After a prolonged period of growth, this segment had reached a size which, given the evolving demand for banking services, entailed a clear excess of capacity. From an individual standpoint, the prolongation of the crisis affected the capacity of institutions to generate profits for the following reasons: an increase in non-earning assets (doubtful loans and repossessed real estate assets), the narrowing of margins due to a fall in income associated with rising non-earning assets and to a higher cost of funds, the decrease in business volume, etc. Moreover, the high growth of previous years, due particularly to increased business with the real estate sector, had raised the dependence on wholesale debt markets, exposing savings banks to the liquidity risk associated with adverse developments in those markets. Compounding this is the intrinsic limitation of savings banks when it comes to raising core capital, a limitation which is important because the trend in both the markets and the prudential financial regulation currently under international revision is clearly towards stepping up requirements in this area. Given the need to downsize this sector and the conviction that the productive structure of many credit institutions had to be rationalised to hold efficiency at adequate levels in a sector characterised by growing competition, the time was ripe for the creation of the FROB, under whose auspices many savings banks have arranged their mergers or institutional protection systems (hereafter referred to by the Spanish acronym “SIP”).
Accordingly, strict compliance with the target must be ensured, both through special budgetary monitoring and surveillance procedures and through additional measures that should be applied if deviations from the target are detected. Naturally, to be in a position to react promptly and effectively, the measures most suited to the objectives set and which least interfere with a return to sustained growth must be designed in advance. Given the high decentralisation of public spending in Spain, the regional and local governments’ participation in this austerity drive and their commitment to attaining budgetary targets are vital. And I must say that the measures announced so far by most of these tiers of government do little to respond to the radical reduction in unproductive public spending that our economy needs. As I said earlier, the recently approved fiscal adjustment measures were urgent, since they were vital to curb a situation of extremely high instability that might have had disastrous  2  BIS Review 92/2010  consequences. But there are other measures which, without having the same degree of urgency, are nonetheless more important, since their goal is to ensure medium- and long-term budgetary stability. Clearly, I am referring to the measures to reform our pension system. At an earlier date, the government tabled some proposals in the updated Stability Programme and, on this basis, the Toledo Pact Commission will set about work in the coming weeks. I do not wish to go into details here on the possible avenues of reform.