the adaptation to a more demanding regulatory framework that involves higher requirements in respect of own funds and liquid assets, along with other additional demands derived from the new resolution regulations. these regulatory changes, which have been introduced globally, are the response by the economic authorities to the shortcomings highlighted by the international financial crisis. their essential aim is to increase banking systems ’ resilience in the face of adverse shocks and to prevent taxpayers from having to bear the cost of the resolution of ailing banks. the first raft of reforms, known as basel iii, which was designed between 2010 and 2011, focused on increasing the volume of bank capital and improving its quality, and on the introduction of new minimum liquidity requirements and counterparty exposure limits, and of macroprudential instruments, such as the so - called countercyclical capital buffer. all these requirements will be effective, practically in their entirety, in late 2019. spanish banks have already largely adapted to these new requirements, with their liquidity and capital ratios currently standing above the minimum levels stipulated. in any event, as 6 / 8 regards the cet 1 and tier 1 solvency ratios, their aggregate levels – albeit with significant dispersion across banks – are, as at march 2018, low compared with those of the euro area banking systems, according to data from the european banking authority. this once again highlights the need for spanish banks to adopt capital - strengthening strategies. with regard to the solvency regulatory measure, which does not take into account risk weightings, i. e. the leverage ratio, the spanish banking system as a whole shows, on the contrary, slightly higher levels than the euro area average. also, spanish banks evidence, overall, a sound liquidity position, with their lcr ratio above the european average. regarding the resolution of institutions, in recent years a number of regulations have been approved in europe establishing a common framework for the eu, and defining the circumstances in which banks with financial difficulties should enter wind - up or resolution processes. in this setting, a new category of senior non - preferred debt instruments has been created, which ranks below senior debt in the payment priority of insolvency proceedings, with a view to facilitating compliance with the minimum requirements for own funds and eligible loss - absorbing liabilities, known as mrel. the mrel requirements that the single resolution board has started to set for significant european institutions are an added reason for spanish banks to strengthen their capital in the present environment of recovering profitability and

05. 10. 2018 the challenges to the spanish banking industry conference on banking, profitability and monetary normalisation / universidad de deusto, kpmg and el correo pablo hernandez de cos governor good morning. let me first thank the organisers for their kind invitation to me to participate in this deusto university event. it is a pleasure to be here with you today and to share some thoughts on the banco espana ’ s view of the main challenges currently facing the spanish banking industry. as is well known, credit institutions were greatly affected by the last crisis. this was manifest in a strong rise in impaired assets, including both non - performing loans and real estate foreclosures, and in a significant fall - off in profitability, which even turned negative in 2012. to address these problems it was necessary to undertake intense recapitalisation and restructuring in the industry. as a result, there has been a notable and generalised improvement in spanish banks ’ financial position. also contributing here have been the recent roll - out of an extensive package of regulatory measures and the favourable course since 2013 of the macroeconomic setting and financial conditions, assisted by the ecb ’ s monetary policy measures and by other actions at the european and domestic levels. the spanish banking industry ’ s improved financial position in recent years can clearly be seen both in terms of asset quality and in its profitability and solvency levels. thus, from december 2013, when the deterioration in bank balance sheets was at its worst, to june 2018 the volume of non - performing loans in transactions with the resident private sector has declined by 60 %. and the amount of foreclosures has done so by 40 % since its 2012 peak. the consolidated return on equity, which in 2012 stood at around - 25 %, has gradually picked up to levels of 7 % on data as at june 2018, and the overall capital ratio has risen from 11. 4 % in 2012 to 15. 1 %. despite this notable improvement in its financial position, the spanish banking industry continues to face significant challenges. these are largely shared by other banking systems in the euro area, and include i ) the reduction in assets impaired by the crisis, ii ) the recovery in profitability, such that spanish banks may draw closer to the solvency levels of other euro area banks, iii ) adaptation to the new regulatory framework and, iv ) the configuration of a new competitive setting characterised by the emergence of new technologies and competitors. i shall now