick fix ” ) and, again, the public guarantee programme and the recommendation against paying dividends. despite their heterogeneous initial solvency positions, banks performed favourably across the board in 2020. moreover, as at december 2020, accounting capital and reserves constituted the main components of spanish banks ’ prudential capital, while deductions for goodwill lost relevance as compared with previous years owing to a significant share of this having been amortised. more recently, in 2021 q1, spanish banks ’ solvency ratios held stable relative to december 2020. short and medium - term risks in my view, this positive sector performance must not obscure some of the short, medium and long - term risks that still exist. the latest macroeconomic projections point to robust growth in the coming quarters once the vaccination programme has gathered pace and restrictions on movement have been progressively lifted. however, significant uncertainties remain as to the course of the pandemic itself, private consumption, tourism flows, the economic impact of the ngeu funds and the damage to the productive system caused by the pandemic. against this background, there is still the risk of credit quality impairment being more pronounced in the future than has been observed to date, especially in the sectors hardest hit by the pandemic, and particularly once the support measures are gradually withdrawn. in fact, some signs of