The European Systemic Risk Board (ESRB) calls on authorities in its latest report to preserve and strengthen the resilience of the financial sector so that it can continue supporting the real economy in an environment of increasing risks to financial stability.
The ESRB is responsible for supervising the stability of the entire financial system in Europe and for preventing and mitigating risks that could disrupt it. Created during the financial crisis, its role is key both in guiding supervisors’ decisions that strengthen financial stability and in identifying weaknesses that may threaten it.
In its latest recommendations, this body identifies severe risks to financial stability in Europe and delivers a forceful message given the difficulty of the current moment and the high short-term uncertainty.
The two main vulnerabilities detected by the ESRB are: the deterioration of economic activity and its potential impact on households and businesses, and the instability of financial markets, in a context where public debt has reached historically high levels.
In the face of all this, the Board notes, banks are the first line of defense and must therefore be prudent in managing their risks.
European authorities are clear and firm in reiterating, as a priority at this time, the need to preserve the soundness of banks, an idea shared by the governments of most countries.
This is the case because the context demands it, on the one hand, due to the return to normal interest rates set by the European Central Bank to control inflation that shows no respite and is accompanied by the geopolitical uncertainty created by the war in Ukraine.
And on the other hand, because as demonstrated during COVID, banks are essential when it comes to protecting households and preserving the productive fabric.
The current difficult context represents a new threat to growth when we were barely beginning to recover from the health crisis. In Spain, we have not yet recovered the GDP levels prior to the start of the pandemic and, although it is true that economic forecasts are better than in neighboring countries, the near future remains subject to unprecedented uncertainty.
In fact, the Bank of Spain warns in its latest reports of an immediate economic slowdown resulting from efforts to combat inflation that impoverishes us.
It was the Governor of the Bank of Spain himself, Pablo Hernández de Cos, who, in a recent public appearance, highlighted the current strong position of Spanish banks, emphasizing the strengths of our institutions, the continued improvement of balance sheets, as well as the current low non-performing loan ratio, and the gradual improvement in profitability.
Profitability is, in fact, the best guarantee of ensuring future solvency, but it must be higher than the cost of capital (the minimum return required by investors) in order to attract investment. This has been one of the main challenges for Spanish banks in recent years.
It is difficult to anticipate how banks’ results will evolve following the interest rate increase and the economy’s own performance and, therefore, it is very important not to add more uncertainty to what already exists.
The current situation requires rowing in the same direction. The role of banks is always key to guaranteeing financing and driving economic growth, but now it is even more so to maintain support for households and businesses so they can continue with their activities and projects, and that is the message coming from Europe.
For all these reasons, the intention to apply a new tax on banks is contradictory to the Board’s recommendation of prudence. The levy is an ineffective measure with undesirable effects that could hinder institutions’ own activity of generating capital and accessing financing and, by extension, could limit their ability to continue financing the economy under the best possible conditions. It would be an obstacle at the worst time, precisely when the instability of financial markets diminishes the role they play as an alternative to bank financing.
Spanish banks possess the strength and resources to guarantee the financing that households and companies need and, in this way, move forward and make their projects a reality in any situation, and especially in difficult times like the present.
José Luis Martínez Campuzano, spokesperson for the Spanish Banking Association
