Maximum prudence and planning in the face of an increasingly uncertain scenario. The Bank of Spain insists on its appeal to banks to exercise extreme caution and take advantage of the increase in their profits to allocate more provisions that allow it to face unexpected situations without restricting the supply of credit to those projects that are solvent. The wake-up call from the entity’s Governor, Pablo Hernández de Cos, comes at a time when the sector has been announcing record profits and improving shareholder remuneration.
In circumstances of high profitability and significant uncertainty, the governor considers it “very important” that entities carry out a prudent provision and capital planning policy, since this would make it possible to better face possible losses if the risks materialize. identified.
During his speech at the III Finance Observatory organized by El Español and Invertia, Hernández de Cos explained that both for the European economy as a whole, and for the particular case of Spain, greater resilience is being observed than expected a few years ago. a few months.
So much so that it is “highly likely” that the regulator will revise its estimates of GDP growth for 2023 upwards in the coming weeks in relation to those published in December, while those of general inflation would also be modified downwards. The General Director of Economy and Statistics, Ángel Gavilán, recently pointed to an advance of around 1.6% for the current year.
In any case, he insisted, we must continue to be “very prudent” because the savings accumulated in the pandemic are being reduced, the effects of the tightening of monetary policy have not yet been fully perceived, geopolitical uncertainty has not been reduced, and the persistence of inflation increases the probability of second-round effects. In short, despite the improved outlook, the level of uncertainty and the risks to financial stability remain high.
5.6% drop in household disposable income
The governor recalled that the strong increase in inflation has resulted in a 5.6% drop in household disposable income in the first nine months of 2022 Furthermore, the rise in interest rates is reducing the additional capacity of indebted households to meet their financial obligations.
The Bank of Spain calculates that an increase in the 12-month Euribor of around 400 basis points -in 2022 it rose close to 350- would increase the percentage of highly indebted households by 3.6 points percentages compared to the situation prior to the crisis. And it would reach 14.7% if the Euribor rose 500 basis points.
This effect, moreover, would tend to be more intense in indebted households with lower incomes, which, due to the greater weight of consumption on income, are also affected to a greater extent by the increase in inflation. In the case of companies, the supervisor estimates that increases in market interest rates of 400 basis points will mean a increase in the gross financial burden of companies with debt of between 4.3 points and 8.7 points percentage.
Under the same scenario, the proportion of total corporate debt held by companies with high financial pressure, which was somewhat below 15% before the start of the current crisis, would increase between 6.9 and 9.5 percentage points. On the other hand, the governor has explained that the transfer of interest rates is being slower than in the past in Spain, especially for deposits. The particularity of the starting point of this episode, with market rates below zero, and the excess liquidity accumulated by deposit institutions would be contributing to this phenomenon, he added.
