General Information & Client Service
  • Americas: +1.212.553.1653
  • Asia: +852.3551.3077
  • China: +86.10.6319.6580
  • EMEA: +44.20.7772.5454
  • Japan: +81.3.5408.4100
Media Relations
  • New York: +1.212.553.0376
  • London: +44.20.7772.5456
  • Hong Kong: +852.3758.1350
  • Tokyo: +813.5408.4110
  • Sydney: +61.2.9270.8141
  • Mexico City: +001.888.779.5833
  • Buenos Aires: +0800.666.3506
  • São Paulo: +0800.891.2518
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

Related Insights
News

FSB Report Examines Financial Stability Implications of Fintech

FSB published a report that assesses fintech-related market developments and their potential implications for financial stability.

February 14, 2019 WebPage Regulatory News
News

US Agencies Amend Regulatory Capital Rule to Allow Phase-In for CECL

US Agencies (FDIC, FED, and OCC) adopted the final rule to address changes to credit loss accounting under the U.S. generally accepted accounting principles; this includes banking organizations’ implementation of the current expected credit losses (CECL) methodology.

February 14, 2019 WebPage Regulatory News
News

OCC Consults on Company-Run Stress Test Requirements for Banks

OCC proposed amendments to its company-run stress testing requirements for national banks and Federal savings associations, consistent with section 401 of the Economic Growth, Regulatory Relief, and Consumer Protection (EGRRCP) Act.

February 12, 2019 WebPage Regulatory News
News

CFTC Extends Comment Periods for Trade Execution Requirement Proposals

CFTC announced that it is extending comment period for the proposed amendments related to the regulations on swap execution facilities (SEF) and trade execution requirement.

February 12, 2019 WebPage Regulatory News
News

OCC Proposes to Renew Information Collection Under Stress Test Rule

OCC is proposing to renew its information collection titled “Annual Stress Test Rule” (OMB Control No: 1557-0311). Comments must be received on or before March 13, 2019.

February 11, 2019 WebPage Regulatory News
News

OSFI Consults on NSFR Disclosure Requirements for D-SIBs

OSFI proposed the draft guideline on the net stable funding ratio (NSFR) disclosure requirements for domestic systemically important banks (D-SIBs).

February 11, 2019 WebPage Regulatory News
News

EC Amends Its Regulation to Clarify Impairment Requirements for IFRS 9

EC published the EU Regulation 2019/237 that amends Regulation (EC) No 1126/2008 adopting certain international accounting standards, in accordance with Regulation (EC) No 1606/2002 regarding International Accounting Standard (IAS) 28 on Investments in Associates and Joint Ventures.

February 11, 2019 WebPage Regulatory News
News

FSB Chair Randal Quarles Speaks About the Upcoming Work of FSB

While speaking at the BIS Special Governors Meeting in Hong Kong, Randal K. Quarles, the Chair of FSB and Vice Chair of FED, discussed his views on how the work of FSB must evolve and the key principles that, he believes, should inform that work.

February 10, 2019 WebPage Regulatory News
News

OSFI Proposes to Amend the Liquidity Adequacy Requirements for Banks

OSFI proposed revisions to the Liquidity Adequacy Requirements (LAR) Guideline for banks. OSFI published the proposed drafts (with proposed changes highlighted in yellow) of Chapters 1,2, 4, and 5 of the LAR guideline.

February 08, 2019 WebPage Regulatory News
News

HKMA Publishes FAQs on Local Implementation of IRRBB Framework

HKMA published the frequently asked questions (FAQs) related to the local implementation of the interest rate risk in the banking book (IRRBB).

February 08, 2019 WebPage Regulatory News
RESULTS 1 - 10 OF 2593