Let me note, in passing, that those problems unfortunately were not specific to the Euro area. Public debt jumped by around 30% of GDP in UK and in US. Structural deficits in those countries stand at similar or higher levels than those in most parts of the Euro area. Overall, the crisis has put into light major deficiencies in the implementation of fiscal discipline and, more generally, in the economic governance of the Euro area. It is indeed demanding to operate a single currency with multiple fiscal and structural national policies. Given the insufficient of market discipline, the founders of the Euro had seen the problem and put in place the Growth and Stability Pact. The principles were sound. The framework was adequate. The implementation has been extremely weak. Bluntly speaking, peer pressure failed to ensure consistent and rigorous respect of the principles which had been agreed upon. It was, and remains necessary to make a “quantum leap” in economic governance. What did we do ? The governments are now trying to address those deficiencies. Significant progress has been made over the past year. At the national level, all Member States have embarked upon credible public finance consolidation plans that are already bearing fruit. At the EU level, a new framework has been agreed upon. The first pillar is a strengthening of the SGP with a much stronger preventive arm. Surveillance over budgetary policies has been reinforced with a more effective prevention/correction of excessive deficits.
In addition to having an impact on profitability through higher legal costs, this situation has been accompanied by a reputational deterioration which, if not reversed, may lead to a loss of business in the medium term. This is particularly significant in a setting such as the present one with the emergence of new competitors described above. Consequently, it is essential for the sector to recover customers’ trust as soon as possible, this being a key asset in the financial business. Also, Spanish banks have to complete their adaptation to the new international regulatory and supervisory framework. As indicated, although their capital ratios are above the minimum requirements in the area of solvency, the Spanish banking system still remains below other European countries in the case of the highest quality ratio (CET1). Strengthening capital would not only lead to greater resilience to adverse shocks but it would also bring down issuance costs.5 In addition, higher solvency would help facilitate compliance with MREL requirements (Minimum Requirement for own Funds and Eligible Liabilities) that Spanish banks will have to gradually meet over the coming years. It will be a considerable challenge for smaller banks to comply with these requirements since they do not usually obtain funding by regularly tapping the capital markets. Lastly, another significant challenge is that associated with climate change and the transition towards a more sustainable economy which, although it affects all economic agents, has a particular impact on the financial sector.