Faced with this unprecedented shock, the banking sector has so far shown notable resilience. Its favourable performance is underpinned by the improvements since the global financial crisis, in terms of balance sheet quality and solvency. The far-reaching international financial reform and, in Spain’s case in particular, the restructuring of the sector have increased banks’ capacity to absorb the unexpected materialisation of risks. Firstly, the restructuring of the Spanish banking sector entailed a significant decline in the number of banks and in their capacity, measured in terms both of branches and of employment and bank balance sheet size.1 As a result, Spanish banks were more efficient and profitable than the European average, although the level of profitability was low in historical terms, as was also the case with European banks. As regards balance sheet quality, the NPL ratio had fallen by 9 pp since peaking in 2013, to 4.8% in 2020 Q1, though this was still higher than in 2007. Further, in that same period, the weight of forborne exposures relative to assets had fallen by 9 pp. Also, the weight of lending to construction and real estate development, which came to account for 27% of total lending to the non-financial private sector, stood pre-pandemic at around 10%. Finally, mortgage lending standards have been much stricter and, in the case of loans to firms, these have been tied far more to firms’ efficiency.
In Spain, recent experience has shown how inefficient the existing insolvency proceedings for credit institutions are in terms both of timelines and recovery in value. It would, therefore, be desirable for progress to be made in determining an administrative mechanism for winding up credit institutions that maximises the preservation of value and reduces both the timelines and the costs of the existing insolvency proceedings. The need to address the long-term challenges If the current crisis has done anything it has been to underline the importance of having a healthy banking sector with sufficient buffers to absorb unexpected risks. In this connection, going forward we must ensure that the banking sector remains resilient to any new risks that might emerge. Completing Basel III and expanding the macroprudential toolkit available to the Banco de España are two particularly important avenues of work. To more accurately measure the risks assumed by banks and thus reinforce the credibility of their capital ratios, particular focus was placed on the calculation of risk-weighted assets (RWAs) in the second phase of the Basel reforms, approved at the end of 2017. Standardising the treatment of RWAs across institutions was considered necessary. The output floor is a key part of the reform to achieve this goal. The floor limits the benefits banks can derive from using internal models to calculate minimum capital requirements vis-a-vis the standardised approach, which does not require the use of models and is much less sensitive to new information.