## cr17321

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### Executive summary — post-crisis progress and priorities
- Spain’s banking system strengthened solvency and reduced nonperforming loans (NPLs) during 2012–16, aided by the economic recovery and the ECB’s accommodative policies.
- Four reform priorities:
  - accelerated cleanup of legacy bank assets;
  - further improvement in bank profitability and capitalization;
  - rigorous management of interest rate and liquidity risks;
  - reform of the institutional framework for financial oversight.
- Completing restructuring of bank balance sheets:
  - Total problem assets (nonperforming loans and foreclosed property) are at 70 percent of their 2013 peak.
  - Implementation of the 2017 ECB guidance on NPLs should be tough; targets should be ambitious and non-compliance should carry consequences.
  - Banks needing resources to support cleanup should raise capital or explore other financing options ahead of TLTRO expiration in June 2020.
- Capital and cost compression:
  - Raise more high-quality capital; compress operating costs to offset phase-in of deductions under the CRR.
  - FSAP stress tests indicate additional capital would help manage potential sharp increases in interest rates and government bond yields.
  - Consolidation, diversification, business-model shifts, mergers, and branch reduction recommended to address structurally weak profitability.
- Interest rate and liquidity risk monitoring:
  - Adopt a conservative approach toward banks heavily using ECB support; prioritize effective liquidity risk management.
  - Exposure to long-duration government bonds could trigger losses if euro bond market moves unexpectedly.

### Macrofinancial conditions, vulnerabilities, and outlook
- Macrofinancial backdrop:
  - Real GDP has likely surpassed its pre-crisis level in H1 2017 after four years of expansion.
  - Financial conditions more favorable; lending rates largely comparable with euro area averages.
- Major remaining vulnerabilities:
  - Large negative net international investment position: 86 percent of GDP.
  - High unemployment: 18 percent.
  - Elevated public sector debt: almost 100 percent of GDP.
  - House prices recovering but well below pre-crisis levels.
  - Low interest rates compress bank net interest income.
- Credit and intermediation:
  - Banks not fully active in intermediation; credit continues to contract due to deleveraging, high unemployment, shift to nonbank financing, and corporates financing with retained earnings.
  - Adjusted figure definition: "effective flows" = newly extended credit net of repayment (excludes write-offs/adjustments).
- Growth projections and headwinds:
  - Real GDP projected to expand by 3.1 percent in 2017.
  - Real GDP projected to average around 2 percent in 2018–22 with risks tilted to the downside.
  - Termination of ECB TLTROs will expose banks to higher funding costs; CRR deductions phase-in requires more high-quality capital; digitalization shifts retail preferences.

### Banking sector resilience, capital, profitability, liquidity, and problem assets
- Capital and solvency:
  - System total capital ratio: 11.6 percent at end-2012 → 14.8 percent at end-2016.
  - For SIs, difference between fully-loaded and transitional CET1 could be about 160 bps.
  - CET1 on a fully-loaded basis is relatively low.
  - IFRS 9 implementation could require capital; transitional arrangements may limit impact.
- Profitability:
  - Return on equity remains below the cost of capital.
  - Profitability affected by low rates, sizable NPLs, and excess branch capacity.
  - Internationally oriented banks perform better in net interest income than domestically oriented banks.
- Problem assets and NPLs:
  - Consolidated NPL ratio: 5.6 percent as of end-2016.
  - NPL ratio for banking business in Spain: peak 13.6 (2013) → about 9.25 percent at end-2016.
  - Total problem assets still about 70 percent of 2013 peak.
  - NPL concentration: residential mortgages and real estate-related firms account for about 57 percent of all NPLs; real estate sector accounts for about 40 percent of NPLs.
- Liquidity:
  - All banks had LCRs above 100 percent at end-2016.
  - Aggregate NSFR: 111 percent.
  - Cash-flow analysis: enough liquid assets to cover net liquidity outflows from one week to more than a year.
  - ECB funding: represented 6 percent of total funding on average; higher for one SI.
  - Absent ECB funding, aggregate NSFR would fall to about 97 percent → funding shortfall equal to 4.8 percent of GDP (end-2016 data).
  - NSFR of the weakest SI would drop to 77.5 percent absent ECB funding.
- Sovereign exposure:
  - At end-2016, Spanish banks’ claims on its own sovereign were 11 percent of total assets.

### Stress-test scenarios and aggregated results (2017–2019)
- Severely adverse scenario narrative:
  - Mixes features of the 2012 crisis and growth slowdowns in Spanish banks’ foreign markets, plus de-globalization, post-Brexit arrangements, stock market sell-off, capital outflows from Latin America and Turkey, UK slowdown, and weaker domestic demand due to political uncertainty.
- Coverage and baseline date:
  - Top-down stress test used supervisory information as of December 2016; covered 14 SIs in operation as of December 2016.
- Solvency results:
  - SI aggregate fully loaded CET1 ratio would decline from 10.9 to 7.4 percent (about 1 percent of GDP).
  - Capital reductions by risk type over stress horizon:
    - Credit risk: 1.5 percent of RWAs.
    - Interest rate risk in the banking book: 0.6 percent of RWAs.
    - Repricing of fixed income securities: 0.4 percent of RWAs.
  - A few SIs would struggle under the severely adverse scenario; no LSI would suffer capital shortfalls under authorities’ TD stress test.
- Liquidity results:
  - Scenario 1: Retail and small business deposit withdrawals by 10 to 15 percent respectively and a reduction of ECB funding by 20 percent in a month:
    - Several SIs would fall below LCR hurdle rate of 100 percent, though all would meet the binding regulatory level of 80 percent in 2017.
    - No LSI would experience a liquidity shortfall under authorities’ test.
  - Scenario 2: Loss of unsecured wholesale funding by 70 percent:
    - Most SIs would have enough liquid assets to cope.
  - Extreme: Complete freeze of unsecured wholesale funding:
    - A significant number of SIs would face liquidity shortfalls; LSIs’ shortfalls very limited.

### Stress-test macro-financial variables (Baseline vs Adverse, 2017–2019)
- Real GDP (2016=100):
  - Baseline: 2017: 102.4; 2018: 104.6; 2019: 106.7
  - Adverse: 2017: 98.3; 2018: 95.9; 2019: 97.3
- Short-term money market rate:
  - Baseline: 2017: 0.1; 2018: 0.1; 2019: 1.0
  - Adverse: 2017: 0.8; 2018: 1.3; 2019: 2.2
- Long-term government bond yield:
  - Baseline: 2017: 2.2; 2018: 2.7; 2019: 3.1
  - Adverse: 2017: 3.7; 2018: 4.4; 2019: 4.4
- Exchange rate (EUR/USD):
  - Baseline: 2017: 0.95; 2018: 0.95; 2019: 0.95
  - Adverse: 2017: 0.94; 2018: 0.94; 2019: 0.94
- Equity price growth:
  - Baseline: 2017: 13.9; 2018: 0.0; 2019: 0.0
  - Adverse: 2017: -16.8; 2018: -10.5; 2019: -4.0
- Inflation rate (CPI):
  - Baseline: 2017: 2.4; 2018: 1.4; 2019: 1.5
  - Adverse: 2017: 1.5; 2018: -1.5; 2019: -1.8
- Unemployment rate:
  - Baseline: 2017: 17.8; 2018: 16.8; 2019: 16.0
  - Adverse: 2017: 20.9; 2018: 21.9; 2019: 21.7
- Nominal GDP growth:
  - Baseline: 2017: 4.0; 2018: 3.6; 2019: 3.7
  - Adverse: 2017: -1.0; 2018: -4.1; 2019: -0.5
- Real GDP growth (memo, percent):
  - Baseline: 2017: 2.4; 2018: 2.1; 2019: 2.0
  - Adverse: 2017: -1.7; 2018: -2.4; 2019: 1.5

### Nonbank sectors, market structure, and contagion risks
- Insurers and markets:
  - Insurance sector appears solvent and profitable but needs better management of interest rate risk; Spanish life products contain interest rate guarantees.
  - EIOPA stress tests revealed need for better asset-liability matching in Spain.
  - Some fixed-income market segments show reduced liquidity, risking mispricing and funding challenges for banks.
- Investment funds and redemption risk:
  - Redemption risks low currently; industry fell by half during the crisis but has recently expanded with >50 percent of mutual funds’ AUM invested in foreign securities.
  - Reallocation reduced illiquid assets share but increased equity volatility exposure.
- Shadow banking and market size:
  - Shadow banking stable at 25 percent of GDP; mainly collective investment vehicles susceptible to runs.
  - Around 12 percent of shadow banking is asset-backed securities outside banking books.
  - Outstanding debt securities: about 150 percent of GDP, almost 60 percent are government bonds.
  - Total market capitalization of Spanish exchanges: about 60 percent of GDP.
- Key interconnectedness channels:
  - Common exposures (notably government debt), conglomerate structures, cross-sectoral and cross-border claims.
  - In 2016 banks and other financial institutions held Spanish government debt securities of around 15 and 10 percent of GDP, respectively.
  - Spanish banks’ claims on own sovereign: 11 percent of total assets at end-2016 (euro area average: 9 percent).
  - Government guarantees: outstanding guarantees on certain bank liabilities about €1.06 billion at end-2016; government guaranteed Sareb senior debt €41.6 billion at end-2016 (about 4 percent of GDP).
  - A one-standard deviation positive shock to Spain’s 10-year sovereign yield (~50 bps) associated with 4 percent decline in bank equity index in real terms in first two quarters after the shock.
- Interbank, cross-sectoral, and cross-border linkages:
  - Domestic interbank contagion contained due to limited exposures and ECB long-term funding; five largest banks account for about 85 percent of interbank exposures among SIs.
  - Exposures of insurers to banks around 30 percent of insurers’ total exposures; banks’ exposures to insurers about 1 percent of banks’ total exposure.
  - Cross-border: inward spillovers from France, the United Kingdom, the United States, and Italy; outward spillovers to France, Austria, Italy, the Netherlands, the United Kingdom, and influence on Mexico, Chile, Brazil, Turkey via equity linkages.
  - Brexit impact expected contained at this stage; channels include Spanish subsidiaries in the UK (about a quarter of two Spanish banks’ assets) and use of London-based CCPs.
- Data needs:
  - Collect cross holdings among banks and nonbanks, ownership structure of key financial assets, derivative exposures, and size/risk of non-traditional banking activities.

