The main current threat to financial stability comes from outside, according to the Bank of Spain. In the risk traffic light that the institution publishes every semester as part of its report on the financial system, released this Monday, the geopolitical one is now the only one that appears in red. It appears alone among tensions in Europe, the Middle East and Taiwan, while persistent inflation or weak growth no longer generates as much concern and moves to amber.
“Military conflicts in Ukraine and the Middle East continue to be sources of high geopolitical tension” and “constitute a source of uncertainty that is difficult to quantify,” states the Bank of Spain in its spring financial stability report. The publication of the document coincides with this weekend’s attack by Iran on Israel, which for now has not disrupted the price of oil, around $90 per barrel in the case of Brent.
“The markets are not discounting a major escalation, but we will have to be vigilant,” said Ángel Estrada, general director of the Bank of Spain during the presentation of the report, commenting on the tensions of this weekend. “There is also uncertainty surrounding all the electoral processes this year,” he added.
The report alludes to “episodes of regional extension of tensions” in the Middle East and to incidents such as attacks on merchant ships in the Red Sea, which increase transportation costs and slow down the traffic of goods. “A worsening of the conflict cannot be ruled out,” he says. A survey carried out by the institution itself in the first quarter of this year shows that 60% of companies are worried about international uncertainties.
The Bank of Spain cites energy supply, raw materials and merchandise as the most exposed commercial variables. Gas prices are now much lower than those recorded with the start of the Russian invasion of Ukraine, but the same is not true of oil. It also refers to the tension between China and the United States, and the intensification of cyber attacks, which have banks and the financial system as one of their favorite targets.
The semiannual report also indicates that the Spanish economy appears to have moderated its growth in the first quarter after the “positive surprise” at the end of 2023 and highlights the high public debt as one of the main vulnerabilities. If there are no fiscal and budgetary adjustments, the debt-to-GDP ratio will go from 108% in 2026 to 120% in 2040. The scenario is “more adverse” than that expected in 2019, so “it is necessary to start in 2024 a fiscal consolidation process,” he warns.
The debt problem is aggravated by rate increases. The Bank of Spain calculates that last year the average cost of public debt issues was 3.4%, 2.1 points more, and that the interest on all of the country’s liabilities will increase by three tenths in three years, up to 2.6%.
The financial burden of companies has increased by 7.3 points, to 16.3%, but households are doing better: their income increased by 5.5% last year thanks mainly to wage increases. The Bank of Spain estimates that households have been able to repay close to 3% of their debt.
The ratio of individual debt to GDP is 47%, the lowest level since 2002. In addition, vulnerable households, which are those with a financial burden greater than 40% of income, barely increased 0.7 points with the rate increases, up to 11.2%.
The code of good practices agreed between the Government and the banks to help mortgage holders in trouble has also had a “limited” effect, thanks in part to the “resilience” of households. In 2023, the debt refinanced with the code amounted to 907 million euros through 7,900 operations, 0.2% of the outstanding mortgage balance. A year before there were 135 million and 1,350 operations.
Of the nearly 65,000 refinancing requests in accordance with the code made last year, only 12% materialized, while the rejection percentage stood at 43%. “It is good news that people have not had to resort to the code of good practices,” said Estrada. “The economic situation has been better than expected.”
Credits move at twice the speed of deposits
The Bank of Spain considers that the transfer of rate increases to mortgages has already been completed. The new scenario allows it to refine its calculations and conclude that 57% of the rate increase has been transferred to loans, with percentages of 37% in the case of mortgages, while in the case of deposits it has been barely 22%.
“There would persist a certain upward trend in the cost of bank deposits,” he points out. It is foreseeable that the transfer of current accounts to time deposits, and that of bank deposits to investment funds and public debt, will continue.
The Bank of Spain report also calls on banks to be “prudent” with the distribution of dividends and warns that during the past year Spanish entities increased the unfavorable difference in terms of solvency with respect to the euro zone measure. This gap increases despite the fact that Spanish banks show “higher levels of profitability” than their neighbors.
“Shareholder remuneration has increased significantly,” the report indicates. Of the profits obtained by banks, 44% has gone to shareholders through dividends or share buybacks. All of this, the bank warns, “implies a lesser reinforcement of solvency.”
The soundness of the banks has not increased “significantly” and these circumstances “make it advisable for entities to carry out a prudent policy of managing their profits that increases their capacity to resist possible adverse shocks,” he states.
“Entities must take advantage of this situation in terms of results to improve their capacity to absorb disturbances,” said Estrada. They must do so especially in view of the fact that “this year we will see a deterioration in the quality of bank balance sheets,” he added.
