Featured Product

    IMF Publishes Reports on the 2018 Article IV Consultation with Spain

    November 21, 2018

    IMF published its staff report and selected issues report under the 2018 Article IV consultation with Spain. Directors welcomed further strengthening of the banking system. They stressed the importance for banks to continue raising high-quality capital as a shield against shocks, including from potential spillovers related to market volatility. Directors underscored the need for rigorous management of liquidity and interest rate risks, particularly ahead of the eventual gradual normalization of the accommodative policies of ECB. They welcomed the authorities’ plan to create a macro-prudential authority to better address potential financial stability risks and to swiftly expand the macro-prudential toolkit of the Bank of Spain.

    The staff report notes that health of the banking system continues to steadily strengthen. Asset quality improved as nonperforming loans (NPLs) on a consolidated basis dropped to 4.5% of total loans in the first quarter of 2018, just below the euro area average. Implementation of the NPL guidance of ECB is critical to keep reducing impaired assets. Since August 2017, several major banks have announced plans to dispose of NPLs. However, some banks still need to lower their elevated levels of NPLs and foreclosed assets.  The common equity tier 1 (CET1) ratio inched up by 0.3 percentage points to 13.4% at the end of 2017. CET1 capital on a fully loaded basis remains lower than that of many European peers, even though they are generally less leveraged. Similarly, by some estimates, the Spanish banking system may be among those in Europe facing relatively large shortfalls to comply with the upcoming minimum requirements for own funds and eligible liabilities (MREL) targets. The resolution of Banco Popular, via the purchase by the largest bank in Spain, and the merger of the two state-owned banks have consolidated the banking sector further, with a potential to improve the system efficiency. 

    The report shows that banks continued to build capital buffers, but progress has been slow and uneven. Continuing the buildup of capital buffers and keeping on track the buildup of “bail in-able” debt in the largest banks would help to shield against shocks, especially related to interest rate and sovereign risks, where exposure of the Spanish banking system is relatively high. Larger capital buffers would also help protect banks from potential spillovers related to volatility in emerging markets, as any significant increase in asset impairment at Spanish banks’ large subsidiaries would impact group-wide profitability. The report highlights that while gradually rising interest rates might support profitability, stress tests performed during the 2018 Euro Area Financial Sector Assessment Program (FSAP) and the 2017 Spain FSAP suggest that sharp interest rate increases could erode margins via higher funding costs, and that some banks are vulnerable to interest rate and government bond yield shocks through valuation effects and trading losses, given their significant exposures to long-duration sovereign bonds.

    The report further notes that the 2017 FSAP identified four priority areas where momentum must endure. These include accelerated cleanup of legacy bank assets, further improvement in bank profitability and capitalization, rigorous management of interest and liquidity risks, and reform of the institutional framework for financial oversight. Actions taken to address FSAP recommendations so far have been limited in some areas. FSAP called for a tough stance on the implementation of the ECB NPL guidance, including promoting banks’ disclosure of NPL reduction targets and progress. FSAP also proposed to establish a Systemic Risk Council—chaired by the Bank of Spain and comprising the Treasury and other financial oversight agencies—to bolster systemic risk surveillance and promote inter-agency coordination. The Spanish authorities are moving in this direction, as they are drafting a proposal for a national macro-prudential authority.

    Additionally, the focus for institutional upgrades has been on creating an independent insurance and pensions supervisor, a financial consumer protection authority, and enhancing the transparency of the appointment process for senior positions at financial oversight agencies. The urgency to enhance the macro-prudential toolkit has risen. Even though there is no clear evidence, so far, of a generalized house price overvaluation, it is critical that the Bank of Spain has a comprehensive toolkit at its disposal to enable it to act promptly if misalignments emerge. This means that a legal basis should be established for the use of macro-prudential tools. The authorities have three near-term priority financial sector projects, including setting up of a national macro-prudential authority, transposing the EU mortgage directive into national law, and launching a sandbox for facilitating innovation in financial activities within a controlled framework.

     

    Related Links

    Keywords: Europe, Spain, Banking, Insurance, Securities, Macro-prudential Framework, NPL, FSAP, Stress Testing, Systemic Risk, Article IV, IMF

    Featured Experts
    Related Articles
    News

    EBA Analyzes Impact of Unwind Mechanism of Liquidity Coverage Ratio

    EBA published a report analyzing the impact of the unwind mechanism of the liquidity coverage ratio (LCR) for a sample of European banks over a three-year period, from the end of 2016 to the first quarter of 2020.

    November 19, 2020 WebPage Regulatory News
    News

    ECB Outlines Views on Possible Changes to AnaCredit Rule and TLTROs

    In response to questions from a member of the European Parliament, the ECB President Christine Lagarde issued a letter clarifying the possibility of amending the AnaCredit Regulation and making targeted longer-term refinancing operations (TLTROs) dependent on the climate-related impact of bank loans.

    November 19, 2020 WebPage Regulatory News
    News

    IASB Begins First Phase of Post-Implementation Review of IFRS 9

    IASB started the post-implementation review of the classification and measurement requirements in IFRS 9 on financial instruments and added the review as a project to its work plan.

    November 18, 2020 WebPage Regulatory News
    News

    FSB Report Examines Progress in Resolvability of Systemic Institutions

    FSB published a report that examines progress in implementing policy measures to enhance the resolvability of systemically important financial institutions.

    November 18, 2020 WebPage Regulatory News
    News

    EBA Benchmarks National Insolvency Frameworks Across EU

    EBA published a report on the benchmarking of national loan enforcement frameworks across 27 EU member states, in response to the call for advice from EC.

    November 18, 2020 WebPage Regulatory News
    News

    FSB Reports Assess Impact of Pandemic on Financial Stability

    FSB published a letter from its Chair Randal K. Quarles, along with two reports exploring various aspects of the market turmoil resulting from the COVID-19 event.

    November 17, 2020 WebPage Regulatory News
    News

    RBNZ Consults on Implementation of Capital Review Changes

    RBNZ launched a consultation on the details for implementing the final Capital Review decisions announced in December 2019.

    November 17, 2020 WebPage Regulatory News
    News

    IASB Announces Andreas Barckow as the New Chair from July 2021

    The Trustees of the IFRS Foundation, which are responsible for the governance and oversight of IASB, have announced the appointment of Dr. Andreas Barckow as the IASB Chair, effective July 2021.

    November 17, 2020 WebPage Regulatory News
    News

    HKMA Consults on Capital Rules for Bank Equity Investments in Funds

    HKMA issued a letter to consult the banking industry on a full set of proposed draft amendments to the Banking (Capital) Rules for implementing the Basel standard on capital requirements for banks’ equity investments in funds in Hong Kong.

    November 17, 2020 WebPage Regulatory News
    News

    ESRB Supports Extension of Macro-Prudential Measure by Swedish FSA

    ESRB published an opinion assessing the decision of Swedish Financial Supervisory Authority (FSA) to extend the application period of a stricter measure for residential mortgage lending, in accordance with Article 458 of the Capital Requirements Regulation (CRR).

    November 17, 2020 WebPage Regulatory News
    RESULTS 1 - 10 OF 6153