06.07.2021  The Spanish banking sector: over one year of fallout from the pandemic 16 IESE Banking – Banking: helping to boost the economy Pablo Hernández de Cos Governor  Good morning, I should like to thank the IESE Business School for the invitation to this event, which gives me the opportunity to discuss the main developments in the banking sector since the onset of the pandemic. The proper identification of risk developments in the sector is crucial, both to inform the authorities’ and banks’ response in this new economic recovery phase and to draw lessons with a view to tackling the medium and long-term challenges. A good point of departure for this analysis might be to identify why it has been oft-repeated during this crisis that, thus far, the banking sector “has been part of the solution, not part of the problem”. Besides the fact that this crisis has been entirely exogenous in origin and bears no relation to the sector itself, there are two aspects that, in my view, have been crucial. First, the international financial reform implemented over the past decade has given rise to a healthier, more capitalised banking sector that is more resilient to different shocks. In Spain, this reform also came in tandem with a programme of very profound restructuring in the sector.
In any event, since the global financial crisis, the sector’s ROE has remained systematically below the cost of capital, offering yet another sign of structural profitability challenges in the sector. Lastly, this crisis is also prompting an increase in risks that were already manifest before the crisis, such as competition from technology firms, the reliance on third-party IT services and, of course, cyber risks. What economic policy response is needed to address these risks? First, the improved economic outlook, underpinned by the encouraging progress of the health situation, has reduced the likelihood of the severest scenarios in terms of economic growth and financial stability. Nevertheless, the recovery remains highly dependent on the monetary and fiscal support measures. Monetary policy must continue to guarantee favourable financial conditions for all economic agents and, for now, the fiscal measures need to remain focused on the sectors and population groups hit hardest by the crisis. In parallel, the structural adjustments stemming from the pandemic must be smoothed, and efforts should concentrate on tackling our economy's structural challenges, many of which pre-date this crisis. The timely design of a fiscal consolidation programme, to be gradually  10  In 2008, there was one branch per 1,000 inhabitants in Spain, compared with 0.61 in France, 0.58 in Italy and 0.48 in Germany. By contrast, in 2020, the number of branches in Spain had fallen to 0.47, below the 0.48 in France, but still far from the 0.39 in Italy and 0.29 in Germany.