Spanish banks’ preparedness for the COVID-19 crisis: A European comparison

Spanish banks’ preparedness for the COVID-19 crisis: A European comparison

Fecha: mayo 2020

Joaquín Maudos

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SEFO, Spanish and International Economic & Financial Outlook, V. 9 N.º 3

Spanish banks’ key metrics, such as capital adequacy levels and liquidity buffers, have improved since the last crisis; however, the economic fallout from COVID-19 is projected to have an adverse impact on the sector. Therefore, it is essential that Spain’s banks continue their cost-cutting efforts and reduce their capacity, given the expected increase in provisions
needed in the coming months to cover the anticipated rise in NPL ratios.

Abstract: With a capital adequacy level 4.2 percentage points higher than in 2008, Spanish banks appear better positioned to withstand the economic fallout from COVID-19 than during the previous financial crisis. Notably, Spanish banks boast aboveaverage profitability and efficiency compared to their eurozone peers, their loan-to-deposit gap has improved, and they have a healthy buffer of liquid assets. That said, the IMF and the European Commission are forecasting a bigger contraction in GDP in Spain (8%-9.4%) than in the eurozone (7.5%-7.7%). Although government-backed guarantees, the aid rolled out to prop up business and household income and the easing of bank regulations may help cushion the impact of the crisis on the banks, a GDP contraction of that magnitude will drive non-performance higher and require the recognition of provisions. Moreover, although the Spanish banking sector’s solvency ratio is significantly above regulatory requirements, it is 2.3 percentage points below the eurozone average. Furthermore, even though a deep restructuring effort has left Spanish banks among the most efficient in Europe, efficiency has deteriorated in recent years. As a result, Spain’s banks will need to continue with their cost-cutting efforts and reduce their capacity even further in order to weather the COVID-19 crisis.

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