The future challenges will arise, on one hand, from the international financial crisis, a phenomenon affecting all European banks; and, on the other, from the weak macroeconomic situation, which has global dimensions, but also elements particular to Spain. Both forces are going to affect the income statement, and therefore the ability to generate profits which, as we all know, are banks’ first line of defence against future problems. In the first place, banks are already suffering difficulties arising from the international financial crisis and, in particular, the consequences of the closure of financing markets. In this regard, the particular structure of the liabilities of Spanish banks, characterised by a broad deposit base and debt with mostly medium and long-term maturities, together with the plans recently approved by the Spanish parliament in coordination with other EU countries, mitigates the problem, but does not make it disappear. The cost of financing will certainly not be the same as that prevailing prior to the summer of 2007, when investors began to rapidly reassess the risk of financial instruments. Even if the wholesale markets gradually re-open, it is highly unlikely that the differentials required by the various products will return to their exceptionally low pre-crisis levels. 6  BIS Review 133/2008  Greater competition among banks to attract deposits, and the fact that they are replacing lower-remunerated sight deposits with time deposits, will also put pressure on the financial costs Spanish banks have to bear.
Since December 2009, the yuan has appreciated almost four percent, while this figure is much closer to ten percent for most EMEs. The comparison is even more dramatic when looking at a longer period of time. This has been achieved through massive reserve accumulation and limited financial integration. However, for measures in the foreign exchange market to have real effects – that is, on the real exchange rate, which is the relevant variable from the point of view of competitiveness – these measures need to have some support from the real side of the economy. In the case of China, this is a very high savings rate. China saves about half of its GDP and the resulting current account surplus sustains a depreciated real exchange rate. Otherwise, attempts to maintain a depreciated nominal exchange rate sooner or later lead to inflation, which is the way to achieve relative price adjustment when the nominal exchange rate is not allowed to adjust. The U.S., in turn, is undertaking an extraordinary monetary expansion. Beyond having reached the zero lower bound for the federal funds rate, unconventional measures are adding additional monetary stimulus. In particular, the massive purchase of securities implemented in the so-called QE2 program. This explains why the dollar has reached its lowest level in several decades (Figure 3), but this is not only the result of expansionary monetary policy, but also of the lack of domestic demand and of the external imbalances.