Responses to the low profitability environment In recent years, Spanish banks have partially cushioned the fall in net interest income by means of various strategies. To address the current low profitability environment, they should persevere in some of these strategies and embark on others. First, as I mentioned earlier, banks have made great efforts to reduce their nonperforming and foreclosed assets. But the non-performing loan ratio still stands at 5.3% for business in Spain and foreclosed assets amount to around € billion, in both cases well above the pre-crisis levels. Banks should therefore persevere with this strategy. To illustrate the room for improvement that still exists in connection with these non-performing assets, if the level of provisioning of average total assets were as low as in 2005 (which, at 0.26%, was the lowest level recorded since 2000), it is estimated that Spanish deposit institutions’ annual consolidated profit would increase by € billion. This would raise average ROA by 10 bp and ROE by 1.3 pp.4  4  In addition, in a hypothetical scenario in which all foreclosed assets were performing assets, earning a return equivalent to average ROA (0.49%), net profit would increase by around € million, a modest but far from negligible figure. 15/29  Second, banks have diversified their revenue generation and in particular there has been an increase in fee income.
According to the literature, the Basel III reforms give rise to capital levels within the range of estimates that point to positive net macroeconomic benefits for society as a whole, as a result of the greater financial stability and enhanced shock-absorbing capacity they provide. 3  Basel Committee on Banking Supervision (2019): “The costs and benefits of bank capital – a review of the literature”, June. 14/29  In short, there is no evidence to suggest that we have gone too far in calibrating the Basel III capital requirements. The priority, therefore, should be for jurisdictions now to apply these standards in full, consistently and within the periods agreed. This is the message reiterated by the G20 leaders, and banks are required to adapt to this new regulatory environment. We must fight against what has come to be known as the “regulatory cycle”, according to which (and there is empirical evidence to confirm this), over time, memories of crises and of their negative effects tend to fade, the pressure of individual interests grows and the temptation to ease regulatory standards increases. Clearly, a different question altogether is the need to ensure a level playing field. In particular, it is important to ensure that the risks associated with the non-bank financial intermediation sector, and those stemming from its interconnectedness with the banking sector, are properly regulated and supervised. This requires, among other things, close monitoring of the regulatory perimeter of the whole financial system, to ensure that market participants operate under the principle of regulatory neutrality.