04.10.2022  The situation of Spanish banks in the new macro-financial environment* V Foro Banca/elEconomista Pablo Hernández de Cos Governor  *lEnglish translation from the original in Spanish. *  Good morning. Allow me to begin by thanking El Economista for inviting me to participate, once again, in this banking forum, which represents an excellent opportunity to discuss the present situation of the banking industry and the implications of the current macro-financial environment. Our societies have been hit by several global events (the pandemic, Russia’s invasion of Ukraine) in quick succession, generating a highly complex macro-financial environment in which the risks of a global cyclical downturn have been magnified by persistently high global inflation, the tightening of financing conditions stemming from the widespread normalisation of monetary policy and the heightened uncertainty prompted by a broad-based downward revision of growth forecasts. The question of how the banking industry could be affected by this complex setting is an important one. The starting point: a banking industry with lower non-performing loan ratios and profitability above cost of capital To answer that question, I should first emphasise that the Spanish banking sector started out from a relatively favourable position. Allow me to illustrate this point with a few figures. First, the quality of banks’ balance sheets continued to improve through to 2022 Q2. Nonperforming lending to the resident private sector fell by 12.4% in 2022 Q2, seeing the pace of correction return to pre-COVID-19 levels after easing to rates of 5% following the pandemic.
So the relative weight of past inflation, the exchange rate, wage inflation, market expectations and output gaps in inflation dynamics may differ significantly from advanced economies. Chile has pioneered monetary policy innovation in the emerging world. After four decades of double-digit inflation, our Central Bank was given independent status and a mandate of price stability nearly 30 years ago and exercised it swiftly, with the support of a first version of inflation targets in the early 1990s. The monetary policy framework further evolved after the Asian Crisis to a fully-fledged forward inflation targeting regime with a floating exchange rate in 1999. This was soon complemented by a major upgrading of monetary policy communications and a structural fiscal policy rule. 2  Central Bank of Chile October 2018  This framework has basically remained in place for the last 18 years and its effectiveness has improved as markets, agents and institutions have adapted to it. Over time, markets have developed adequate FX hedging mechanisms, inflation expectations have become more anchored at the monetary policy target level, the Central Bank has overcome fear of floating, financial markets have deepened and the labor market has gained some flexibility. As an open economy, we are not immune to external shocks but the ability to cushion them through the exchange rate and countercyclical policy response has improved significantly. At the time of the 2007 Global Financial Crisis, this framework helped us to avoid large costs and contain financial problems despite our strong ties with the global economy.