### Institutional framework, oversight, and macroprudential governance
- Institutional architecture:
  - Three agencies oversee banking, insurance and pension funds, and capital markets.
  - Government (MoE) participates in boards of BdE and CNMV and directly oversees insurance/pension supervision through DGSyFP.
  - SIs supervised/resolved at European level (ECB, SRB) with operational support from BdE and FROB; BdE directly responsible for LSIs under ECB/SRB oversight.
- Systemic Risk Council (SRC) recommendation:
  - Establish SRC chaired by BdE governor, comprising Treasury and relevant agencies; supported by a BdE-led technical secretariat.
  - SRC powers: legislative mandate to maintain financial stability; issue observations, alerts, warnings, recommendations; accountable to Parliament; produce revamped Financial Stability Report covering all parts of the financial system.
- Macroprudential oversight:
  - BdE designated authority under CRR/CRD IV; ECB has topping-up power.
  - Countercyclical capital buffer at zero (credit gap negative; house prices weakly recovering).
  - Recommendation to expand toolkit to include borrower-based tools (loan-to-value, debt service-to-income, amortization limits) assigned to BdE.
- Surveillance and analytical capacity:
  - Need to integrate risk assessments across sectoral authorities and strengthen early warning, macroprudential stress testing, and mapping of systemic risk across subsectors.
- Microprudential priorities:
  - Stronger enforcement of risk management, governance, conduct, and provisioning practices.
  - Address asset classification issues (NPLs/forborne loans possibly misclassified as performing).
  - Reconsider Royal Decree Laws imposing fixed provision levels for certain real estate exposures that may impede BdE’s provisioning policy and conflict with IFRS.
  - Liquidity risk management, collateral quality for emergency liquidity assistance, and plans for ECB funding unwinding need attention.
  - Corporate governance improvements (board skills, internal audit, extension of related-party rules to significant shareholders).
  - Transposition of the Mortgage Credit Directive and enhanced retail mortgage disclosure required.

### Credit cooperatives, insurance supervision, and AML/CFT
- Credit cooperatives:
  - Structural weaknesses: low loss-absorbing liabilities and limited capital-raising options.
  - 25 cooperatives aggregated in two groups (one an SI) authorized as IPS; 29 coops formed AECR for shared services but solo prudential standards remain.
  - Policy: incentivize formation of IPS with central body; if unsuccessful consider compulsory schemes modeled on foreign reforms; enhance governance, fit-and-proper regimes, and subject cooperative shares to MiFID rules.
- Insurance supervision and Solvency II:
  - DGSFP effective but resource-constrained; supervisory culture needs shift from compliance to judgement-based, market-consistent risk assessment under Solvency II.
  - Develop skills in assessing insurer governance and risk management.
- AML/CFT:
  - Progress made since 2014 evaluation; TF offense deficiencies addressed; TFS laws issued but domestic designations pending.
  - SEPBLAC increased supervisory resources and inspections (55 DNFBP inspections during 2015–16; 10 MVTS inspections since 2014) but resources remain insufficient.
  - Immediate priorities: implement TFS without delay; provide additional SEPBLAC resources; enhance MVTS supervision; identify and sanction unlicensed MVTS.

### Legacy issues — Sareb and FROB; resolution and crisis management
- Sareb overview and risks:
  - Created in 2012 to manage about €106.5 billion of non-performing assets (€50.7 billion after discount) with 15-year horizon.
  - Ownership: 55 percent by Spanish companies and one foreign bank; remainder by government via FROB.
  - 2012–16: Sareb sold assets and repaid senior debt about 22 percent and 20 percent, respectively.
  - Sareb plans to repay FROB and private investors about 79 percent of original investment.
  - As of end-2016, audited financial statements show negative equity for €2.7 billion.
  - For statutory purposes Sareb reports equity resources of about €4 billion (capital plus subordinated debt); unrealized losses ~€5.3 billion do not count for corporate insolvency per Spanish accounting rules and a Royal Decree.
- Sareb initial balance sheet (In billions of euros):
  - Cash 4.8
  - Loans 39.4
  - Real Estate Owned (REOs) 11.3
  - Equity 1.2
    - FROB 0.5
    - Private 0.7
  - Senior bonds 50.7
  - Sub. Debt 3.6
  - Total Assets 55.5
  - Total liabilities 55.5
- Systemic considerations:
  - Sareb’s remaining liabilities about 4 percent of GDP.
  - Forecasting cashflow generation through end-2027 critical; implementation risks over next 3–5 years given price and volume assumptions, bank competition, and rental preferences.
  - Recommendation: BdE should challenge Sareb’s cashflow projections using internal macroeconomic and adverse scenarios; set up tripartite group (BdE, MoE, FROB) independent of Monitoring Commission to analyze mid-term corrections.
- FROB and privatization:
  - FROB restructured ~40 institutions and holds stakes in two SIs.
  - June 2017 merger agreement between two state-owned SIs will pave way for divestment by an extended deadline end-2019.
  - FSAP recommends early involvement of investment bank/consultant to accelerate privatization.
- Resolution framework and gaps:
  - BRRD transposed; Spain opted not to include nationalization or government financing; tools: sale of business, bridge bank, asset separation, bail-in.
  - Preventive resolution role under BdE; executive role under FROB.
  - Operational gaps: financing for bridge bank/asset separation under review; not all SIs hold adequate loss-absorbing debt; MREL requirements under development.
  - LSIs face greater challenge raising MREL-eligible debt; consider industry-financed resolution fund or accelerate loss-absorbing debt issuance; unresolvable LSIs should face enhanced supervision/tougher capital.
- Banco Popular case (June 2017):
  - Resolution of a listed SSM systemic institution was orderly; depositors and taxpayers not exposed to loss.
  - Highlighted operational issues: speed, coordination, communication, supervision, early intervention, preparation for resolution action and funding.
- Crisis management and safety nets:
  - Enhance crisis management framework and inter-agency coordination; conduct simulation exercises.
  - Prepare recovery and resolution plans for significant insurance companies.
  - Approve and prioritize recovery plans for at-risk LSIs; update smaller LSIs’ plans more frequently under stress.
  - Strengthen safety nets: modernize FGD, enhance revenue base and payout system, organizational changes to meet seven working day payout objective, consider emergency liquidity facility for FGD, test deposit data quality regularly.
  - Consider protection scheme for insurance policyholders, particularly life insurance.

### Key near-term financial stability recommendations (selected)
- Enforce implementation of ECB guidance on NPLs; promote bank disclosure of targets and progress (SSM, BdE).
- Improve recovery of viable businesses: enable stay/involvement of public creditors in pre-insolvency processes; enhance OCAP for SMEs; strengthen commercial courts (MoE, MoJ).
- Evaluate further banking consolidation: mergers, branch reduction, business-model adjustments (SSM, BdE).
- Monitor interest rate and bond market risks; set appropriate capital requirements (SSM, BdE).
- Improve liquidity monitoring; close reporting gaps; review funding of banks reliant on ECB liquidity (SSM, BdE).
- Reduce insurer asset-liability mismatches via supervisory and prudential steps (DGSyFP).
- Foster market-based financing and nonbank financial services for corporates and households (MoE, BdE, CNMV, DGSyFP).
- Enhance capacity to monitor macrofinancial linkages, intra-system connectedness, and cross-border spillovers; close data gaps (BdE with CNMV and DGSyFP).
- Review Sareb’s medium-term outlook under adverse scenarios; set up tripartite committee (MoE, BdE, FROB).
- Set up a Systemic Risk Council for inter-agency coordination on systemic risks (MoE with BdE, CNMV, DGSyFP).
- Expand macroprudential toolkit to include borrower-based tools (All authorities).
- Increase supervisory focus on corporate governance across credit institutions and nonbank sector (SSM, BdE, DGSyFP, CNMV).
- Assign BdE full regulatory powers in matters not harmonized at European level (e.g., authorizing mergers) (BdE, MdE).
- Develop credible resolution strategy for credit cooperatives and other LSIs; prepare recovery and resolution plans for significant insurance companies (BdE, FROB, DGSyFP).
- Strengthen and upgrade deposit guarantee scheme; create protection scheme for insurance policyholders (FGD, MoE, DGSyFP).

### Financial system structure and selected statistics
- Aggregated assets of financial institutions: about 360 percent of GDP as of end-2016; two-thirds belonged to deposit-taking institutions.
- Share of financial assets abroad: about 45 percent of total financial assets at mid-2016 (up from 20 percent at mid-2008).
- As of July 2017: 13 significant institutions (SIs) — one GSIB and another cooperative group; SIs represent over 90 percent of bank assets.
- LSIs as of July 2017: 22 commercial banks, 2 small saving banks, and 43 credit cooperatives; cooperative sector market share about 7 percent of assets.
- Rest of financial system (insurers, pension and investment funds, FVCs) mostly part of bank-led conglomerates.
- Shadow banking: 25 percent of GDP; around 12 percent represented by asset-backed securities outside banking books.
- Outstanding debt securities: about 150 percent of GDP; almost 60 percent are government bonds.
- Market capitalization of Spanish exchanges: about 60 percent of GDP.

*Source: IMF Financial Sector Assessment Program: Spain — Executive Summary and chapter text (cr17321).*

### EXECUTIVE SUMMARY ___________________________________________________________________________ 7

### EXECUTIVE SUMMARY

### Post-crisis progress and priorities
- Spain’s banking system has strengthened its solvency and reduced nonperforming loans (NPLs) during 2012–16, aided by the economic recovery and the European Central Bank’s (ECB) accommodative policies.  
- It is critical to sustain the reform momentum in four areas:
  - accelerated cleanup of legacy bank assets;
  - further improvement in bank profitability and capitalization;
  - rigorous management of interest rate and liquidity risks;
  - reform of the institutional framework for financial oversight.
- Completing restructuring of bank balance sheets is a priority:
  - Total problem assets (nonperforming loans and foreclosed property) are at 70 percent of their 2013 peak.
  - The pace of reduction must lean on a tough stance on the implementation of the 2017 ECB guidance on NPLs; targets should be ambitious and lack of compliance should carry consequences.
  - Banks needing additional resources to support the cleanup should raise capital or explore other financing options.
  - Market discipline will become more demanding as Spanish banks turn to tap wholesale funding once the ECB’s Targeted Longer-Term Refinancing Operations (TLTROs) expire in June 2020.
- Additional capital and cost compression are advisable:
  - Raising more high-quality capital and further compressing operating costs will help compensate for the phase-in of deductions under the Capital Requirements Regulation (CRR).
  - FSAP stress tests indicate additional capital would help manage potential sharp increases in interest rates and government bond yields.
  - To overcome structurally weak profitability, banks should explore consolidation and diversification, including shifts in business models, mergers, and further branch reduction.
- Enhanced monitoring and supervisory attention to interest rate and liquidity risks:
  - With the likelihood of monetary policy normalization over the medium term, authorities should adopt a more conservative approach towards banks making high use of ECB support and place a premium on effective liquidity risk management.
  - Movements in the euro bond market and unexpected swings in financial market prices may trigger losses due to exposure to long-duration government bonds in bank portfolios.

