Our estimates show that a 400 bp increase in market interest rates, similar to that observed in the 3-month EURIBOR since December 2021,16 could drive up non-financial corporations’ median gross interest burden by between 2.9 pp and 6.8 pp,17 and the percentage of corporate debt held by corporations under high financial pressure18 by between 6.5 pp and 8.9 pp, compared with end-2021 levels. For households, a 450 bp increase, in line with that observed in the 12-month EURIBOR19 since end-2021, would raise the percentage of households with a high net interest burden20 by 3.9 pp. This effect would tend to be more marked among lower-income indebted households, which are also being harder hit by rising inflation. In this regard, the reform in late 2022 of the Code of Good Banking Practice (CGP) focuses precisely on providing for orderly debt restructuring for household segments with a high degree of socio-economic vulnerability. How different banks and financial systems are positioned against these risks will determine their level of resilience. In this respect, amid such high uncertainty, including that surrounding the degree of monetary policy tightening, Spanish banks must implement a prudent provisioning and capital planning policy. A policy that earmarks part of the higher profits obtained in the short term to bolster banks’ resilience would mean they would be better placed to absorb any potential losses should the worst risk scenarios materialise. From a European standpoint, a smoother-functioning euro area with improved governance would contribute hugely to making the European financial system less vulnerable.
Agreements signed in 2023 – affecting around 1.5 million workers – provide for an average wage rise of 4.3%. 2  See the results of the Banco de España Business Activity Survey. 3  Indeed, while Eurosystem financing amounted to 10% of Spanish banks’ consolidated liabilities in 2020-2021 (3% in 2007), that figure fell by nearly 5 pp in 2022. 3  an increase in deposits.4 However, these fell in 2023 Q1 by nearly 2.5%, especially among firms.5 In 2022, the average interest expense on bank liabilities increased by nearly 60 bp compared with the 2020-2021 average, to stand at 1.1%, still slightly below pre-pandemic levels. This change highlights the fact that the rise in the 12-month EURIBOR has only partially passed through to deposit costs, far less than in previous monetary tightening cycles.6 Banks’ comfortable liquidity position helps to explain this. Similarly, the fall in the cost of equity – by 2 pp between December 2021 and May 2023, when it reached 6.6% – has cushioned the rise in the cost of borrowing from banks.7 The cost of equity rose during February and March 2023, mainly owing to the higher equity market risk premium, although the increases have been moderate. The liquidity coverage ratio stood at 173% at March 2023, much higher than the required minimum threshold and likewise above pre-pandemic levels8. Meanwhile, the net stable funding ratio stood at 130% at December 2022, again above the minimum requirement of 100%.