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.
Keywords: Europe, Spain, Banking, Insurance, FSAP, Article IV, FSSA, CRR, Solvency II, BRRD, IMF
Previous ArticleEP Briefing on the Public Hearing with Danièle Nouy of ECB
PRA, via the consultation paper CP12/20, proposed changes to its rules, supervisory statements, and statements of policy to implement certain elements of the Capital Requirements Directive (CRD5).
EIOPA published the financial stability report that provides detailed quantitative and qualitative assessment of the key risks identified for the insurance and occupational pensions sectors in the European Economic Area.
EBA published its risk dashboard for the first quarter of 2020 together with the results of the risk assessment questionnaire.
EBA announced that the next stress testing exercise is expected to be launched at the end of January 2021 and its results are to be published at the end of July 2021.
PRA published the consultation paper CP11/20 that sets out its expectations and guidance related to auditors’ work on the matching adjustment under Solvency II.
MAS published a statement guidance on dividend distribution by banks.
APRA updated its capital management guidance for banks, particularly easing restrictions around paying dividends as institutions continue to manage the disruption caused by COVID-19 pandemic.
FSB published a report that reviews the progress on data collection for macro-prudential analysis and the availability and use of macro-prudential tools in Germany.
EBA issued a statement reminding financial institutions that the transition period between EU and UK will expire on December 31, 2020; this will end the possibility for the UK-based financial institutions to offer financial services to EU customers on a cross-border basis via passporting.
SRB published guidance on operational continuity in resolution and financial market infrastructure (FMI) contingency plans.