Pablo Hernández de Cos, head of the Bank of Spain, warned on Monday that the profitability and solvency of the banking sector could be harmed by the current macro-financial environment and new sector taxes. He urged policymakers to take a step back and consider the broader implications for the industry.
The rate increase under discussion would boost bank revenues, yet it would also raise the financing costs for households and businesses. That combination would weigh on their ability to meet obligations and would push banks to lift their loan loss provisions to cover potential defaults.
Speaking at the XIII Financial Meeting organized by KPMG and Expansión, Hernández de Cos noted that in a baseline scenario, Spanish banks might see their solvency improve by about 60 basis points, even without new taxes on the evolving sector. With tax considerations, the gain could be trimmed to roughly 50 basis points.
The effect of the economic situation and the tax
The reality of the economy has deteriorated. When tax effects are included, the expected improvement in the sector’s solvency ratio could shrink to around 30 basis points, down from the previous expectation of about 60 basis points.
As of June 2022, the CET1 capital ratio stood at 12.9%. While this figure had improved from pre-pandemic levels, it remained among the lower end of the banking union, signaling tighter capital cushions.
Forecasts indicate banks will need to significantly raise their provisions, which would push the CET1 maximum quality solvency ratio down by about 2.4 percentage points. In a more adverse scenario that assumes extraordinary tax measures, the decline could reach 2.6 percentage points.
Looking at mid-year data, the sector’s solvency ratio could settle around 10.3%. This reflects substantial capital consumption, yet the governor emphasized that overall sector solvency would stay at adequate levels, with some differences among individual institutions.
Bank of Spain officials conclude that, within the current uncertainty, risks to financial stability and the likelihood of worst-case scenarios are rising. Businesses might use the period of higher short-term gains to strengthen their resilience.
Hernández de Cos also stressed that institutions should pursue prudent strategies in procurement and capital planning and monitor macroeconomic developments closely. The goal is to respond quickly should the considered risks materialize.
Family status
The governor highlighted that deteriorating household finances could affect families’ ability to repay debts. Still, empirical evidence suggests mortgages are typically among the last financial obligations to be fully settled when times get tough. For many Spanish households, mortgage repayments have been a priority.
Defaults tend to cluster in the first five years of a loan’s life. When extreme conditions hit, such as mortgage loans paired with sharp income declines (more than 20%) or rising unemployment, defaults can persist for about two years before normalizing.