### Nonbank sectors, market structure, and contagion risks
- Focus on insurers, capital markets, and credit cooperatives should intensify:
  - Insurers need to adjust balance sheets to contain interest rate risk.
  - Reduced liquidity in certain segments of fixed-income markets could induce risk mispricing and warrant closer capital market surveillance.
  - Credit cooperatives face weak corporate governance, limited options to raise capital, and low loss-absorbing liabilities; a recent government initiative to incentivize higher mutualization of losses in the credit cooperative sector is welcome, but if unsuccessful, compulsory schemes should be considered.
- Growing exposures to contagion risk and data needs:
  - Increasing cross-border presence of Spanish banks provides diversification but requires continuing surveillance of inward and outward spillovers and reputational risk amplification.
  - Emerging sources of contagion risk include intra-system connectedness, direct links between insurers and banks, significant presence in branch form of foreign banks, insurers, and investment firms, and the core role of the government bond market for banks, nonbanks, corporates, and foreign investors.
  - Anticipated shifts in interest rate and liquidity conditions could revitalize interconnectedness risks that are currently muted.
  - Key data needs for analysis: cross holding of assets by banks and nonbanks, ownership structure of key financial assets, derivative exposures, and the size of non-traditional banking activities including financial digitalization.

### Institutional framework and oversight recommendations
- Stronger institutional foundations for financial oversight are needed:
  - Independence, governance, forward-looking orientation, and analytical capacity need strengthening within and across financial agencies.
  - Government proposals to improve the framework for financial oversight must be implemented as a priority.
  - The Bank of Spain (BdE) role should be bolstered by ensuring that all bank prudential matters not included in the Single Supervisory Mechanism (SSM) mandate are under its exclusive or prevalent control.
  - The macroprudential toolkit should be expanded to manage unexpected future vulnerabilities.
- Proposed “Systemic Risk Council” (SRC):
  - FSAP proposes establishment of an SRC chaired by the BdE governor and comprising the Treasury and relevant financial agencies to monitor and act on financial system activities relevant to Spain in an integrated manner and to strengthen partnerships with Banking Union supranational authorities.
- Resolution, crisis management, and safety nets:
  - Spain completed a timely transposition of the Banking Recovery and Resolution Directive (BRRD) and has publicly committed not to use public funds for bank bailout.
  - Reform of a new category of senior non-preferred debt will support implementation of the minimum requirement for own funds and eligible liabilities (MREL).
  - Future action should include developing a resolution strategy for less significant institutions (LSIs) with low loss-absorbing liabilities.
  - The Deposit Guarantee Fund (FGD) would benefit from enhancements to its revenue base and the payout system.

### Financial system structure and key statistics
- Aggregated assets of financial institutions were about 360 percent of GDP as of end-2016; two-thirds belonged to deposit-taking institutions.
- The share of financial assets abroad grew to about 45 percent of total financial assets at mid-2016 (up from 20 percent at mid-2008).
- As of July 2017, Spain had 13 significant institutions (SIs), of which one is a global systemically important bank (GSIB) and another is a cooperative group; SIs represent over 90 percent of bank assets.
- Less significant institutions (LSIs) as of July 2017 comprised 22 commercial banks, 2 small saving banks, and 43 credit cooperatives; the cooperative sector has a market share of about 7 percent of assets.
- The rest of the financial system: insurers, pension and investment funds, and financial vehicle corporations are mostly part of bank-led conglomerates.
- Shadow banking is stable at 25 percent of GDP and consists mainly of collective investment vehicles susceptible to runs; around 12 percent of shadow banking is represented by asset-backed securities outside banking books.
- Outstanding debt securities amount to about 150 percent of GDP, of which almost 60 percent are government bonds.
- Total market capitalization of Spanish exchanges is about 60 percent of GDP.

### Key near-term financial stability recommendations (selected from Table 1)
- Enforce implementation of the ECB guidance on NPLs, including promoting banks’ disclosure of targets and progress (SSM, BdE).
- Improve recovery of viable businesses by enabling the stay and involvement of public creditors in all pre-insolvency processes and enhancing the OCAP process for SMEs; strengthen commercial courts by resourcing them better (MoE, MoJ).
- Evaluate scope for further banking consolidation through mergers, branch reduction, and business model adjustments (SSM, BdE).
- Monitor rigorously interest rate and bond market risks; ensure appropriate capital requirements to mitigate such risks (SSM, BdE).
- Improve liquidity monitoring, close reporting gaps, critically review funding structures and policies of banks with excessive reliance on ECB liquidity support; place a premium on effective liquidity risk management by banks (SSM, BdE).
- Initiate supervisory and prudential steps to reduce mismatching of assets/liabilities in insurer balance sheets (DGSyFP).
- Foster development of market-based financing and supply of nonbank financial services for corporates and households (MoE, BdE, CNMV, DGSyFP).
- Enhance capacity to monitor and analyze macrofinancial linkages, intra-system connectedness, and cross-border spillovers; close data gaps (BdE with CNMV and DGSyFP).
- Review Sareb’s medium-term financial outlook based on adverse scenarios; set up a tripartite committee (BdE, MoE, and FROB) to work out needed mid-course corrections (MoE, BdE, FROB).
- Set up a ‘Systemic Risk Council’ for inter-agency coordination on systemic risk factors, surveillance, and system-wide financial sector policies (MoE with BdE, CNMV, DGSyFP).
- Expand the macroprudential toolkit to include borrower-based tools (All authorities).
- Increase supervisory focus on corporate governance practices across all credit institutions and the nonbank sector (SSM, BdE, DGSyFP, CNMV).
- Assign the BdE full regulatory powers in matters not harmonized at the European level including authorizing mergers (BdE, MdE).
- Develop a credible resolution strategy for credit cooperatives and other LSIs; prepare recovery and resolution plans for significant insurance companies (BdE, FROB, DGSyFP).
- Strengthen and upgrade the deposit guarantee scheme; create a protection scheme for insurance policyholders (FGD, MoE, DGSyFP).

*Source: IMF Financial Sector Assessment Program: Spain — Executive Summary (cr17321).*

### 4. Since the 2012 FSAP, the macro financial conditions have become more supportive of

### cr17321 - 4. Since the 2012 FSAP, the macro financial conditions have become more supportive of

### Macrofinancial conditions and vulnerabilities
- Real GDP has likely surpassed its pre-crisis level in the first half of 2017 after four years of economic expansion.
- Macro financial imbalances have declined thanks to sustained current account surpluses and private sector deleveraging.
- Financial conditions are more favorable, with lending rates largely comparable with the euro area averages.
- Major remaining vulnerabilities:
  - Large negative net international investment position: 86 percent of GDP.
  - High unemployment: 18 percent.
  - Elevated public sector debt: almost 100 percent of GDP.
  - House prices are recovering but remain well below pre-crisis levels, complicating efforts to reduce foreclosed assets.
  - Low interest rates compressing bank net interest income.

### Credit, intermediation, and private sector deleveraging
- Banks are not fully active in intermediation; credit continues to contract.
- Drivers of weak bank lending:
  - Weak demand for bank-based financing as corporates and households continue to deleverage.
  - High unemployment.
  - Corporates’ shift to nonbank financing.
  - Improving corporate profit margins enabling financing of new investment with retained earnings.
- Adjusted figure definition: The adjusted figure shows "effective flows", which comprise newly extended credit net of repayment (i.e., not including write-offs or adjustments).

### Outlook, ECB funding and structural headwinds
- Real GDP projections:
  - Real GDP is projected to expand by 3.1 percent in 2017.
  - Real GDP is projected to average around 2 percent in 2018–22 with risks tilted to the downside.
- Near-term bank challenges:
  - Prospective termination of the ECB’s TLTROS will expose banks to higher funding costs.
  - Phase-in of deductions under the CRR will require more high-quality capital.
  - Shifts in retail banking customer preferences from digital finance will impose changes in bank business models.

### Implementation of 2012 FSAP recommendations and supervisory actions
- Implementation status:
  - From a total of 18 key recommendations, only about 3 related to insurance oversight and independence of the securities market regulator (CNMV) are still in progress.
  - The financial sector assistance program adopted in 2012, and the move towards the Banking Union, helped close several oversight and resolution gaps.
- BdE supervisory actions to reduce problem assets:
  - Two Royal Decrees issued in 2012 on recognition of bank losses.
  - BdE introduced in 2013 a more conservative approach on loan classification.
  - Circular 4/2016 amended accounting rules for provisioning, provides guidance on valuation of collateral and foreclosed assets, and initiates transition towards adoption of IFRS 9 in 2018.
  - BdE created a real estate database and a technical group to assess consistency of asset valuation across banks.
  - ECB guidance on NPLs issued in March 2017 expects banks to submit NPL reduction targets that are realistic but sufficiently ambitious.
- Spain implemented major reforms of its insolvency regime.

### Banking sector resilience, capital, profitability, and liquidity
- Capital and solvency:
  - System’s total capital ratio increased from 11.6 percent at end-2012 to 14.8 percent at end-2016.
  - For SIs, the difference between fully-loaded and transitional CET1 capital ratios could be about 160 bps.
  - CET1 on a fully-loaded basis is relatively low.
  - Implementation of IFRS 9 could require capital, although transitional arrangements may limit the impact.
- Profitability:
  - Return on equity remains below the cost of capital.
  - Profitability influenced by low interest rate environment, sizable NPLs, and relatively high excess capacity (branch density).
  - Internationally oriented Spanish banks perform more strongly in net interest income versus domestically oriented banks due to subsidiaries abroad.
- Problem assets:
  - NPL ratio for consolidated operations: 5.6 percent as of end-2016 (close to EU average).
  - NPL ratio for banking business in Spain declined from 13.6 (2013 peak) to about 9.25 percent at end-2016.
  - Total problem assets are still about 70 percent of their peak in 2013.
  - NPL concentration: exposures to residential mortgages and real estate-related firms account for about 57 percent of all NPLs.
  - Real estate sector accounts for about 40 percent of NPLs.
- Liquidity:
  - All banks had Liquidity Coverage Ratios (LCRs) above 100 percent at end-2016.
  - Aggregate Net Stable Funding Ratio (NSFR) was comfortable at 111 percent.
  - A cash-flow analysis indicates banks have enough liquid assets to cover net liquidity outflows from one week to more than a year.
  - ECB funding represented 6 percent of total funding on average and higher in the case of one SI.
  - In the absence of ECB funding, aggregate NSFR would fall to about 97 percent, translating into a funding shortfall equal to 4.8 percent of GDP (based on end-2016 data).
  - The NSFR of the weakest SI would drop to 77.5 percent under the same assumption.
- Sovereign exposure:
  - At end-2016, Spanish banks’ claims on its own sovereign were 11 percent of total assets.

