Banco de España
Financial Stability report (Spring 2022)

Main vulnerabilities of the Spanish economy and financial system

The Bank of Spain (BdE) published its Spring Financial Stability Report, analyzing the risks for the financial system of the new macroeconomic context, in which geopolitical risks, inflation and the evolution of the pandemic increase uncertainty about the outlook. The main vulnerabilities of Spain to face this scenario are the high level of public debt and the financial situation of vulnerable households and the companies most affected by the pandemic and by the rise in energy prices. According from the bank of Spain the banking sector faces this new scenario from a solid position.

Main vulnerabilities of the Spanish economy and financial system according to the Financial Stability Report:

  • High level of public debt: Public debt is at very high levels and approximately 20 points of GDP (up to 118% at the end of 2021) above the level before the pandemic. The Russian invasion of Ukraine may put further pressure on public spending. The high levels of deficit and public debt make the Spanish economy vulnerable to deterioration in financing conditions and limits the fiscal space to react to the materialization of new risks.

  • Financial weakness of certain segments of households and companies: The report focuses on the high percentage of public guaranteed loans due to the Covid crisis in which grace periods will expire before the summer of 2022, increasing the financial burdens of the sector and the likelihood that potential losses in bank´s loan portfolios will materialize, especially in the sectors most affected by the pandemic.

  • Need to maintain prudence in an uncertain environment, to preserve confidence in the sector and support the continued flow of credit to the economy, despite the results of the banking sector for 2021 have confirmed the recovery of pre-crisis profitability levels and that the stress tests carried out by the Bank of Spain in the face of potential stress scenarios arising from the current crisis show that the sector's aggregate solvency would remain at adequate levels, with a heterogeneous impact between entities.

- In this regards, Bank of Spain points out to the existence of latent credit portfolio impairments that could materialize over the coming quarter and calls to the need to address the structural challenges prior to the pandemic and the crisis in Ukraine: the growing competition from tech firms and the crypto-asset boom, the increase in cyber risks, and the potential adverse effects associated with climate risks.

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