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

short, at this stage it can now be said that both the authorities and private agents have made considerable efforts in the right direction and that, as a result, the process of adjustment of the banking sector and of the spanish economy as a whole is progressing reasonably well. the challenges ahead it is clear from the foregoing review of events that at a time like the present we cannot become complacent because there is still a long path ahead. in the banking sector, it is necessary to complete the process of recapitalisation and adoption of new organisational structures envisaged in the february royal decree - law. the royal decree - law, which increases the capital requirements of spanish banks, also promotes the raising of private capital and sets the timetable for recapitalisation of the banks that fail to reach the levels of capital required by the new legislation. of the 114 groups or individual institutions ( commercial banks, savings banks and credit cooperatives ) that the banco de espana examined pursuant to the royal decree - law, in more than 100 cases it concluded that there was no need for more capital. accordingly, the great majority of spanish institutions satisfied these exacting requirements. in twelve cases it was determined that additional contributions of capital were necessary to comply with the provisions of the new legislation. in one of these projects, the institutions that make it up have decided to go their separate ways, while in the other eleven cases there have been no incidents of note to date. therefore, the banco de espana will probably have to analyse thirteen rather than twelve recapitalisation plans. last week the banks submitted their strategies for complying with the new capitalisation requirements. the banco de espana has to approve or, where appropriate, require the necessary changes to be made to these plans, which must be implemented by 30 september, although the banco de espana may grant an extension of this deadline in the cases specified in the royal decree - law. it is important to stress that the frob is obliged to contribute the necessary capital to the banks which request it, as either a first or a subsequent option, to supplement or replace private capital. this contribution of government funds does not constitute, as some have argued, a nationalisation of banks, but rather exceptional and temporary support, since the bis central bankers ’ speeches frob funds must be repaid or replaced by private capital as required by the royal decreelaw. the participation of the frob in this process enables an orderly entry of private investment in the savings bank sector