### Stress test scenarios and results
- Severely adverse scenario narrative:
  - Combines features of the 2012 banking crisis and a growth slowdown in countries where Spanish banks operate.
  - Includes de-globalization initiatives, post-Brexit arrangements, near-term stock market sell-off, large capital outflows from Latin America and Turkey, significant growth slowdown in the United Kingdom, and weaker domestic consumption and investment due to political uncertainty.
- Top-down (TD) stress test coverage:
  - Used supervisory information as of December 2016.
  - Covered 14 Spanish SIs in operation as of December 2016.
- Solvency stress test results:
  - SI aggregate fully loaded CET1 ratio would decline from 10.9 to 7.4 percent (about 1 percent of GDP).
  - Over the stress horizon, capital reductions by risk type:
    - Credit risk: 1.5 percent of RWAs.
    - Interest rate risk in the banking book: 0.6 percent of RWAs.
    - Repricing of fixed income securities: 0.4 percent of RWAs.
  - A few SIs would struggle to remain resilient under the severely adverse scenario.
  - No LSI would suffer any capital shortfalls under the authorities’ TD stress test.
- Liquidity stress test results:
  - Scenario 1: Retail and small business deposit withdrawals by 10 to 15 percent respectively and an (unlikely) reduction of ECB funding by 20 percent in a month:
    - Several SIs would fall below the LCR hurdle rate of 100 percent, although all would continue to meet the rate of 80 percent which is the binding regulatory level in 2017.
    - This scenario aligns with the most severe deposit run experienced by a Spanish bank historically (prior to the June 2017 episode).
    - No LSI would experience a liquidity shortfall under the authorities’ stress test.
  - Scenario 2: Loss of unsecured wholesale funding by 70 percent:
    - Most SIs would have enough liquid assets to cope with net outflows.
  - Extreme scenario: Complete freeze of unsecured wholesale funding markets:
    - A significant number of SIs would face liquidity shortfalls.
    - Liquidity shortfall for LSIs would be very limited under the authorities’ stress test.

### Policy recommendations and mitigation measures
- NPL management and supervision:
  - A tough stance on implementation of the ECB guidance on NPLs is desirable.
  - Cleanup should ideally be completed before the expiration of the ECB’s long-term support.
  - Targets to reduce problem assets should be ambitious; failure to comply should have prudential consequences.
  - BdE should produce its own projections of property prices to assess banks’ NPL reduction strategies.
  - Disclosure of progress should be mandatory under a standardized reporting form.
  - Banks with high migration of performing restructured loans into non-performing should be required to review loan classification policies.
- Provisioning and recoveries:
  - Unrecoverable exposures must be fully provisioned.
  - At end-2015, financially weak firms (negative equity) accounted for 7 percent of corporate debt; those with earnings below interest expenses accounted for 22 percent.
  - For the real estate sector, about 38 percent of debt was owed by firms unable to generate earnings to cover interest expenses during 2013–15.
  - Household debts are mostly covered by assets, potentially limiting losses for banks.
- Insolvency and out-of-court restructuring:
  - Further refinement of in-court and out-of-court processes would support debt restructuring and recovery.
  - Strengthen out-of-court agreements on payments (OCAP) by facilitating coordination and promoting unified approaches among banks, e.g., with respect to viability.
  - Public creditors should be stayed and affected in all pre-insolvency out-of-court procedures.
  - Introduce a modern creditor class voting system with a cram-down mechanism to ensure fair treatment among creditors and restructuring of only viable businesses (those whose restructuring value exceeds their liquidation value).
  - Reinforce institutional framework supporting insolvency and creditor rights with more resources.

*Italic: Source — IMF staff report, cr17321 (chapter text provided).*

### 22. Banks would also benefit from further cost cutting and branch consolidation, and

### cr17321 - 22. Banks would also benefit from further cost cutting and branch consolidation, and

### Banking sector operational adjustments and capital
- Rationalization of the extensive branch network and potential adjustments in business models could help banks.
- Assessing the impact of digitalization and Fintech on retail financial services and benefits from non-interest income generating activities is recommended.
- Banks should be encouraged to hold capital buffers to meet CET1 ratios ahead of transitional arrangements and to withstand macro financial shocks.
- Supervisors should focus on viability of these business options and their impact on the domestic financial structure and competition.

### Augmented supervisory approach and liquidity/interest rate risk
- Supervisors should ensure that banks’ Pillar II requirements reflect banks’ ability to withstand interest rate hikes and bond market yields.
- For interest rate risk, the 2017 sensitivity analysis that the ECB is conducting should help identify outliers and assess the quality of internal methodologies.
- For banks subject to excessive liquidity risk, efforts should be made to ensure the adequacy of good quality collateral for emergency liquidity assistance.
- Supervisors should periodically review Spanish banks’ plans for an unwinding of ECB funding operations and improve liquidity monitoring by closing liquidity reporting gaps with an expanded harmonized EU bank reporting.
- Data needed to compute the maturity ladder should be collected on a regular basis.

### Stress-test scenarios and key macro-financial variables (Table 4 summary)
- Baseline (from WEO) and Adverse Scenario reported for 2017–2019 include exact values:
  - Real GDP (2016=100): 2017: 102.4; 2018: 104.6; 2019: 106.7 (Baseline) — 2017: 98.3; 2018: 95.9; 2019: 97.3 (Adverse)
  - Short-term money market rate: 2017: 0.1; 2018: 0.1; 2019: 1.0 (Baseline) — 2017: 0.8; 2018: 1.3; 2019: 2.2 (Adverse)
  - Long-term government bond yield: 2017: 2.2; 2018: 2.7; 2019: 3.1 (Baseline) — 2017: 3.7; 2018: 4.4; 2019: 4.4 (Adverse)
  - Exchange rate (EUR/USD): 2017: 0.95; 2018: 0.95; 2019: 0.95 (Baseline) — 2017: 0.94; 2018: 0.94; 2019: 0.94 (Adverse)
  - Equity price growth: 2017: 13.9; 2018: 0.0; 2019: 0.0 (Baseline) — 2017: -16.8; 2018: -10.5; 2019: -4.0 (Adverse)
  - Inflation rate (CPI): 2017: 2.4; 2018: 1.4; 2019: 1.5 (Baseline) — 2017: 1.5; 2018: -1.5; 2019: -1.8 (Adverse)
  - Unemployment rate: 2017: 17.8; 2018: 16.8; 2019: 16.0 (Baseline) — 2017: 20.9; 2018: 21.9; 2019: 21.7 (Adverse)
  - Nominal GDP growth: 2017: 4.0; 2018: 3.6; 2019: 3.7 (Baseline) — 2017: -1.0; 2018: -4.1; 2019: -0.5 (Adverse)
  - Commodity price - Energy (Index 2005=100): 2017: 103; 2018: 102; 2019: 100 (Baseline) — 2017: 88; 2018: 67; 2019: 59 (Adverse)
  - Commodity price - Non-energy (Index 2005=100): 2017: 143; 2018: 141; 2019: 139 (Baseline) — 2017: 131; 2018: 115; 2019: 107 (Adverse)
  - Real Estate Price Growth: 2017: 2.9; 2018: 3.7; 2019: 5.5 (Baseline) — 2017: -2.0; 2018: -5.1; 2019: -0.8 (Adverse)
- Memo: Spread of short-term money market rate: 2017: 0.0; 2018: 0.0; 2019: 0.0 (Baseline) — 2017: 0.6; 2018: 1.0; 2019: 1.0 (Adverse)
- Memo: Real GDP growth (in percent): 2017: 2.4; 2018: 2.1; 2019: 2.0 (Baseline) — 2017: -1.7; 2018: -2.4; 2019: 1.5 (Adverse)

### Nonbanks and financial markets (systemic risk assessment)
- Insurance sector:
  - Appears solvent and profitable.
  - Room exists to improve management of interest rate risk.
  - Spanish life insurance products contain various interest rate guarantees in traditional life and annuity products.
  - EIOPA stress test results revealed the need for better matching of assets and liabilities in Spain.
- Investment funds and redemption risk:
  - Redemption risks borne by investment funds are low.
  - During the crisis, the size of the industry fell one half from its peak because of redemption.
  - Recently, funds have expanded and investments have been reallocated to foreign securities (more than 50 percent of mutual funds’ assets under management AUM) and more mixed funds, reducing share of illiquid assets but increasing exposure to equity market volatility.
- Market and investment management firm risks:
  - Risks emanating from markets and investment management firms’ activities are muted for the present.
  - CNMV’s market surveillance indicators point to illiquidity in certain segments of the secondary bond market, likely due to easy funding conditions, potentially distorting risk pricing and undermining banks’ ability to raise funding.
- Recommendation:
  - Authorities and industry should actively consider expanding financial diversity and savings intermediation into insurance, pension, and asset management products to provide alternative risk-sharing and savings allocation buffers.

### Key risk amplification channels and interconnectedness
- Main sources of systemic interconnectedness risks:
  - Common exposures (particularly to government debt).
  - Conglomerate structure.
  - Cross-sectoral and cross-border claims.
- Government debt exposures:
  - In 2016 banks and other financial institutions held Spanish government debt securities of around 15 and 10 percent of GDP, respectively.
  - Spanish banks’ claims on its own sovereign amounted to 11 percent of total assets at end-2016 (euro area average: 9 percent of total assets).
- Contingent liabilities and guarantees:
  - Outstanding government guarantees on certain bank liabilities at about €1.06 billion at end-2016.
  - Government guaranteed the entire senior debt issued by Sareb in the amount of €41.6 billion at end-2016 (about 4 percent of GDP).
- Bank-sovereign market perception channel:
  - A one-standard deviation positive shock to Spain’s 10-year sovereign yield (around 50 basis points) is associated with a 4 percent decline in bank equity index in real terms in the first two quarters after the shock.

