## 1espea2024003

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### EXECUTIVE SUMMARY — Macroeconomic context and outlook
- Spain’s growth projected to average 2.4 percent in 2024.
- Headline inflation rebounded to above 3 percent after falling below target levels; headline and core inflation expected to return close to the ECB’s target before mid-2025.
- Unemployment rate reached a post-GFC low at below 12 percent.
- Disbursements of Next Generation EU (NGEU) grants, followed by NGEU loans, will continue to support investment.

### Financial sector structure and recent performance
- System structure and intermediation:
  - Financial system well-developed and bank dominated; NBFI comprises a smaller share.
  - Aggregate assets of credit institutions amounted to 285 percent of GDP in 2023.
  - NBFI sector accounts for 25 percent of domestic financial sector assets.
- Banking sector characteristics:
  - Global footprint; largest banks generate significant business from foreign subsidiaries.
  - Deposit-funded with low intra-financial system and limited intra-group exposures.
  - Profitable: profitability grew as lending margins rose with interest rates.
  - Stable asset quality, allowing increased dividend payouts and accelerated share buybacks while holding solvency buffers steady.
  - Ample liquidity buffers and high share of retail deposits; large reserves of high-quality liquid assets.
- Sectoral concentrations and exposures:
  - Spanish banks among the most exposed to sovereign risk in Europe.
  - Sovereign debt securities: 26 percent held by Spanish banks and the domestic NBFI sector.
  - Sovereign debt (including EA securities) shares of assets: banks 11 percent; insurance firms 44 percent; pension funds 30 percent; open-ended investment funds 30 percent.

### Key risks to financial stability
- Prominent downside risks and vulnerabilities that could amplify exogenous shocks:
  - Escalation of global geopolitical tensions and commodity market volatility (especially energy) could raise inflation, increase recession likelihood, and tighten domestic monetary and financial conditions.
  - Tighter conditions could challenge debt servicing of households and firms.
  - Incumbent solvency buffers of banks do not compare favorably to European peers on a risk-weighted basis, due in part to lower voluntary buffers.

### Deleveraging, households, NFCs, and real estate
- Deleveraging and credit gaps:
  - Deleveraging across key sectors has driven a sustained downward trend in the credit-to-GDP gap, which remains negative.
  - Outstanding loans contracted at end-2022 with credit growth of -4 percent in 2023Q3.
  - Credit to the private sector: 2023: -3.2; 2024: 0.0; 2025: 0.5.
- Households:
  - Total outstanding household debt declined by 2.4 percent y-o-y as of November 2023 to 47 percent of GDP.
  - Share of floating rate loans to households as at Sept-2023: 63 percent.
  - Vulnerability projections:
    - Share of households with DSTI ≥ 40 percent: 6½ percent in 2022 → 6 percent in 2024 (baseline).
    - Under alternative cost-of-living adjusted definition: baseline vulnerable share 26 percent → 34 percent in 2024 (adverse).
    - Share of household debt-at-risk would increase by 8.4 percentage points in the adverse scenario.
- Nonfinancial Corporates (NFCs):
  - NFC debt-to-GDP ratio: 82 percent in 2023Q3.
  - Share of floating rate loans to NFCs as at Sept-2023: 57 percent.
  - NFC vulnerability projections:
    - Debt-at-risk projected to increase by 1.7 percentage points compared to baseline by 2026, reaching 29.5 percent of the total debt analyzed.
    - Proportion of firms with ICR < 1 rises by over 6 percentage points in the adverse scenario relative to baseline by end-2024.
    - Relative severity of cashflow problems in the adverse scenario peaks in 2025, with share of firms with expenses greater than income higher by 4 percentage points.
- Residential real estate (RRE) and commercial real estate (CRE):
  - Housing transaction volumes fell by 13.4 percent on average during first three quarters of 2023.
  - Nominal house prices registered small increases; cumulative increase since 2019Q3 in line with EA average; real RRE prices remain significantly below pre-GFC levels.
  - FSAP demand-side overvaluation: around 6 percent in 2022Q1 → 2.1 percent by 2023Q3; adding credit cycle and supply constraints reduces misalignment to around 0.9 percent in last two quarters.
  - CRE prices remain below pre-pandemic levels as of 2023Q3; CRE market relatively small versus European peers.

