Contrary to early predictions and the experience of other crises, banking sector guilt related to lending did not rise during the pandemic and the recent inflation shock. In fact, the default rate on total loans fell to 3.5 percent, the lowest since December 2008, the start of the Great Financial Crisis. Yet, lenders flagged higher risk in housing loans, signaling potential trouble ahead. By the end of 2022, nonperforming household loans in Spain reached 33,565 million euros in private supervision. The Bank of Spain noted an elevated nonpayment risk, with 2,153 million more defaults than in 2021 and a 6.8 percent rise, and 3,071 million more than in 2019, reflecting increased strains on borrowers.
The most notable takeaway from this rise is the breakdown of indicators during the 2020–2021 period. While payment capacity appeared to improve for some borrowers, the latest stability report from the supervisor shows the slowdown in activity did not fully translate into the following year, and there are signs of credit quality deterioration among organizations as noted in the biannual financial stability assessment.
Defaults past due over 90 days declined at a faster pace than in previous years, totaling 18.5 percent of all overdue loans and about 39.936 million euros above 3.5 percent of total lending. This trend appeared widespread across sectors. Defaults among businesses fell by 4.73 percent, totaling 23,000 million, while household defaults dropped by 2.77 percent to 16,936 million. Loans that were refinanced or restructured fell by 16.5 percent, reflecting tighter credit conditions in the private sector, which registered a 12.2 percent drop to 80,989 million, or 7.1 percent of total loans. The decline was mainly driven by companies, down 22.3 percent to 47.424 million, while household debt showed only a modest increase of 5.48 percent to total lending. IMF cautions, in its January report on Spain, that these dynamics are consistent with pre-pandemic levels and evolving slowly.
households faced penalties
From these figures, banks perceive rising default risk, which in turn fuels concerns that higher interest rates may impose heavier burdens on households. The Bank of Spain has warned that exchange rate pressures could add to these challenges. A sharp rise in Euribor could translate into higher debt service, especially for highly leveraged households. The share of debt servicing exceeding 40 percent of income rose from 1.19 million households at 10.4 percent of total loans to 1.56 million households at 13.9 percent, reflecting the sensitivity of housing costs to rate changes.
Not all loans under special supervision will inevitably default, but a portion is likely to do so, suggesting a measurable increase in defaults later in the year. The public sector provided substantial support to mitigate pandemic effects, but private-sector actions have begun to take hold more slowly. The rate increases trend generally takes time to manifest fully, with effects intensifying over a 24 month horizon. As inflation remains a driver, the likelihood of higher defaults in the near term remains a possibility, though analysts expect these movements to be gradual.
precaution
Authorities and institutions see reasonable grounds to anticipate a rising default rate in the near term, particularly in the second half of the year as variable-rate loans adjust with price movements. Mortgages, with annual or semiannual reviews, are a focal point for potential payment problems. Low-income families, smaller firms carrying substantial debt, and sectors most exposed to price volatility are expected to bear the brunt. Still, the forecast remains a moderate increase, projected to be manageable over a few months.
Against this backdrop, institutions stress careful interpretation of the numbers. The Bank of Spain urges prudence because uncertainty remains high, including policy-tightening risks. Non-payment obligations require lenders to set aside reserves to cover potential losses, protecting solvency. As the stock of outstanding loans grows, asset quality can come under pressure, reducing profitability and limiting resources to support households and firms, with potential impacts on economic growth.