### Interbank, cross-sectoral, and cross-border linkages
- Interbank market:
  - Contagion risk in the domestic interbank market is contained because of limited exposures, largely due to ECB’s long-term funding.
  - Among the SIs, the five largest banks account for about 85 percent of interbank exposures.
  - A domino-type SI network analysis found that no bank would fail if any of the SIs were to default on their interbank exposures.
- Cross-sectoral links:
  - Exposures of insurers to banks are significant (around 30 percent of insurance companies’ total exposures).
  - Banks’ exposures to insurers are mild (around 1 percent of banks’ total exposure).
  - Mutual funds’ domestic assets represent around 40 percent of AUM; mutual funds’ investment in domestic deposits is about 1 percent of deposits.
  - Transmission to banks from securitization appears mild: subscriptions by credit entities over the last three years represent about 1 percent of bank assets.
  - Common exposure to the sovereign bond market remains the largest source of interconnectedness.
- Cross-border spillovers:
  - Inward spillovers to Spain: credit and funding shocks from France, the United Kingdom, the United States, and Italy could cause significant inward spillovers to Spanish banks via claims on the banking sector; claims on public and nonbank private sectors in Brazil, Mexico and Turkey could be important sources of credit shocks once all exposures are included.
  - Outward spillovers from Spain: Spanish credit and funding shocks could have sizable outward spillover to banks in France, Austria, Italy, the Netherlands, and the United Kingdom, and could influence banks in Mexico, Chile, Brazil, and Turkey through equity return linkages.
  - Note: Limited data availabilities for Turkey, Brazil and Mexico may underestimate the impact for these three countries.
- Brexit:
  - Impact on the Spanish financial sector is expected to be contained at this stage.
  - Potential channels: Spanish subsidiaries in the United Kingdom (about a quarter of two Spanish banks’ assets), use of London-based CCPs, debt issuance in London, presence of U.K. insurers and branches in Spain, relocation of non-EU banks’ subsidiaries away from London to EU countries.
- Recommendation:
  - Cross-sectoral and cross-border linkages should become part of regular systemic risk surveillance.
  - Interagency and supervisory college collaboration should be enhanced for holistic monitoring.
  - Key data to collect: cross holding of assets among banks and nonbanks, ownership structure of key financial assets, derivative exposures of financial institutions, and size/risk of non-traditional banking activities within and outside banks.

*International Monetary Fund — Selected content from the Spain FSAP chapter provided in the source PDF.*

### 32. Spain’s financial oversight architecture features a strong sectoral approach and active

### 32. Spain’s financial oversight architecture features a strong sectoral approach and active

### Institutional architecture and governance
- Three separate agencies are responsible for the oversight of banking, insurance and pension fund, and capital markets, respectively.
- Government involvement through the Ministry of Economy, Industry and Competitiveness (MoE):
  - participation in the boards of BdE and CNMV;
  - direct oversight of insurance and pension supervision through DGSyFP, a department within MoE;
  - involvement in general purpose accounting and auditing standards, and broad-based responsibility to determine the regulatory framework.
- On banking matters, supervision and resolution decision-making responsibilities have shifted to the European level:
  - The ECB and the Single Resolution Board (SRB) are directly in charge of SIs, with operational support from BdE (as the National Competent Authority) and FROB (as the National Resolution Authority along with BdE).
  - For Spanish LSIs, BdE is directly responsible for their supervision and resolution under the general oversight of the ECB and the SRB.

### Recommendation — Establish a Systemic Risk Council (SRC)
- Purpose and role:
  - To bolster systemic risk orientation in oversight and policy coordination given the sectoral approach.
  - Provide a platform bringing together core member agencies—BdE, CNMV, DGSyFP, and the Treasury.
  - Perform the national macroprudential authority role for the system as advocated by the ESRB.
- Chairing, support, and participation:
  - Should be chaired by the Governor of the BdE.
  - Supported by an inter-agency technical secretariat led by BdE.
  - FROB and the FGD may participate on an as-needed basis, subject to appropriate governance arrangements.
- Powers and accountability:
  - SRC should have a legislative mandate for maintaining overall financial stability and authority to issue statements—ranging in force from observations, to alerts, to warnings, to recommendations—on emerging threats to financial stability, buildup of systemic risks, and needed remedial actions.
  - An appropriate accountability framework should ensure willingness to act by the SRC and its member agencies.
  - SRC should be held accountable to Parliament for safeguarding financial stability, including submission of a revamped Financial Stability Report covering risks arising from all parts of the financial system and not just banks.

### Recent and announced government initiatives
- Initiatives include:
  - Creation of an independent insurance and pension fund supervisory agency (currently falls under the remit of the MoE).
  - Reform of the appointment process of top management at the financial sector authorities.
  - Introduction of single ombudsman scheme to handle consumer complaints related to financial products.
  - Transfer of responsibility for general purpose accounting standards-setting and auditor oversight from ICAC, an institute attached to the MoE, to CNMV.
- Evaluative points:
  - The plan to create an independent insurance and pension authority was recommended in the 2006 and 2012 FSAPs, and the new authority should be able to fund its programs via fees levied on the industry.
  - There is merit in assessing the current system of accounting standards-setting for banks, insurers, and the broader financial sector; any arrangement must permit effective and accountable enforcement of robust prudential norms, implementation of IFRS 9, and avoidance of any potential conflict of interest.
  - An appropriate mechanism for information exchange should be established so intelligence from patterns of consumer complaints identified by the envisaged ombudsman is not lost to sectoral supervisors.

### Resolution arrangements and potential consolidation
- Current split:
  - Preventive and executive resolution roles for banks and investment firms are divided between BdE and CNMV on the one hand, and FROB on the other, which could give rise to potential replication of work and coordination efforts.
- Recommendation:
  - There is merit in eventually merging the preventive resolution (planning, eligibility) and executive resolution (implementation) roles into a single resolution authority.
  - Medium-term decisions should consider effectiveness and accountability criteria as well as European arrangements.
- Institutional note:
  - Irrespective of consolidation, the FROB would remain a holding company for the failed institutions it currently manages (until they are resolved or sold), and its corporate character would need to undergo a change.

### Long-term supervisory structure considerations
- Observation:
  - Spain is one of only a few EU Member States to have maintained a sectoral approach.
  - Other countries have pursued supervisory convergence through unified or "twin peaks" models in response to increasing market integration and interconnectedness.
- Short-term recommendation:
  - Given other institutional priorities (such as establishment of the SRC), a more cost-effective approach is more active coordination and information exchange between the ECB, and the CNMV and the DGSyFP, through the BdE.
- Caveats:
  - International experience cautions that organizational costs and challenges of establishing an integrated prudential oversight agency are substantial and that it takes time and cost for the integrated agency to build reputation and credibility.

### Macroprudential oversight (banking)
- Division of responsibilities:
  - Macroprudential oversight for banking is a shared responsibility between the BdE and the ECB.
  - BdE is the competent and designated authority for exercising macroprudential powers under the CRR and the CRD IV, while the ECB possesses the “topping-up” power.
- Current stance and framework:
  - BdE has put in place a framework for calibrating capital buffers and the macroprudential policy stance for the banking sector appears broadly appropriate.
  - The countercyclical capital buffer is at zero given that a new financial cycle upturn has not started, with credit gap still negative and weakly recovering house prices.
- Policy recommendation:
  - Adopt a requirement to assess the sensitivity of borrowers’ debt servicing capacity, including against rising interest rates.
  - Expand the macroprudential toolkit to include borrower-based tools: legal basis for imposing limits on loan-to-value, debt service-to-income, and amortization periods should be actively considered and assigned to the BdE.

### Systemic risk surveillance and analytical capacity
- Surveillance gaps:
  - No mechanisms currently bring together risk assessments independently carried out by BdE and other sectoral authorities to form a comprehensive view on overall financial stability.
  - Preparing for the ‘unexpected loss’ of tail-risk events requires better understanding of transmission of systemic risk and resilience to shocks.
- Recommended actions:
  - Establish better mapping of systemic risk surveillance comprising all subsectors of the financial system and macrofinancial conditions.
  - Conduct regular early warning exercises to increase focus on risks and ability to ‘connect the dots.’
  - BdE, in collaboration with DGSyFP and CNMV, should improve early warning system and macroprudential stress testing capacity to better identify macrofinancial vulnerabilities and account for second-round effects, solvency-liquidity links, intra-system contagion, and cross-border spillovers.
- Technical capacity:
  - Technical capacity is generally strong and BdE's Financial Stability Report shows analytical sophistication, but additional methodological work is needed.

### Microprudential oversight — Banks
- Key financial stability issues requiring further attention:
  - Supervisors must be more demanding on bank risk management practices.
  - Stronger focus needed on governance and conduct issues.
  - Some preconditions for effective supervision should be strengthened.
  - Reform of the credit cooperative sector should be completed.
- Asset classification and valuation:
  - Evidence from on-site inspections and SREP reports of NPLs classified as performing and forborne (restructured) loans classified as performing without meeting necessary probation period; some forborne loans’ terms may be generous and collateral valuation not up to date.
- Provisioning rules:
  - BdE and the government should consider whether maintaining the Royal Decree Laws that impose fixed provision levels for certain real estate exposures is still appropriate; these rules now impede BdE’s ability to establish a provisioning policy in line with current developments in asset prices and are at variance with good accounting practice and contrary to IFRS.
- Liquidity risk:
  - Liquidity risk management needs special attention, including quality of liquid assets, structure of liabilities, and hedging practices.
  - Banks are communicating plans to reduce reliance on ECB funding but do not feel urgency to prepare for the ECB’s unwinding of accommodative policies.
- Corporate governance and conduct:
  - More remains to be done to align some banks’ corporate governance to best practice; insufficient skills in some bank boards and board committees, particularly internal audit and IT.
  - Internal audit function in some banks appears underdeveloped.
  - Related-party requirements currently imposed on directors and senior management should be extended to significant bank shareholders and other significant interests held by such shareholders.
- Mortgage market conduct:
  - Transposition of the Mortgage Credit Directive into Spanish legislation important for better management of conduct risk.
  - Government committed to enhance transparency of the retail mortgage contract by introducing disclosure requirements in addition to those required by the Directive; controls by the notaries will also be reinforced.
- Residual prudential powers:
  - Consideration should be given to ensure that all prudential issues not included in the SSM mandate are under the exclusive or prevalent control of BdE.
  - Examples: authorizing mergers is still under the responsibility of the MdE (BdE provides opinion); BdE still does not have effective powers to promulgate prudential rules in some residual areas such as implementing AML/CFT provisions.