### Banking sector: solvency, profitability, asset quality, and liquidity
- Market shares and international footprint:
  - SIs represent almost 95 percent of banking sector assets.
  - Largest banks present in Brazil, Mexico, Türkiye, the United Kingdom, and the United States; exposures to those jurisdictions accounted for 66 percent of consolidated foreign claims (EUR 1.8 trillion).
  - Exposures by counterparty type of consolidated foreign claims: NFCs 58 percent; sovereigns 25 percent; banks 10 percent.
- Profitability and funding:
  - Return on equity: 12.1 percent; return on assets: 0.76 percent in June 2023 (alternate consolidated figures: return on assets 2023: 1.1 percent; return on equity 2023: 11.8 percent).
  - Recent increase in net interest income (NII) boosted profitability; deposit migration and rising funding costs could reverse trends in 2024.
  - Loans to deposits (funding): 2023: 74.8.
- Capital and liquidity:
  - CET1 ratio for aggregate Spanish SIs: 12.6 percent as of June 2023.
  - Aggregate CET1 capital ratio projected to rise from 12.6 percent in Q3-2023 to 15.4 percent at end-2026 under the baseline.
  - Spanish SIs’ LCR: 182 percent in June 2023; internationally active Spanish SIs LCR: 153 percent in June 2023.
  - Aggregate NSFR for the 10 SIs well above hurdle rate for last two years.
- Asset quality and provisioning:
  - Banking sector NPL ratio decreased by three-percentage points in the five years up to June 2023; consolidated nonperforming loans to total loans: 2023: 3.0 percent.
  - Specific provisions to NPLs (consolidated): 2023: 35.1 percent.
  - Share of Stage 2 loans averaged 7.6 percent of lending to private sector in 2023Q3.
  - ICO-backed loans of EUR 67 billion face Stage 2 loans of 20.6 percent and NPLs of 9.6 percent.
  - Provisioning coverage of NPLs: NFCs 46.5 percent; households 40.2 percent (twelve months prior to June 2023).

### Stress test findings and systemic resilience
- Solvency stress test scope and framework:
  - Top-down IMF solvency stress-testing framework covering credit, earnings, and market risks; covers consolidated global exposures of 10 SIs accounting for almost 95 percent of banking assets.
  - Adverse solvency scenario spans 2024-2026 with a cumulative loss of 7 percentage points of real GDP over two years, peaking in year 2.
- Baseline and adverse outcomes:
  - Baseline: aggregate CET1 rises to 15.4 percent by end-2026 driven by interest income, low cost retail funding, and stable provisioning; caveat that results may overestimate capital due to exclusion of share buy-backs and liability composition shifts.
  - Adverse scenario: aggregate CET1 declines up to 3 percentage points to 9.6 percent at end-2025, recovering to just over 10 percent by end-2026.
  - Two of the ten SIs breach CCB and O-SII buffers after two years; one SI also breaches leverage ratio requirement.
  - Aggregate resilience materially built on substantial and rapid credit deleveraging; without deleveraging more banks’ solvency on a risk-weighted basis would likely have been threatened.
  - Policy implication: increased profit retention when profitability is high would materially pay off if downside tail risks materialize.
  - FSAP recommends authorities deploy policies, including introduction of a positive neutral CCyB rate, to ensure banks raise usable capital buffers.
- Solvency drivers and sensitivities:
  - Loan loss provisions are the primary driver of reduced profitability; majority of impairments recorded in foreign portfolios.
  - Interest rate increases initially mitigate credit loss impact via NII growth in year 1; effect wanes as negative credit growth and rising NPEs persist.
  - Market risk losses material only in first year; securities gains contribute positively as rates normalize in outer years.
  - Alternative interest-rate pass-through calibrations have at most modest impact; one additional CET1 breach possible under certain calibrations.
- Liquidity stress and cash-flow analysis:
  - Structural liquidity analysis assesses LCR use and granular cash-flow over one week and three months across four LCR scenarios and 25 CF scenarios.
  - Aggregate LCR falls below regulatory hurdle of 100 percent under outflow and aggressive scenarios:
    - Number of banks with LCR < 100 percent by scenario: Basel III: 0; Market: 0; 25% Outflow: 0; 50% Outflow: 1; 75% Outflow: 2; 100% Outflow: 6; Aggressive: 7.
  - CF analysis: marginal liquidity surplus over 1-week horizon under aggressive scenario; small shortfall over three months.
    - Three banks have a marginal one-week shortfall at “aggressive” severity.
    - Four banks (66 percent of sector by assets) have a three-month shortfall under “aggressive”.
  - Withdrawal of wholesale funds is the largest cash outflow source; retail deposits preeminent in funding attenuate impact.
- Liquidity-solvency interaction (forced sales scenario):
  - If LCR breaches prevent access to ECB standing facilities and BdE ELA is not provided, banks could be forced to sell government bonds held at amortized cost, realizing market losses.
  - Unencumbered euro area sovereign bonds at cutoff date: 39 percent of bond portfolio; total carrying amount EUR 105 billion (team FSAP estimate).
  - Estimated potential sale losses induce a median firm-level CET1 ratio decline between 1.3 and 3.5 percentage points.
  - Prioritizing sale of shorter-maturity bonds could allow liquidation of up to half of portfolios with less than one quarter of these loss estimates.
- Interconnectedness:
  - Cross-border bank contagion spillovers between Spanish and foreign banks are modest; most cross-border claims are to non-bank customers.
  - Domestic interbank contagion vulnerability is small.

