Good morning. Allow me to thank Nueva Economía and the sponsors for the opportunity to be here with all of you, as well as the attendees at this breakfast for their effort and patience in coming here to listen to me. Because, let’s not fool ourselves, it takes considerable fortitude to start the week discussing topics as dry as those that occupy and concern the banking sector. The only possible explanation is that you are aware of the importance this sector has for economic development and, ultimately, for the prosperity of any society. After all, I know of no single case of a prosperous economy and society where the banking sector has not been present and played a key role—that of financing the consumption and investment projects of families, SMEs, and businesses in general. So thank you, once again, for your presence and your support.
I also want to thank José Manuel Campa for his kind introduction. With him I share not only the interests of the sector we represent, but also, if you will allow me, a certain camaraderie of those of us who have developed in other places and times, in other trenches—abusing the term—an ungrateful but necessary work for certain parts of the economy of a country that went through very difficult times, now overcome.
A first reference when preparing this speech, which we could call mid-term, has been, logically, to review the one I gave two years ago at this same forum. And it is truly surprising how persistent the issues that occupied us then continue to occupy us now. We are talking, of course, about regulation that, like the never-ending lightning bolt, continues to produce new and increasingly demanding standards; we are talking about the sector’s profitability problems in this low interest rate environment; about digital transformation; about the need to manage the legacy assets from the brutal crisis we experienced and, of course, about the sector’s reputation problems. One could repeat that conference given two years ago, but it is not possible, because although the problems persist, very relevant nuances have emerged in these two years. Allow me to put some of these issues on the table.
With regard to regulation, the sector continues to face extremely complex rules, as well as imprecise in some cases, such as the new bank resolution regime, and changing in others—I refer to what in sector jargon we call Basel IV. Furthermore, supervisors insist that they find current bank capital levels adequate, but nevertheless every few months stricter measures are introduced that involve raising the quantitative capital bar. It is true, however, that within the sphere of regulators and supervisors, greater sensitivity to these arguments is beginning to be appreciated. There are even supervisors, such as the Bank of England, who have had the courage to allow the use of countercyclical capital buffers precisely when they are needed, when risks, such as Brexit, have materialized. In any case, it is necessary for the regulatory drive to conclude now and allow managers to concentrate on the numerous challenges posed by the banking business.
We must not forget that our economy, with a strong presence of SMEs in the productive fabric, is more dependent on a banking sector with the capacity to finance them, since markets will never be a source of financing for SMEs. Therefore, in our case, the development of financial markets associated with the Capital Markets Union will not be able to replace the role of banks, so it must be a strategic priority to avoid blindly importing solutions that are more suitable for countries with productive structures different from ours.
And of course, we must avoid any national goldplating disconnected from international developments. Sometimes we do not understand that we are in an increasingly complete monetary, banking, and financial union, and that well-intentioned measures only serve to increase activity in Luxembourg, to the detriment of Spanish financial companies. We must fight the battles that we as countries think we should fight, but in the appropriate European forums.
With regard to interest rates, several elements should be highlighted. First, that undoubtedly their impact on the economy has been beneficial and, in particular, for the Spanish economy. But the negative effects of this policy are beginning to be felt intensely, while its positive effects seem to be exhausted. This can be summarized by saying that monetary policy has apparently reached its limit, so we must think of an economic policy strategy that does not rest exclusively on this. And what is relevant, again, is the growing unanimity around this issue. In any case, it seems that the downward cycle of interest rates is coming to an end, although we do not know either the pace of normalization or the equilibrium rates of the future, in an environment of population aging. Personally, I am more concerned about possible episodes of instability associated with that normalization than about the pace or final destination. Therefore, maintaining international confidence in sovereigns, particularly in those heavily indebted abroad, will be essential throughout this process of progressive normalization of interest rates. I will return to this later in my speech.