### Microprudential oversight — Credit cooperatives
- Structural weaknesses:
  - Credit cooperatives have low levels of loss absorbing liabilities and low ability to raise capital.
- Current arrangements:
  - 25 credit cooperatives aggregated in two separate groups, one of which is an SI; both groups authorized as Institutional Protection Schemes (IPS) and credit institutions permanently affiliated to a central body, allowing consolidation of prudential ratios.
  - Of remaining credit cooperatives, 29 coops formed the Asociación Española de Cajas Rurales (AECR) to achieve economies of scale through shared services (IT and insurance), although members still observe prudential standards on a solo basis. AECR may, but is not obliged to, provide financial assistance to its members; a centrally managed support fund has been set up.
  - Recent distress at one credit cooperative in this type of association illustrated weaknesses of such arrangement.
- Policy recommendations:
  - Recent government initiative to provide incentives to the remaining credit cooperatives to form an IPS with affiliation to a central body is welcomed.
  - If the industry fails to respond, other jurisdictions' reforms may offer guidance (example: the recent Italian reform introducing the mutual banking group; membership compulsory to obtain or keep authorization to operate as a mutual bank; opt-out only under very stringent conditions).
  - Corporate governance of credit cooperatives needs enhancement: up-to-date expertise, risk culture, and director tenures; BdE has started addressing issues with a more rigorous fit and proper regime.
  - Shares in credit cooperatives should be made subject to MiFID rules.

### Microprudential oversight — Insurance companies
- Solvency II implementation:
  - Implementation of the Solvency II regime requires changes in the current compliance-based supervisory culture.
  - DGSFP is an effective insurance supervisor despite resource constraints, but supervisory culture tends to be reactive or compliance-oriented, not consistent with Solvency II emphasis on market consistent valuation and judgement-based risk measurement.
- Skill and supervision needs:
  - DGSFP should further develop skills and proficiency in assessing the quality of insurer governance and risk management; these topics were identified in previous FSAPs as needing improvement.

### Financial integrity — AML/CFT
- Progress and remaining constraints:
  - Spain has continued to make good progress in fighting money laundering and terrorist financing (ML/TF).
  - Government strengthened the AML/CFT regime since the 2014 evaluation, notably by addressing deficiencies in the terrorist financing (TF) offense including with respect to the financing of foreign terrorist fighters.
  - Laws and regulations to implement targeted financial sanctions (TFS) have been issued but have yet to result in domestic designations.
- SEPBLAC (Spanish Financial Intelligence Unit) activity:
  - SEPBLAC has increased supervisory resources, however, they remain insufficient considering the number of supervised entities.
  - SEPBLAC increased monitoring of designated non-financial businesses and professions (DNFBPs), resulting in 55 inspections during 2015–16; it also conducted 10 inspections of money or value transfer services (MVTS) since 2014.
  - Spain has sanctioned DNFBPs and MVTS for failure to comply with AML/CFT requirements.

*IMF staff.*

### 54. Spain must nevertheless continue to enhance its AML/CFT regime. Key steps include:

### 54. Spain must nevertheless continue to enhance its AML/CFT regime. Key steps include:

### AML/CFT: immediate priorities
- Implementing TFS without delay and without waiting for designations to be transposed into EU regulation.
- Providing additional resources to SEPBLAC to strengthen AML/CFT supervision of all DNFBPs.
- Enhancing the supervision of MVTS operating under EU passporting rules.
- Paying attention to the identification and sanctioning of unlicensed MVTS.

### A. Legacy Issues: SAREB and FROB — findings and risks
- Sareb was created in 2012 to manage about €106.5 billion of non-performing assets (€50.7 billion, after discount) in bank portfolios with a view to convert them into cash over a period of 15 years.
- Ownership: 55 percent of Sareb’s capital belongs to Spanish companies (mainly banks and insurers) and to one foreign bank; the rest is owned by the Spanish government through FROB.
- Reported solvency and accounting treatment:
  - During 2012–16, Sareb has sold assets and repaid senior debt by about 22 percent and 20 percent, respectively.
  - Sareb plans to repay FROB (its major shareholder) and private investors about 79 percent of their original investment.
  - As of end-2016, Sareb’s audited financial statements show negative equity for €2.7 billion.
  - For statutory purposes Sareb reports equity resources of about €4 billion (capital plus subordinated debt) as unrealized losses for about €5.3 billion related to swap adjustments and impairment of assets do not count for corporate insolvency per the Spanish accounting rules and a Royal Decree, respectively.
- SAREB: Initial Balance Sheet (In billions of euros)
  - Cash 4.8
  - Loans 39.4
  - Real Estate Owned (REOs) 11.3
  - Equity 1.2
    - Of which:
      - FROB 0.5
      - Private 0.7
  - Senior bonds 50.7
  - Sub. Debt 3.6
  - Total Assets 55.5
  - Total liabilities 55.5
- Systemic risk considerations:
  - Sareb’s remaining liabilities are about 4 percent of GDP.
  - Forecasting cashflow generation through end-2027 is critical and faces implementation risks, especially over the next three to five years, including the materialization of assumptions on real estate prices and sale volumes in a context of tough competition from banks and increasing customer preference for rentals.
  - The BdE should challenge Sareb’s cashflows projections based on its internal macroeconomic projections (including real estate prices, credit growth, and unemployment), as well as adverse scenarios.
  - A tripartite group (the BdE, MoE, and FROB)—comprised by members independent of its Monitoring Commission—should be appointed to objectively analyze and identify any needed mid-term correction of Sareb’s business plans.
- FROB and privatization:
  - FROB, created in 2009, restructured about 40 institutions and still holds stakes in two SIs.
  - In June 2017, a merger agreement was reached between two post-crisis state-owned SIs; this transaction will pave the way for divestment of public ownership in the new bank by the deadline that was extended to end-2019.
  - FSAP recommends early involvement of an investment bank or consulting firm to support the privatization process to speed it up.

### B. Bank resolution framework — status and gaps
- BRRD transposition:
  - Transposition of the BRRD into Spanish law strengthened the resolution regime in Spain.
  - Spain opted not to include nationalization and use of government financing; current tools comprise (i) sale of business, (ii) establishment of a bridge bank, (iii) asset separation, and (iv) bail-in.
  - At the national level, resolution responsibilities are divided into preventive role under BdE and executive role under FROB.
- Operationalization gaps:
  - FROB has authority to exercise resolution tools without need for additional legal powers and regulations to operationalize them.
  - Mechanics for bridge bank and asset separation are well established, but financing these operations remains under review.
  - Use of bail-in powers is important, but not all SIs hold an adequate level of loss-absorbing debt instruments.
  - MREL requirements are still under development; smaller Spanish banks, which are predominantly deposit-funded, will face greater challenges raising proportionally more MREL-eligible debt due to more limited access to capital markets.
- Resolution process:
  - A two-step resolution process is established: for SIs both the ECB and the SRB can determine failing-or-likely-to-fail; for Spanish LSIs only BdE may make such a determination.
  - Once resolution is chosen, the relevant resolution authority (SRB or FROB) prepares the resolution scheme, which requires endorsement by the European Commission in the case of SIs.
- Case study — Banco Popular (June 2017):
  - The resolution of a publicly listed bank and SSM systemic institution was orderly with limited immediate negative spillovers; neither depositors nor taxpayers were exposed to any loss.
  - The resolution highlighted operational issues for further analysis by Spanish NRA and NCA together with European authorities, including supervision and early intervention measures, preparation for resolution action and funding, and roles of Spanish NCA and NRA going forward.
  - The experience demonstrates the suddenness of terminal liquidity drains and that speed, coordination, communication, and adequate supervisory and resolution tools are critical.
- Resolution of LSIs:
  - Many LSIs hold a low level of loss-absorbing debt instruments, putting depositors at risk.
  - Resolution tools for LSIs are limited; acquisitions by other credit cooperatives or larger institutions are viable but demand is limited in some regions.
  - Considerations: accelerate placement of loss-absorbing debt instruments; alternatively, establish a resolution fund financed by the industry to provide financing for smaller institutions.
  - If unresolvable, LSIs should face enhanced supervision and tougher capital requirements.

### C. Crisis management — recommendations
- Enhance the broader crisis management framework and inter-agency coordination to develop coordinated policy responses to systemic stress.
- Conduct crisis simulations at individual agency level and as coordinated exercises to test information sharing and policy coordination.
- Prepare recovery and resolution plans for significant insurance companies.
- Recovery planning for LSIs:
  - All SIs have submitted complete recovery plans, updated at least annually.
  - Progress on developing recovery plans for some LSIs is lagging; full approval impeded by insufficient information to evaluate plans.
  - Priority should be given to approving recovery plans of institutions most at risk.
  - Smaller LSIs that update plans every three years will need careful supervision and updating of recovery plans when under stress.

### D. Safety nets — enhancements needed
- Strengthen safety nets, including modernization of FGD and establishment of a protection scheme for insurance policyholders.
- FGD improvements:
  - Enhance revenue base and payout system.
  - Organizational and procedural changes needed for FGD to meet objective of paying out deposits in seven working days.
  - Consider introducing an emergency liquidity facility for FGD to ensure private sector confidence.
  - Regularly test the quality of deposit data.
- Insurance policyholder protection:
  - Authorities should consider whether insurance policyholders, especially life insurance, should be afforded specific coverage guarantees in the event of insolvency.

*International Monetary Fund — content from the cited PDF chapter.*

### Appendix Table 1. Implementation Status of 2012 FSAP Recommendations

### Appendix Table 1. Implementation Status of 2012 FSAP Recommendations

### Overall Financial Sector Stability
- Status: Limited implementation.
- CNMV administrative autonomy:
  - The CNMV has been recently granted with greater administrative autonomy, among others, regarding recruitment.
  - Autonomy limited to replacing employees who leave the CNMV with new staff (who are normally less-experienced).
  - CNMV does not have autonomy to hire extra-staff, if needed.
  - CNMV cannot independently decide on the salary policy of its staff and, consequently, cannot retain highly professional and experienced people that leave the CNMV in many cases to work for other Spanish administrative authorities (for example, BdE, or FROB).
  - CNMV is not able to hire experts from the market with experience in certain areas that would be useful for the CNMV to adequately perform its duties (especially when new competences are given to the CNMV).
  - The possibility to replace the employees who leave has only been used once and has been contested by the Spanish Government (in fact, a judicial process has been opened to clarify this aspect).

- Use more proactively sanctioning powers about breaches of conduct obligations (CNMV).
  - Status: Implemented.
  - The CNMV has significantly increased the number of disciplinary proceedings in relation to breaches of market conduct regulation both in ISPs and credit institutions providing investment services.

