Spain: Strength of the banking sector in a resilient economy facing structural challenges

The Spring 2025 Financial Stability Report by the Bank of Spain (BdE) provides a comprehensive overview of the Spanish economy and financial sector. The overall assessment is positive: households, businesses, and banks have strengthened their financial positions, showing a favorable evolution despite a still challenging environment. Nevertheless, the report warns that significant sources of vulnerability remain. The main risks to financial stability are concentrated in four areas: the growing deterioration of the international geopolitical context, the possibility of abrupt corrections in financial markets, macroeconomic risks linked to heightened uncertainty, and the increasing importance of cyber risks as a potential trigger of instability episodes. This edition of the report also analyzes the newly introduced banking tax, reiterating the European Central Bank’s 2024 opinion, which warned that its application could undermine the banking sector’s resilience to shocks. It may also have adverse economic effects by limiting banks' capacity to grant credit, potentially leading to less favorable financial conditions for customers.

Key Highlights of the Spring 2025 Financial Stability Report:

• Strength in the private sector: The financial position of households and non-financial corporations has improved, supported by historically low debt levels and a reduction in interest burdens, driven by monetary easing in the euro area.
• Public sector vulnerability: The financial position of the General Government remains fragile, with a still high debt level (101.8% of GDP) and a deficit that is narrowing only gradually. Fiscal constraints continue to limit the room for maneuver in the event of future economic shocks.
• Strong banking sector: Spanish banks show robust profitability (ROE at 14.1%) and solid solvency levels (CET1 ratio at 13.5%). There has also been a notable recovery in private sector lending and an improvement in credit quality, with declines in non-performing and special-watch loan ratios.
• Housing market: Although real prices continue to rise—driven by strong demand relative to limited supply—price imbalance indicators remain at moderate levels. The conditions under which new mortgage loans are being granted do not currently show signs of loosening in credit standards. In 2024, the outstanding stock of credit for home purchases in Spain grew by 0.5% year-on-year, while the flow of new mortgage lending increased by 34.6%.
• Rising global risks: The report flags trade tensions, high valuations of risk assets, and geopolitical uncertainty as key threats to financial stability. Cyber risks are gaining prominence as a potential systemic vulnerability.
• More active macroprudential policy: The Bank of Spain confirms that, if the current level of cyclical systemic risk persists, the countercyclical capital buffer (CCyB) will be raised to 1% as of October 2026. The Bank is also preparing a framework to introduce structural limits on credit origination standards.
• Banking tax: The Bank of Spain endorses the conclusions and recommendations of the ECB’s 2024 opinion:
  - The tax may reduce the banking sector’s resilience to shocks and could lead to adverse economic effects by limiting banks’ capacity to grant credit, potentially resulting in less favorable conditions for borrowers and clients of other banking services.
  - The extraordinary deduction mechanism based on profitability partially mitigates the potential negative effects of the tax. However, this relief only applies in scenarios of low or negative profitability, and only partially in the former, meaning that the tax could still impair banks’ ability to build capital buffers under these conditions.
  - During periods of high profitability, the deduction does not apply, further limiting banks’ capacity to accumulate capital proactively to withstand future shocks.
  - Like other similar taxes introduced by national authorities in the EU, it may contribute to the fragmentation of the European financial system and undermine the level playing field within the banking union. The application of a progressive scale may also lead to competitive asymmetries depending on the size of the institutions.