Certainly, banks are not waiting for the manna of higher interest rates to fall from heaven, but are actively managing the balance sheet to minimize the impact that the rate environment has on their margins and profitability. Thanks to this, profitability, while still below what markets and shareholders demand, is better than that of other banking systems in our environment.
One of the management responses our banks are providing is to improve efficiency through cutting installed capacity, both in networks (more than a 34% decrease from the 2008 peak) and in employees (29% for the same period). It is true that this is not yet clearly reflected in costs, partly due to the investments necessary to address the digital revolution or the fact that adjustment processes are costly. But there is no doubt that the sector is laying the foundations for a much more efficient future structure.
And that future evidently involves successfully addressing the digital challenge. Perhaps this is where the changes over these two years have been most evident. No one now doubts the relevance of this issue and its irreversibility, even though practical strategies may differ. It is not so much a question of whether it will happen but of how and when. Furthermore, the digital revolution is no longer seen as a challenge, but as an opportunity to improve the sector’s efficiency in an environment of low interest rates and pressure on profitability. And although the competitive environment will be more complex for banks as fintechs mature and the natural selection characteristic of this type of start-up occurs, there is also a perceived trend toward possible coexistence between these start-ups and certain banks. While the former provide the technological base and better user experience, the latter can contribute volume, customers, and improve overall efficiency.
But it would not be appropriate to end this section without acknowledging that in these two years we have also seen darker aspects associated with this New Cyber World. I am referring, of course, to cybercrime. We must understand that every advance carries associated risks and the digital revolution will be no exception. I cannot claim to be an expert on these matters; I am only a witness to the very deep and rich international debate on these issues. But I do understand enough to point out that in this area, collaboration between banks and between them and the authorities is more than justified. After all, in the financial chain, only one weak link is needed for it to break. This is not terrain for competition or coercion, but for public and private collaboration.
Another element that was present two years ago and is still valid today is that of assets damaged during the crisis, mainly real estate. Given the intensity of the crisis and the nature of many of the damaged assets, it is not surprising that these remain present on bank balance sheets. We could not expect these assets, scars of the crisis, to disappear as if by magic from balance sheets, particularly considering that new doubtful debtors and foreclosed assets have continued to enter year after year. That is, the glass that was emptying on one side was filling on the other. This phenomenon has prevented the enormous cleanup effort made by Spanish banks from showing in more attractive figures. Nevertheless, the downward trend in non-performing loans and the strong provisions made by our institutions—above the average of eurozone banks—will accelerate the reduction of non-performing assets. In any case, bank managers must maintain focus on the strategies designed to reduce the weight of these assets, as this will be essential to maintain the sector’s profitability in the next decade. The Single Supervisory Mechanism and the EBA are showing intense interest in the damaged assets of European banks given their impact on bank solvency and profitability.
With regard to reputational issues, I already pointed out two years ago the need for patient and persistent education on all aspects of the sector, from its importance in society and in financing the productive economy to the profound changes experienced after the crisis both in terms of greater sector strength and placing the customer, their needs and circumstances, at the center of our activity. And, of course, with Financial Education of customers, current and future, playing a vital preventive role in the medium term.
Here it is pertinent, in light of recent events, to reflect on the nature of reputational problems. First, to note that no business model is 100% safe from potential problems, although the Spanish commercial banking model based on long-term relationships with customers offers lower risk. It is therefore advisable not to relax and to commit to establishing an appropriate, effective banking culture extended to all levels of the organization. The second lesson is that, in the reputation chain, it is the weakest links that shape public opinion and extend it to the entire sector. This generates frustration, as the innocent end up paying for sinners and requires collective and coordinated action, at the international level, to end the problems.
In any case, it is worth remembering that, in some countries, problems arose in unsophisticated institutions, with high regional concentrations, very deficient and peculiar corporate governance, and an unclear ownership structure, characterized by the profusion and confusion of private and public stakeholders. As I always say, AEB banks, along with many other deposit institutions, did not receive public capital assistance, and it has been their private shareholders who have faced the worst consequences of the crisis. It is important not to forget these lessons and to remember, once again, the importance of appropriate incentives for correct management and an appropriate definition of ownership structure.
