The Spanish Banking Association has made it a priority to help its members transition toward this digital world and, to that end, has been promoting regulations—now at a very advanced stage—that allow for the creation of controlled testing environments, known as sandboxes. With that same objective, the banking sector—through the AEB—has been calling for software investments to no longer be penalized in capital requirements, a demand that has finally been addressed. Another of our concerns in this area, and no less important, is cybersecurity. This has resulted in the creation of a Committee within the Association that allows the main banking entities to share useful information for the prevention of and fight against cyber risks.
While the sector faces this disruptive challenge, the regulatory front remains open. On the one hand, the effects of the significant regulatory changes introduced in recent years are now beginning to be identified and on the other, new regulations continue to emerge that complement existing ones. This is the case with the regulatory package that will amend the Capital Requirements Directive (CRD) and will represent a further tightening of own funds requirements. More concerning is the lack of definition of the composition of the countercyclical buffer known as MREL, which keeps banks on edge and paralyzes the issuance of liabilities eligible for this crisis buffer. We hope this uncertainty will be resolved throughout 2019, since these criteria will enter into force on January 1, 2020. This legislative reform will also regulate certain aspects of the new resolution system, such as how to provide liquidity to institutions once they have been declared non-viable.
Added to all this is the new definition of default approved last year by the European Banking Authority (EBA) and the European Central Bank (ECB), which will enter into full force on January 1, 2021 and is expected to result in an increase in the amount of loans considered non-performing. An additional problem arises when verifying that this new definition does not coincide with the IFRS 9 accounting standard when determining provisions, so both will need to eventually converge. IFRS 9, which entered into force on January 1, 2018, has had great significance for the sector given that it incorporates a more demanding philosophy in the calculation of provisions by changing the concept of incurred loss to expected loss.
This tightening of the accounting standard is in line with the European supervisor’s insistence that banks accelerate the reduction of their non-performing assets (NPLs). In this area, it is necessary to highlight the enormous effort made by Spanish banks, which in the last two fiscal years have eliminated non-performing assets in an amount exceeding €70 billion. In this way, the non-performing loan ratio of our institutions has fallen below the European average. It is also worth noting the good results obtained by our banks in the stress tests carried out in 2018 by the EBA and the ECB. The results of these tests show that in the hypothetical most adverse scenario of 2020, our institutions would destroy half the capital of the European average and would maintain a better leverage ratio.
As can be seen, regulation continues to work against the profitability of our institutions. Each new regulation represents a further tightening that diverts efforts and resources from our banks. The digital transition requires, for the moment, enormous investments and facing growing competition that puts pressure on the price of products and services. Likewise, monetary policy stands as the primary obstacle to recovering an adequate level of profitability. And despite the fact that the ECB stopped making net debt purchases last year, monetary normalization appears to be delayed beyond the last quarter of 2019, the expected moment to begin a slow increase in interest rates. Profitability therefore remains the Achilles’ heel of our banks and in this context, the new Mortgage Law may become another obstacle.
The Law Regulating Real Estate Credit Contracts, whose processing extended throughout last year and was finally approved in February 2019, offers a more predictable and secure framework for mortgage activity, so important for our sector. However, this legal certainty has been gained by limiting the contractual freedom of the parties and, in particular, that of banking institutions, which could translate into a more restrictive credit offering, both in price and volume. In any case, we hope that, among all the participants in this market—institutions, authorities, notaries and registrars—we can restore confidence in this activity and mitigate the exacerbated litigiousness we have suffered in recent years.
José María Roldán, Chairman of the Spanish Banking Association
