The European Central Bank defines financial stability as a situation in which the financial system (banks, other financial agents, and markets) is capable of withstanding shocks and addressing abrupt corrections of financial imbalances.
By preserving the stability of the financial system, it is prevented from becoming a risk to real economic activity. The supervisor’s priority is to analyze which risks threaten the stability of the financial sector and propose solutions to neutralize them.
A solid and resilient financial sector, capable of efficiently and effectively providing all types of services, acting responsibly in financing the economy and driving prosperity, is the shared goal of regulators and banks.
The regulatory changes introduced following the 2012 financial crisis have been fundamental in improving the stability of European banks, the main component of the financial sector in its broadest sense.
One of the European supervisor’s most important tasks is to monitor the banking sector and the rest of the financial sector to detect vulnerabilities and verify their resilience in adverse situations. Should potential systemic risks exist, these would be addressed through so-called macroprudential policies. Ultimately, given that banks provide services to society, the regulation developed in this regard is comprehensive and supervision is strict.
The main purpose of this supervision, as can be seen in the latest financial stability report published by the Bank of Spain, is to ensure that risks to financial and banking stability do not originate within the sector itself.
Geopolitical tensions and higher, more persistent inflation had increased risks to financial stability since the publication of the previous report, and in such an uncertain context, economic growth projections for 2023 have been revised downward, while the probability of recession has increased.
It should be noted that one of the main vulnerabilities to financial stability lies in the financial markets themselves, which must adapt to the return to normality of monetary policy in a context of fighting inflation.
High public debt is also a factor of concern, as reflected in the Stability Report, which recommends a combination of policies combining necessary short-term support measures with a medium-term consolidation program that strengthens the sustainability of public finances.
The Spanish banking sector faces this complex situation with improved profitability in line with the cost of capital demanded by investors; non-performing loans that have continued to decline; and solvency levels above those existing at the start of the health crisis. However, as the supervisor warns, the deterioration of the macrofinancial environment may ultimately have a negative impact on its capital and income statements. The Bank of Spain also considers that, in this context, the temporary tax levy proposed in Parliament would reduce the sector’s earnings generation capacity, with potential implications for its solvency if the set of risks identified in this report materializes with intensity.
In a scenario as complex and uncertain as this, banks must exercise extreme prudence and caution, both in providing financing and in managing their balance sheets. Solvency is a fundamental element for fulfilling their main objective in a stable and unrestricted manner, which is to support their clients, businesses, and households at all times. This was evident during the worst moments of the health crisis, when Spanish banks made available more than €140 billion to finance businesses.
The European Systemic Risk Board (ESRB) called on European 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. 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, the preservation of banks’ soundness, an idea shared by the governments of most countries.
José Luis Martínez Campuzano, Spokesperson for the Spanish Banking Association