### Payments and Securities Systems Oversight
- Improve liquidity risk management of the central counter party (CCP) by regularly conducting stress-tests and providing access to central bank liquidity facilities (CNMV, BdE).
  - Status: Implemented by Regulation (EU) nº 648/2012 (EMIR).
  - BME Clearing developments:
    - Has developed a framework for managing the liquidity risk in line with prescriptions of the EU regulation with Article 44 of EMIR on liquidity risk control and the subsequent CDR 153/2013 developing the requirements of that Article.
    - Developed a stress testing program to ensure that its liquid financial resources are sufficient and take into consideration daily potential liquidity needs arising from the default of the two biggest clearing members to which the CCP is exposed and to the two biggest liquidity exposures (in accordance with Article 49 of EMIR).
    - Last update of this framework was assessed in the context of the authorization of the extension of services to Interest Rate Swaps and equity segments, approved by the CNMV in July 2015.
    - Has access to intraday financing from the Banco of Spain-TARGET 2.
    - Has a general agreement with three different banks (with access the TARGET2 overnight financing facility), by which the CCP could obtain liquidity in exchange of its collateral held by entering a repo transaction or by selling such collateral to them in the extreme situation of illiquid repo and bond markets.
    - EMIR (Article 50) contemplates the possibility to comply with liquidity requirements through arrangements with private banks.

- Put in place coordinated contingency plans to deal with a potential financial failure of a CCP (MdE, CNMV, BdE).
  - Status: In progress (at EU level).
  - EMIR Articles 23 and 24 establish obligation for competent authorities, members of the ESCB and other relevant authorities to cooperate in the context of a CCP emergency.
  - CNMV has set up a college of authorities under Article 18 of EMIR to ensure procedures and contingency plans exist.
  - The college of BME Clearing adopted, in the context of the annual meeting in May/2016, an Emergency Protocol with aspects referring to:
    - The definition of an emergency,
    - The mechanism for the exchange of information,
    - The type of information to be exchanged,
    - The communication procedures.
    - And the need to conduct, at least annually, a simulation exercise.
  - CCP compliance and planning:
    - CCP is required to comply with capital and business requirements regarding the winding down or restructuring under EMIR in a manner consistent with the CPMI-IOSCO Principles for Financial Markets Infrastructures.
    - CCP has identified situations that may affect seriously its capacity to perform its critical and functions and the steps it needs to implement to address the situations.
    - CNMV committed to duly inform the college and to activate the emergency protocol whenever a situation as described occurs.
  - Note: A specific resolution framework for CCPs is still being developed in the EU to complete existing actions already taken.

### Crisis Management
- Introduce special tools to resolve banks, such as prompt recapitalizations, purchase and assumption transactions, and bridge banks, as well as related provisions for overriding shareholders’ rights and imposing losses on (left-behind) creditors (all agencies).
  - Status: Implemented by Law 11/2015 and Royal Decree 1012/2015.
  - The Law and the Royal Decree have transposed the EU resolution framework into the Spanish legislation.
  - New legal framework introduces a set of tools to facilitate the recovery and resolution of entities.
  - Resolution Authorities will have at their disposals several resolution tools (transfer of assets, bridge bank, asset management companies and bail-in), will elaborate resolution plans and will be able to adopt decisions to be applied by the entity even without the consent and the opposition of the shareholders.
  - (Measure 6 of the MoU).
  - Law 11/2015 also empowers the CNMV, BdE and FROB to resolve failing banks and investment firms (IPS) in an orderly manner by protecting deposits and client assets (funds and financial instruments), among other resolution objectives.
  - CNMV organization: organized separately, as a supervisor which must assess the recovery plan and as a preventive resolution authority responsible, primarily, for evolving the resolution plan and cooperating, on the execution phase, with the FROB.

- Further develop burden sharing mechanisms between the private and the public sector in the restructuring and resolution of banks, by clarifying the financial responsibilities of the FROB and of the FGD, including through a contingency credit line from the State to the FGD (all agencies).
  - Status: Implemented by Law 11/2015 and Royal Decree 1012/2015.
  - In line with the EU resolution framework, the Law and the Royal Decree include the bail-in tool by which the losses of the resolution will be imposed to shareholders and debtors to protect the public funds (Measure 5 of the MoU).

---

### Appendix Table 2. Stress Test Matrix: Solvency and Liquidity (Using December 2016 Data)

### BANKING SECTOR: SOLVENCY RISK — Top-down by FSAP Team and Top-down by the BdE
- Institutional Perimeter:
  - Institutions included:
    - FSAP Team: 14 SIs.
    - BdE: 44 LSIs.
  - Market share:
    - FSAP Team: 93 percent of total banking sector assets.
    - BdE: 7 percent of total banking sector assets.
  - Data and baseline date:
    - FSAP Team sources: European reporting templates (FINREP and COREP); Publicly available data from the 2016 EBA Transparency Exercise, and the 2016 EBA Stress Test; Supervisory data from the BdE; Other public data sources such as SNL and market data; December 2016 data; Consolidated.
    - BdE sources: Publicly-available data; Supervisory data, based on national reporting templates; December 2016 data; Individual and consolidated data.

- Channels of Risk Propagation / Methodology:
  - FSAP Team:
    - Detailed balance sheet stress test, covering key risk-sensitive exposures.
    - Based on satellite models developed by the FSAP team.
    - For SIs, stress test conducted at group/holding level, considering both domestic and foreign exposures.
    - Level of detail depended on data availability and relevance (e.g., certain market risks were not covered, and some foreign exposures were irrelevant).
    - Satellite models for macro-financial linkages: For banks under Basel II standardized approach, nonperforming loan ratios projected by sector. For Internal Ratings-Based banks, sensitivity of Probability of default (PDs) for various portfolios to macroeconomic cycles was calculated based on historical experience.
    - Lending rate and funding costs estimated and projected based on various macro and financial factors such as Euribor, changes in sovereign yields, and changes in the VIX index.
    - NPLs assumed to not provide any accrued interest.
    - Expert judgment super-imposed.
  - BdE:
    - To the extent possible methodology was aligned with that of the larger banks.
    - For the small banks, nonperforming loan ratios were projected by sector.
    - BDE methodology.

- Stress test horizon:
  - Three-year horizon: 2017–2019.

- Tail shocks / Scenario analysis (same scenario used for SIs and LSIs):
  - Baseline Scenario based on the IMF October 2016 or January 2017 Update World Economic Outlook.
  - Scenario 1: Financial stress in Europe
    - Assumes realization of financial stability risks in the Euro Area with spillovers worldwide.
    - Includes an abrupt unwinding of financial risk taking and low secondary market liquidity in systemic advanced economies.
    - Assumes a reemergence of financial stress in high spread Euro Area economies, represented by an increase (and divergence) in long-term government bond yields and stock-market sell-off.
    - Shocks include:
      - A tightening of financial conditions in systemic economies, represented by risk premium shocks and increases in long-term yields.
      - A credit cycle downturn in all emerging market economies and a disorderly deleveraging in China, represented by an increase in default rate on bank loans.
    - Suppressed economic risk taking worldwide, with private investment and private consumption declining in all economies.
    - Additional contraction in consumption and investment in Spain.
  - Scenario 2: De-globalization and Stagnation in Advanced Economies:
    - Triggered by financial markets reactions to de-globalization initiatives in the short-term, and their dampening effect on growth in the medium-term.
    - Sources of shocks:
      - Stock-market sell-off and heightened uncertainty regarding international trade and financial arrangements in the short-term.
      - Secular stagnation in the medium-term due to protectionist measures in Europe and the United States.
      - Large capital outflows from emerging markets.
      - Additional demand shocks in those countries with a significant Spanish bank presence.
      - Political uncertainty and roll back of reforms hit confidence and affect bond yields in Spain.
      - Spain suffers additional pressure on public finances and an aggregate demand shock.
  - Sensitivity analysis:
    - For SIs, sensitivity tests evaluated direct and indirect effects of exchange rate shocks; direct and indirect effects of interest rate shocks; a decline in the prices of sovereign bonds and real estate; and failure of the largest to 10 largest corporate exposures.

- Risks and Buffers:
  - Risks assessed include: credit (domestic and foreign exposures), market (equity risks, exchange and interest rates), sovereign, and interest rate risk in the banking book.
  - Certain risks may not be applicable for the LSIs (certain market risks for example), or feasible to quantify given data limitations.
  - Behavioral adjustments:
    - Balance sheet grows in line with nominal GDP with a floor set at 0.
    - Cooperatives’ remuneration is paid out throughout the stress.
    - Dividends are paid out by banks that remain adequately capitalized throughout the stress.
    - Invariant asset allocation, i.e., no change in business models, lending standards, or investment pattern in response to shocks (over three years).

- Regulatory and Market-Based Standards and Parameters:
  - Calibration of risk parameters:
    - Where they exist, point-in-time PDs and loss given default (LGDs) are taken from supervisory data. Otherwise, proxies are used (such as Moody’s KMV Expected default frequencies or supervisory TTC PDs transformed into PIT PDs after application of a conversion factor).
    - For small institutions, point-in-time PDs and LGD estimates were used.
  - Regulatory/Accounting and Market-Based Standards:
    - CRD IV / CRR [fully loaded/phased-in] levels for CET1.
    - Capital shortfalls to be measured in terms of CET1, T1, total capital and the leverage ratio.

- Reporting Format for Results:
  - Output presentation:
    - System-wide capital shortfall.
    - Number of banks and percentage of banking assets in the system that fall below certain ratios.

### BANKING SECTOR: LIQUIDITY RISK — Top-down by the FSAP team and Top-down by the BdE
- Institutional Perimeter:
  - Institutions included:
    - FSAP team: 14 SIs.
    - BdE: 44 LSIs.
  - Market share:
    - FSAP team: 93 percent of total banking sector assets.
    - BdE: Nearly 7 percent of total banking sector assets.
  - Data and baseline date:
    - Latest data: December 2016.
    - Source: supervisory data (COREP/FINREP) for FSAP; supervisory data (BdE) for BdE.
    - Scope of consolidation: perimeter of individual banks.

- Channels of Risk Propagation / Methodology:
  - FSAP team:
    - An extended Basel III LCR scenario with variants (retail/wholesale shock).
    - A Basel III NSFR scenario.
    - A cash-flow based scenario analyzing different maturity buckets.
  - BdE:
    - An extended Basel III LCR scenario with variants (retail/wholesale shock).

