The ultimate impact of the crisis on the banking industry will indeed hinge on its scale and duration, but also on the effectiveness of economic policies in alleviating its effects on households and firms. In this respect, in the current situation of incomplete, uncertain and uneven economic recovery, retaining a large part of the exceptional measures to support the economy is warranted, in particular for certain sectors. In any event, projections suggest that there will be a significant increase in the ratio of nonperforming loans in the coming quarters, even under the most benign scenario. 2  Against this backdrop, I have three important considerations to make with a view to maintaining the sector’s resilience in the coming months, beyond keeping the extraordinary measures in place. Firstly, much of the downturn in banks’ results in the first three quarters of 2020 was due to greater provisioning in anticipation of future asset impairment, which has still not materialised but which will do so in the coming quarters. Specifically, Spanish banks have increased their provisioning by 75% in the first nine months of 2020 compared with the same period a year earlier. Sustaining this effort in the coming quarters would enable the bulk of provisioning needs anticipated by the stress tests under the most likely scenario for this and the coming year to be met. This has led to a significant decline in banks’ profitability, but it has also raised their loss absorption capacity, something which investors should particularly value in these circumstances.
The Basel reforms that were phased in over the last decade incorporated into regulations the lessons learned during the global financial crisis. The first stage of the Basel reforms began in 2010 and concluded with a second wave of reforms published in 2017. In the first phase, the aim was to boost the level and the quality of banks’ microprudential capital requirements. The intention was to reduce their risk-taking, by increasing their “skin in the game”, and to provide them with greater loss-absorbing capacity. In addition, the releasable macroprudential buffers I referred to earlier were also introduced. The second phase of the Basel reforms focused on a matter that came to light during the first phase, namely the calculation of risk-weighted assets (the denominator of the capital requirements under the Basel standards) and the need to standardise their treatment among institutions. Once again, the aim was to reinforce banks’ credibility with regard to their prudential ratios and the correct measurement of the risks they assume. A crucial aspect of this reform is the “output floor”, which limits the reductions that banks can obtain by using internal models to calculate minimum capital requirements instead of the standardised approach that does not require the use of models and is much less sensitive to new data inputs. 5  The impact analyses of the reform reveal that banks’ capital requirements would increase in some jurisdictions, although they would also be reduced by certain elements.