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October 06, 2017

IMF published its staff report, selected issues report, and the financial system stability assessment (FSSA) report on Spain. These reports are a part of the IMF's financial surveillance of Spain. The FSSA report on Spain is based on the work of the Financial Sector Assessment Program (FSAP) missions.

The staff report noted that the banking system has become more resilient since the last FSAP. It has strengthened its solvency and continued to reduce nonperforming loans for businesses in Spain. Capitalization has remained broadly stable, as banks used retained earnings to maintain capital buffers during the transitional arrangement of Basel III implementation. Though generally less leveraged, Spanish banks have lower fully loaded common equity tier 1 capital ratios than European peers. With ECB’s extraordinary support, banks tend to have ample liquidity. Funding challenges are set to rise over the medium term as the ECB’s policy unwinding proceeds, potentially affecting both liquidity and profitability of banks. Additionally, banks may need to adjust their liability structures to fulfill new regulatory requirements such as Minimum Requirements for Own Funds and Eligible Liabilities or MREL. The report discussed the resolution of Banco Popular and highlighted that banks need to continue improving profitability, building capital buffers, and adjusting funding positions. Moreover, establishing an interagency Systemic Risk Council (SRC) could enhance systemic risk surveillance and macro-prudential decision making. The selected issues report examines the challenges facing the Spanish pension system and the impact of deleveraging on the banking system, also highlighting that corporates have started to rely less on financing from the banking system.

The FSSA report highlights that Spanish banks will benefit from raising more high-quality capital and further compressing operating costs; this will help compensate for the phase-in of deductions under the Capital Requirements Regulation (CRR). Though not yet a strong source of systemic risk, focus on insurance, capital markets, and the credit cooperative sectors must intensify. Furthermore, the Spanish financial system is getting more exposed to contagion risks that need enhanced oversight and analysis, including improvements in data collection.To effectively manage the macro-financial and structural challenges, stronger institutional foundations for financial oversight are a must. The FSAP’s proposed establishment of an SRC would considerably enhance the country's capacity for systemic risk oversight and policy coordination. Spain completed a timely transposition of certain EU Directives, such as Capital Requirements Directive (CRD) IV and the Banking Recovery and Resolution Directive (BRRD), and has publicly committed not to use public funds for bank bailouts. Future action should be on developing a resolution strategy for less significant institutions with a low level of loss-absorbing liabilities. While the banking resolution regime has been strengthened, the broader crisis management framework could be further enhanced. A tough stance on the implementation of the ECB guidance on NPLs is also desirable.

The FSSA report reveals that all banks had liquidity coverage ratios above 100%, at the end of 2016, while the net stable funding ratio did not reveal any excessive maturity transformation, with a comfortable aggregate ratio of 111%. The FSAP stress tests showed that a few significant institutions would struggle to remain resilient under the severely adverse scenario. The EIOPA stress test results revealed the need for better matching of assets and liabilities by insurers in Spain (and across the EU), even among those applying for the Matching Adjustment under Solvency II. The report highlights that domestic financial markets and nonbank financial institutions are less developed than banks and other European markets, depriving market participants from alternative mechanisms for risk-sharing and savings allocation that could provide buffers in times of a liquidity or a systemic stress. The implementation of the Solvency II regime requires changes in the current compliance-based supervisory culture. Furthermore, DGSFP, the insurance supervisor, should further develop its skills and proficiency in assessing the quality of insurer governance and risk management.


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Keywords: Europe, Spain, Banking, Insurance, FSAP, Article IV, FSSA, CRR, Solvency II, BRRD, IMF

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