The Bank of Spain has already examined some of the effects of the recent banking crisis on Spanish entities and will increase its supervision efforts this year to avoid new episodes. Sources from the institution estimate between 300 and 400 million euros the exposure of Spanish banks to Credit Suisse, an amount that they describe as residual and insufficient to generate problems.
The agency is also closely watching deposit outflows, which partly explains the drop in SVB in the United States and Credit Suisse in Switzerland. The sources indicate that there has not been a significant outflow of these resources in Spain, beyond the strategy of some clients to divert them to investment funds or the needs of families to resort to savings due to inflation.
The Bank of Spain will pay special attention this year to aspects such as liquidity or “shadow banking”, which also partly explain the crisis of recent days. For now, he does not believe that liquidity tensions are still generating credit restrictions.
Its new supervision plans for 2023 place the risk of financing and lack of liquidity as a priority for the first time, given the conclusion of the ECB stimulus measures implemented during the pandemic and in view of the latest turbulence in the markets.
Added to this effort will be increased attention to “shadow banking.” “When the cases of interconnections of the banking sector with non-bank financial intermediaries appeared, as in the case of Archegos, which particularly affected Credit Suisse, it was also decided to focus supervision on analyzing the risks for European banks of this type of exposure” , affirms the governor of the Bank of Spain, Pablo Hernández de Cos, in the presentation of the supervisory report of the organization.
Sources from the agency indicate that Spanish banks have a commercial banking model that is highly focused on retail customers, with enormous diversification in assets and liabilities that keeps them away from this problem. They also consider the exposure of Spanish banks to “shadow” banking to be marginal.
Liquidity has also gone from becoming an element of tranquility for banks to putting them on their guard. The SVB and Credit Suisse crises have in common the rapid withdrawal of deposits from savers, which has cast doubt on the ability of European banks to restore balance sheets in situations of this type. If until a few weeks ago the message was of ample liquidity, now there are doubts about it.
Sources from the Bank of Spain specify that the concern regarding liquidity was already foreseen before the Credit Suisse crisis, although now it has grown. It responds above all to the need to repay the ECB loans during the pandemic, the TLTROs, which have flooded the liquidity system. The Bank of Spain considers that the time has come for the normalization of monetary policy, in which banks will also have to make financing efforts.
The Spanish banks, indicates the entity, are well liquid for now, with an LFR rate, which is the one in which this variable is measured, of 175%. This percentage reassures the Bank of Spain, which describes the starting point as very favourable, although it will not lower its guard.
For this reason, it will monitor the new risk and will place emphasis on “banks with more vulnerable financing structures or weaker liquidity and financing risk management practices”, according to the institution in its latest supervision report.
When looking at financing, he will pay special attention to CoCos, which caused a bit of a meltdown in European markets last week. These instruments are bonds convertible into bank shares in the event of difficulties in the entity.
Emphasis will also be placed on aspects such as technological risks, with special mention to the concept of cyber-resilience, which is of particular concern to the Bank of Spain and which will lead it to carry out on-site inspections. Added to these aspects are those that have been incorporated over the years, including those associated with money laundering or crypto assets.
Last year, the bank already focused its stress tests on Spanish entities on geopolitical tensions, rising inflation and the tightening of financial conditions. “The results obtained show an adequate aggregate capacity to absorb losses on the part of the credit institutions”, he affirms.
In an adverse scenario, he points out, banks would be able to maintain a capital ratio of 10.5%, above the ECB’s requirements. However, the supervisor recalls that the environment is “uncertain” and insists on the need for “caution” in the entities.
Over the past year and at least the first quarter of this year, the Bank of Spain has maintained the so-called countercyclical capital buffer at 0%. This cushion, consisting of an additional reserve of capital by the banks, is activated in good times to solve the problems that may arise when a crisis arrives. The war in Ukraine, indicates the entity, has dissuaded him from reinforcing the mattress in the current environment.
However, systemic entities are required to have a certain additional capital cushion. That of Santander for 2023 stands at 1%, compared to 0.75% for BBVA, 0.5% for CaixaBank and 0.25% for Sabadell.
To monitor the 56 entities supervised by the agency, including 19 banks and 35 credit unions, the agency typically uses a system of indicators and alerts with confidential information, in addition to other methods, including on-site inspections.
Apart from the banks, last year there were also two inspections of appraisal companies that were not directly supervised and thirteen actions regarding legal entities that used the name of supervised entities for financial activities such as the purchase and sale of foreign currency.
The sanctioning activity of the bank during the past year consisted of the processing of 14 files that included 97 directors of the entities. Appraisal companies and control areas are the areas with the most files. Regarding the conduct of the entities, a file was initiated, 81 publicity requirements were made and 57 recommendations were formulated.
The bank’s message is that, for now, the net effect of interest rate rises is positive. According to bank sources, banks must take advantage of the good moment to strengthen their resilience by improving solvency and increasing risk positions.
“Beyond supervisory work, entities must adopt a prudent position and take advantage of the current increase in profitability to reinforce their resilience, through an adequate policy of capitalization of profits and constitution of provisions,” says Hernández de Cos.
The Bank of Spain’s report also shows that around 62,000 incidents related to floor clauses have been detected up until last year, which have made it possible to return nearly 133 million euros to customers.