Allow me, before making some brief reflections on the Spanish economy, to recall that the Spanish banking sector, even though it is still subject to considerable pressures in terms of regulation or results, is in a clearly better situation than that of most of its European competitors. Many times, in my international meetings, I have to counter simplifications such as “southern European banking” and clarify that not everything is the same, that Spain did its homework in 2012 and that the situation, while not easy, is far from that existing in other banking systems.
But let us move on to the Spanish economy. We can describe, without any shadow of doubt, 2016 as the year in which the Spanish economy lived dangerously. Because, indeed, if we had been told at the beginning of 2015 that Spain was going to have a caretaker government for ten months and go through two electoral processes, and that despite this, GDP growth and job creation were going to maintain their dynamism, we would not have believed it. And we must remember that one of the clearest paradigms in economic matters is that, in the presence of uncertainty, economic agents—families and businesses—delay their investment decisions until uncertainty dissipates. In 2016 the tailwinds were considerable: low interest rates, very moderate commodity prices (including oil), and a banking sector capable of financing the productive economy, among others. In 2017 these tailwinds, even if they do not turn into headwinds, will not push with the same force.
Therefore, we cannot become complacent; we must maintain the necessary focus so that in 2017 we remain on the good path in terms of job creation, GDP growth, export performance, and balance of payments surplus begun in previous years. To leave behind the worst consequences of the crisis, we must be able to maintain a decade of good economic performance. The crisis has been that harsh and long, and it is not surprising that recovery also requires a long period of time.
Spain, moreover, despite this good performance, presents fragilities that oblige us to be extremely cautious. Specifically, the high external debt which, although decreasing at a good pace, will remain high for many, many years. We have a gross debt of 180% of GDP, of which 50% of GDP corresponds to public debt held by non-residents. That portion of public debt alone, financed at an average of 6.4 years, represents close to €80 billion in refinancing, to which we would have to add the maturities of private debt held by non-residents. Although not all of that 130% of GDP in external private debt corresponds to repayable debts, we can undoubtedly conclude that every year we must convince non-residents to reinvest probably no less than €150 billion in Spanish assets. That is, approximately €150 billion in public and private debt held by non-residents matures each year and we have to convince them to buy Spanish paper again. The figures, calculated with a downward bias, are, despite that bias, of such magnitude that they should make us aware that the Spanish economy cannot afford the luxury of not maintaining its international credibility, and that in 2016 we really played with fire.
This is why it is so important that Spain has a Government after ten months of uncertainty. Ten months that have paralyzed legislative activity, but also State investments and, to a large extent, those of the private sector. Consequently, what we now need is to normalize political life as soon as possible, since it is evident that this legislature will determine whether we manage to consolidate the economic recovery.
Furthermore, a new political stage is opening in which the Government will have to deploy its negotiating capacity. I believe that, in this new stage, we should be able to combine consensus with pragmatism. Addressing the cardinal initiatives of the legislature from the broadest possible consensus would not only confer greater legitimacy on them, but would guarantee their permanence over time. Knowing how to act with pragmatism will be essential to navigate a world in which political risk, surprises, and unexpected turns constitute the daily reality of our international environment.
This good moment for the Spanish economy should facilitate the task of the new Government. It can be expected, for example, that the initiatives of businesses and individuals, postponed during these months of uncertainty, can be unblocked and underpin growth. No one doubts that a stable Government, developing clear and predictable policies, can favor investments and boost the economy.
In short, there is still a long way to go. Therefore, it is necessary not to waste a minute. We must make up for lost time and look ahead with a strong sense of statesmanship to address the reforms that Spain needs.
Thank you very much.
José María Roldán, President of the Spanish Banking Association
