European authorities keep the Old Continent’s financial sector under surveillance. The crisis of Silicon Valley Bank, Credit Suisse and, finally, the doubts about Deutsche Bank last Friday alerted supervisors. “There are certain idiosyncratic elements that contributed to the financial problems”, assured the governor of the Bank of Spain, Pablo Hernández de Cos, this Monday at a forum in Valladolid to subtract a possible contagion in the country. To which he added: “These idiosyncratic elements are not present in European or Spanish banks and therefore a mechanical translation cannot be done”.

For the time being, the EU data scares away the ghosts, although a risk is hovering that frightens the sector as a whole: there is a crisis of confidence, which is the worst symptom for a company that lives on it. “It generated an increase in risk aversion on the part of investors and in the volatility of financial markets, which led to a global reduction in share prices in the banking sector”, explained the governor. On Monday, the Ibex – where Santander, BBVA, CaixaBank, Sabadell, Bankinter and Unicaja are listed – recovers on a high. Of course, the big listed Spanish banks have accumulated a drop of around 15% since the beginning of the crisis.

The supervisor points out in this regard that the sector is facing these turbulences much better equipped than in the Great Recession. On the one hand, it has high capital and liquidity positions. In addition, “Spanish entities even improved their solvency levels” in the last three years, as Hernández de Cos recalled, a period also marked by adverse shocks such as the pandemic.

Regarding the uncertainty generated in recent weeks, it is worth remembering the differences that exist between the Spanish financial sector and what happened to Silicon Valley Bank, where there was an excessive weight of fixed income (whose value fell due to the increase in interest rates) and , in addition, with a high volume of deposits not covered by the State. That’s because it had a large portfolio of companies with high balances as clients. However, in Spain the weight of retail deposits is much higher, most of which are guaranteed by the Deposit Guarantee Fund. “The retail segment has recently contributed both to a positive evolution of profitability in a context of rising interest rates, and to a favorable liquidity position”, underlined the governor.

The Bank of Spain also took advantage of this good position and praised the relevance of the supervisory task. Since the 2008 crisis, there are more and more demands and demands in Europe to accumulate anti-crisis mattresses that serve as firewalls: “The role of supervision of entities must also be emphasized”, said Hernández de Cos. And he also praised the quick reaction of the United States and Switzerland, something he considers “essential” to guarantee financial stability.

Lastly, on this matter, it has insisted on the banks’ request for prudence in terms of provision and capital planning, given the environment of high uncertainty that permeates the sector. It should be allowed, he said, “to allocate part of the increase in profits that is occurring in the short term to further increase the resilience of the sector”.

Monetary Policy Review

On the monetary policy decisions of the European Central Bank (ECB), the governor has defended what was done last year. Likewise, he considers it prudent to continue on March 16 with the 0.5 percentage point hike in rates to combat the upward spiral in prices, anticipated in February. Although he warned that the next decisions will be subject “more than ever” to what may happen in the coming weeks: “Our future monetary policy decisions will depend more than ever on how the different sources of risks materialize, including experienced in recent days in the financial markets”.

Looking ahead, three main factors are closely monitored: new economic and financial data, core inflation dynamics and monetary policy transmission. It is precisely on this last point where he considers that the banking crisis could have greater influence: “The tensions in the financial markets that we have experienced in recent days could have a direct impact, generating an additional tightening of financial conditions and affecting, on the negative side, for perspectives of economic activity and inflation. Events that will have to be taken into account in our next meetings”.

Hernández de Cos also emphasized the closing of his speech on the need to complete the Banking Union, a project that has been stalled for years. As well as the willingness of the ECB and national authorities to “act as and when necessary” to maintain financial stability in the eurozone.

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