- Risks and Buffers:
  - Risks:
    - Funding liquidity (liquidity outflows).
    - Market liquidity (price shocks).
  - Buffers:
    - Counterbalancing capacity.
    - Central bank facilities.

- Tail shocks:
  - For LCR, see: BCBS (2013), The Liquidity Coverage Ratio and liquidity risk monitoring tools, Basel, January 2013.
  - For NSFR, see: BCBS (2014), Basel III: The Net Stable Funding Ratio—Consultative Document, Basel, April 2014.

- Regulatory and Market-Based Standards and Parameters:
  - Regulatory standards: Basel III liquidity standards for LCR and NSFR.

- Reporting:
  - Output presentation:
    - Liquidity ratios, disaggregated by type and size of bank.
    - Counterbalancing capacity.

---

### Appendix Table 3. Stress Test Matrix (STeM) for Interconnectedness Analysis

### Cross-border analysis — Data and Methodology
- The FSAP team applies three main approaches to examine interconnectedness and contagion, based on cross border exposure and market data:

- Espinoza-Vega and Sole (2010) methodology:
  - Examine cross-border banking sector exposures, with the BIS consolidated banking statistics (2016Q2) and regulatory capital data from FSI.
  - Two sets of simulations are considered:
    - Simulation 1: Positions include bilateral bank exposures. Consider both initial credit and funding shocks to the banking sector.
    - Simulation 2: Positions include aggregated total exposures (bank, non-bank private sector and public). Consider the impact of credit shocks to total foreign claims.
  - List of countries for both simulations include: Australia, Austria, Belgium, Brazil, Canada, Chile, Finland, France, Germany, Greece, Ireland, Italy, Japan, Korea, Mexico, the Netherlands, Spain, Sweden, Switzerland, Turkey, the United Kingdom, and the United States.

- Diebold and Yilmaz (2014) methodology:
  - Examine the cross-border interconnectedness between the banking sector in Spain and others countries with strong financial and trade linkages with Spain.
  - The data was sourced from the MSCI Banking Indices and the DataStream banking indices from June 27, 2005 to February 24, 2017 at daily frequency.
  - Equity returns are computed as the average two-day log returns to control to the differences in trading hours due to time zones.
  - The interconnectedness measure is derived from the forecast error variance decomposition of the underlying VAR.

- The Global VAR (2007) methodology:
  - Examine the cross-border impact of credit shocks, accounting for macro-financial interactions.
  - Data sources include Haver Analytics, IMF International Finance Statistics, DataStream, Bloomberg, IMF Direction of Trade Statistics and BIS Consolidated Banking Statistics.
  - The Global VAR model was estimated from 1979Q2 to 2016Q4, covering 33 countries.
  - Analyze the macro-financial impact of a credit shock in Spain and its cross-border implications.

### Interbank market analysis — Data and Methodology
- BdE and the FSAP team conducted the interbank market analysis jointly.

- Espinoza-Vega and Sole (2010) methodology:
  - Examine the interconnectedness among the 14 significant institutions (SIs) in Spain.
  - Source for interbank bilateral exposure data and regulatory capital data was the BdE (2016Q2).
  - Two sets of simulations:
    - Simulation 1: Positions include bilateral bank exposures. Consider both initial credit and funding shocks to the banking sector.
    - Simulation 2: Positions include aggregated total exposures (bank, nonbank private sector and public). Consider both initial credit and funding shocks to the banking sector.

### Cross-sector analysis — Data and Methodology
- Diebold and Yilmaz (2014) methodology — Bank and insurance linkages within Spain:
  - Examine the spillover risks among publicly listed Spanish banks and insurance companies.
  - Use daily equity returns data from 11 October 2007 to 17 February 2017 for publicly listed Spanish banks and insurers.
  - Interconnectedness measure is derived from the variance decomposition of the VAR.

- CNMV and BdE regulatory data on cross sectoral exposures — Bank, insurance companies and mutual fund linkages within Spain:
  - Examine the cross exposures of Spanish banks, insurance companies and mutual funds.
  - Use stress market indices to measure systemic risks as introduced by Cambón and Estévez (2015) and updated by the CNMV.
  - Use liquidity indices to measure illiquidity in fixed income markets as measured by the CNMV.

*cr17321 - Appendix Table 1. Implementation Status of 2012 FSAP Recommendations*

### Appendix Table 4. Selected Economic Indicators

### Appendix Table 4. Selected Economic Indicators

### Demand and supply in constant prices (2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022)
- Gross domestic product: -2.9 -1.7 1.4 3.2 3.2 3.1 2.5 2.0 1.9 1.7 1.7
- Private consumption: -3.5 -3.1 1.6 2.9 3.2 2.7 2.4 2.0 1.8 1.7 1.7
- Public consumption: -4.7 -2.1 -0.3 2.0 0.8 0.7 0.7 0.7 0.7 0.3 0.3
- Gross fixed investment: -8.6 -3.4 3.8 6.0 3.1 4.3 3.3 2.8 2.5 2.0 2.1
- Total domestic demand: -5.1 -3.2 1.9 3.4 2.9 2.6 2.2 1.9 1.8 1.5 1.5
- Net exports (contribution to growth): 2.2 1.5 -0.5 -0.1 0.5 0.5 0.3 0.2 0.2 0.2 0.2
- Exports of goods and services: 1.1 4.3 4.2 4.9 4.4 7.0 4.6 4.2 3.8 3.5 3.5
- Imports of goods and services: -6.4 -0.5 6.5 5.6 3.3 5.9 4.0 4.1 3.7 3.3 3.3
- Real GDP per capita: -3.0 -1.3 1.7 3.3 3.3 3.2 2.7 2.2 2.0 1.8 1.8
- Savings-Investment Balance (percent of GDP)
  - Gross domestic investment: 20.0 18.7 19.4 20.1 20.4 20.6 20.7 20.8 20.8 20.8 20.9
    - Private: 17.5 16.5 17.2 17.6 18.5 18.6 18.6 18.7 18.7 18.7 18.8
    - Public: 2.5 2.2 2.1 2.5 1.9 2.0 2.1 2.1 2.1 2.1 2.1
  - National savings: 19.8 20.2 20.5 21.4 22.3 22.4 22.6 22.7 22.8 22.8 22.9
    - Private: 23.4 24.3 24.0 24.0 24.5 23.6 23.0 22.7 22.6 22.7 22.9
    - Public: -3.7 -4.0 -3.5 -2.6 -2.2 -1.2 -0.4 0.0 0.1 0.1 0.0
  - Foreign savings: 0.2 -1.5 -1.1 -1.4 -1.9 -1.9 -1.9 -1.9 -1.9 -2.0 -2.0
- Household saving rate (percent of gross disposable income): 8.5 9.6 9.0 8.2 7.7 7.4 7.5 7.6 7.7 7.9 8.0
- Private sector debt (percent of GDP): 252.9 241.4 230.4 218.0 208.7 200.4 195.2 190.4 185.9 181.8 177.7
  - Corporate debt: 167.8 159.6 152.8 145.3 139.4 135.5 130.7 127.2 124.4 121.9 118.7
  - Household debt: 85.2 81.8 77.6 72.7 69.3 64.9 64.9 63.2 61.5 60.0 59.1
- Credit to private sector: -9.9 -10.2 -6.5 -4.2 -4.1 0.9 1.4 1.4 1.5 1.6 1.7
- Potential output growth: 0.2 0.0 0.3 0.7 1.0 1.4 1.5 1.6 1.6 1.6 1.7
- Output gap (percent of potential): -6.1 -7.8 -6.8 -4.5 -2.3 -0.7 0.3 0.8 1.0 1.0 1.0

### Prices
- GDP deflator: 0.1 0.4 -0.3 0.5 0.3 1.2 1.5 1.7 1.6 1.7 1.8
- HICP (average): 2.4 1.5 -0.2 -0.6 -0.3 2.0 1.4 1.7 1.7 1.8 1.9
- HICP (end of period): 3.0 0.3 -1.1 -0.1 1.4 1.2 1.4 1.6 1.8 1.8 1.9

### Employment and wages
- Unemployment rate (percent): 24.8 26.1 24.4 22.1 19.6 17.3 15.6 15.0 14.3 13.9 13.9
- Labor productivity 1/ (output per worker): 2.0 1.8 0.3 0.2 0.4 0.4 0.6 1.3 1.2 1.3 1.7
- Labor costs, private sector: 1.1 0.3 0.1 0.2 0.1 1.5 1.5 1.5 1.6 1.7 1.8
- Employment growth: -4.3 -2.8 1.2 3.0 2.7 2.6 1.9 0.7 0.6 0.4 0.0
- Labor force growth: 0.0 -1.1 -1.0 -0.1 -0.4 -0.3 -0.1 -0.1 -0.1 -0.1 -0.1

### Balance of payments (percent of GDP)
- Trade balance (goods and services): 1.5 3.3 2.5 2.4 2.9 2.9 3.2 3.3 3.5 3.6 3.7
- Current account balance: -0.2 1.5 1.1 1.4 1.9 1.9 1.9 1.9 1.9 2.0 2.0
- Net international investment position: -89.9 -94.3 -97.5 -91.3 -85.7 -79.9 -74.4 -69.3 -64.6 -60.1 -55.7

### Public finance (percent of GDP)
- General government balance 2/: -10.5 -7.0 -6.0 -5.1 -4.5 -3.2 -2.5 -2.1 -2.0 -2.0 -2.1
- Primary balance: -8.0 -4.1 -3.0 -2.4 -2.0 -0.6 0.0 0.3 0.5 0.5 0.5
- Structural balance: -3.5 -2.5 -2.0 -2.4 -3.1 -2.6 -2.5 -2.5 -2.5 -2.5 -2.6
- Primary structural balance: -0.5 1.0 1.5 0.6 -0.3 0.2 0.2 0.2 0.2 0.2 0.2
- General government debt: 85.7 95.5 100.4 99.8 99.4 98.5 97.1 95.6 94.3 93.2 92.2

Notes:
- Sources: IMF, World Economic Outlook; data provided by the authorities; and IMF staff estimates.
- 1/ Output per worker.
- 2/ The headline balance for Spain includes financial sector support measures equal to 3.7 percent of GDP for 2012, 0.3 percent of GDP for 2013, 0.1 percent of GDP for 2014, 0.05 percent of GDP for 2015, 0.2 percent of GDP for 2016, and 0.1 percent of GDP for 2017.

*Sources: IMF, World Economic Outlook; data provided by the authorities; and IMF staff estimates.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17321.pdf_