The Bank of Spain warns of an increase in non-performing loans due to the war in Ukraine | Economy

The Governor of the Bank of Spain, Pablo Hernández de Cos.EFE

The Bank of Spain warns the Spanish financial sector: delinquency is going to increase in the coming months. This was expressed this Thursday by the bank’s general director of supervision, Mercedes Olano, in the presentation of the 2021 Supervisory Report. “Delinquency is going to grow. We are facing a very great uncertainty and the uncertainty of the pandemic is still not closed, ”Olano assured.

This statement is based on two factors of imbalance for the Spanish economy. On the one hand, the ravages that are still dragging on from the coronavirus crisis. “39% of ICO credits are still in a grace period. Many will begin to mature this quarter, although there has been a reform in the Council of Ministers and the possibility of extending these maturities in some sectors for another six months has been opened”, recalled the general director. In other words, the moment in which part of this blackberry emerges will be delayed.

Furthermore, on the other hand, the harshness and duration of the effects of the Russian military attack on Ukraine remains to be seen. “We still don’t see the second-round effects of the war, but it will generate higher energy prices, higher inflation, and a drop in consumption and investment. This will badly affect delinquency, although we do not know to what level”, Olano has influenced. The Bank of Spain is analyzing these possible impacts, but everything is at the expense of the duration of the war and the real impact it has on the economy.

For this reason, the supervisor led by Pablo Hernández de Cos underlines the need to maintain prudence in all senses. “Entities must maintain a high degree of prudence, with an adequate and early recognition of the associated risks, in order to preserve confidence in the sector and to facilitate the maintenance of the flow of credit to the economy”, collects the report in the presentation of the governor.

Regulations with ICOs

Olano has also confirmed that the bank has to comply with current accounting regulations in relation to ICO credits and new deferrals. The bank wanted there to be something loose in this regard and that they could not recognize as delinquent the part of the credits that the State guarantees. However, the Bank of Spain does not share this idea and recalls that they have to comply with the current rule. This means that financial institutions have to reflect the entire loan as delinquent and provision between 20% and 25%. “It is a distortion that exists, but accounting regulations must be complied with. If the conditions are not met so that an asset is not removed from the balance sheet, totally or partially, the entities will have to live with this small mismatch. The regulations must be complied with and there is no more flexibility”, insisted the bank’s general director of supervision.

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The report also states that exposures to ICOs continued to show low doubtful rates (2.7% in September 2021), “although they had significant rates of special surveillance (21.1% in September 2021) and began to show signs of deterioration. Hence, the Bank of Spain maintains special vigilance, despite the fact that it considers that the entities are well covered with the provisions they have. For this reason, Deputy Governor Margarita Delgado assures in the report that it is necessary to maintain the current level: “It is important that entities adequately analyze the risks and do not release provisions until the uncertainty dissipates, especially in the sectors most affected by the crisis”.


After years with negative rates, the financial sector faces the coming months with the forecast of successive rate hikes. “Credit institutions must be prepared to properly manage all risks, and in this case they must also be prepared to properly manage interest rate fluctuations. Positive interest rates would be the most logical scenario in an environment of financial stability and growth in which the allocation of resources is made in a balanced manner. Spanish banks, in general, are favorably positioned in the face of interest rate hikes. However, in these moments of enormous geopolitical uncertainty, it is difficult to establish clear scenarios on the evolution of rates”, explains Delgado in the report.

Spanish banking would see its margins improve with a rate hike, even if it would take up to two years for it to be reflected in the accounts. In addition, in these previous years the entities have been used to reduce costs and increase income from commissions. Something that the Bank of Spain closely monitors: “Banking services are no longer free. What worries us about this is that the entities properly advertise these commissions, which have to correspond to services actually provided to customers”, Olano recalled.

On possible mergers, the report includes the possibility of cross-border unions, according to the deputy governor of the Bank of Spain. A possibility that the director general of supervision still sees as distant. And if only national mergers are considered, although there has already been a significant concentration in the sector, Olano has stated that there is still room between smaller entities. All this would help improve the profitability of these banks, which would allow them to face the new reality of the sector. “There is growing competition from technology companies, the rise of crypto assets, the increase in cyber risks and the financial risks associated with climate change,” says Hernández de Cos in the report.

governance models

Another key point for the Bank of Spain is the governance models. The bet of the ECB, as well as of the Spanish supervisor, is that banking moves towards a model that distributes power between presidents and CEOs, the first being also non-executives. This change cannot be mandatory, as Olano has recalled, since the law does not allow it.

“Another different thing is that there are more and more conditions. The idea of ​​the European supervisor and the Bank of Spain is to migrate from a system of executive presidents with a lot of power to a non-executive one, that there be adequate checks and balances on the board of directors so that these executive presidents function correctly and that the board receives the report directly from the CEO and not just from the president”, explained the general director of supervision. The last change that has occurred among Spanish banks to adapt to this new model was that of Santander, which rebalanced the power of the leadership: the CEO, José Antonio Álvarez, gained executive functions and no longer depends on the president of the group , Ana Botín, to report directly to the board of directors.

A different case is that of Unicaja, to which Olano did not want to refer explicitly, but which worries the Bank of Spain. In general, he has made it clear that the supervisor closely follows the governance of entities. “Any deterioration in governance can be reflected in the score that entity receives in the SREP (the Supervisory Review and Evaluation Process, in its acronym in English, by which central banks regularly evaluate and measure the risks of each entity) , may imply a deterioration of the entity’s global rating and, therefore, more capital requirements”, warned the director general of supervision. This adds to the doubts of the Ministry of Economy about the suitability of Braulio Medel to continue leading the Unicaja Foundation, the largest shareholder of Unicaja Banco.

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