The task of the capital markets is to channel capital to investment projects with a high return. If financial investors assess the return on investments in a particular country to be higher than in other countries, there is reason for the exchange rate to strengthen. One cannot rule out the possibility that this is exactly what happened in the USA. Whether the level of indebtedness, the deficit on the current account and the strong USD exchange rate comprise a significant risk of large fluctuations in growth and a threat to global financial stability in the near future depends to a great extent on whether the long-term growth in the US economy will develop much more weakly than was expected when decisions on loans and investment were made. And, as I mentioned earlier, the shaping of economic policy and improvements in regulatory frameworks and risk management systems should have reduced the uncertainty in investment and savings decisions and thereby also the risk of a build-up of large financial imbalances. However, it remains to be seen whether globalisation, IT and telecommunications technology and perhaps also more efficient financial markets have really created the potential for higher growth that lay behind the expectations that pushed up economic activity. So far, the economies have reacted fairly moderately to the shocks they have faced over the past year.
To do so it takes as its starting point the banks’ end-year balance sheets from the previous year. It defines a baseline macroeconomic scenario, which coincides with the Banco de España projections available at the time the exercise is performed, and another, stressed scenario, which attempts to reflect the effect of the previously identified risks materialising. The difference between the two scenarios reflects the degree of stress of the exercise, which is slightly greater than last year, in step with the increase in perceived risks. 27/29  The results obtained in the latest stress test performed by the Banco de España – published in the Autumn 2019 Financial Stability Report – are generally positive. However, earnings-generating capacity under the baseline scenario does not reflect the effect of the downward revision in the macroeconomic projections made in the Banco de España’s September forecasting exercise. In the baseline scenario, banks generate modest earnings; these do, however, provide for an increase in solvency ratios of almost 1 pp in three years if the dividend distribution pattern observed in the preceding years holds. This would not be enough to abandon the bottom rung of the European solvency ranking, which is why improving profitability and a prudent shareholder remuneration policy are so important. Under the adverse scenario a portion of capital is consumed, but moderately so at the aggregate level, although there is substantial heterogeneity across banks.