### Financial sector oversight: gaps and recommended enhancements
- Supervisory resourcing and autonomy:
  - Ensure supervisory authorities are well resourced; grant full autonomy to CNMV over recruitment; align resources at BdE and CNMV to workloads.
- Macroprudential framework and governance:
  - AMCESFI established in 2019; FSAP recommends increasing profile, credibility, transparency, and accountability:
    - Increase AMCESFI Council meeting frequency to quarterly (currently minimum twice a year).
    - Publish summary minutes and timely Annual Reports.
    - Consider appointment of two or three external members to strengthen diversity.
  - CCyB recommendation: deploy policies including introduction of a positive neutral CCyB rate as soon as feasible; simplify administrative/consultation procedures to shorten implementation lag.
  - Further develop macroprudential framework by addressing data and reporting gaps.
- Supervision and regulation of LSIs:
  - Strengthen BdE operational independence: remove MINECO appeal powers over supervisory decisions and sanctions; limit role of government representatives on BdE Governing Council.
  - Streamline offsite monitoring; apply proportionality in SREPs; increase targeted and thematic onsite inspections focusing on governance, liquidity risk, and IRRBB.
  - Embed climate-related financial risk assessment into supervisory activities.
- FMIs and cyber resilience:
  - CNMV’s supervision of BMEC and IC is high quality but resource constrained; grant CNMV full functional autonomy over recruitment.
  - Conduct onsite examinations as part of FMI supervision; improve recovery planning and disclosure of margining sensitivity analyses.
  - BdE and CNMV to be involved in critical infrastructure designation and compliance assessments.
  - Develop lighter threat intelligence red-teaming framework based on TIBER-ES principles for LSIs.
- Fintech oversight:
  - Inter-agency sandbox valuable but administrative processes lengthy; consider legislative changes to delegate powers to Coordination Commission and regulators, streamline procedures, and provide greater supervisory flexibility.
- Financial integrity (AML/CFT):
  - Complement National Risk Assessment; ensure accuracy of centralized beneficial ownership register (CBOR) data; extend AML-CFT risk-based supervisory activities to professional enablers and virtual asset providers.
  - NRA 2020 being revised with update expected in 2024; proceed with dedicated AML/CFT strategy and finalize Sectoral Risk Assessment on Cryptoassets (approved July 2023) sharing process.

### Financial safety net, crisis management, and resolution
- Institutional setup and recommendations:
  - BdE and FROB currently share resolution authority mandate for banks.
  - Recommendation: vest preventative and executive resolution authority functions in a single agency.
  - Recommendation: expand set of resolution options and establish approach to addressing liquidity needs in resolution.
  - Specific legislative and operational recommendations:
    - Provide FROB administrative resolution power to override shareholders and management rights in bail-in resolution without needing special manager or “reasons of special urgency”.
    - Provide bank liquidators power to transfer deposit accounts backed by bank loan assets out of liquidation to an acquirer.
    - Consider transposing government stabilization tools as last-resort options per EU law.
    - BdE to establish policy framework and operational capability for lender-of-last-resort and liquidity-in-resolution arrangements, including testing arrangements for ELA and liquidity-in-resolution lending.
- Deposit guarantee and insurance protection:
  - Eurogroup June 2022 invited Commission to propose CMDI framework changes; use of DGS funds to facilitate resolution for small/medium banks with a large deposit base may be promoted; no specific action expected on EDIS in near term.
  - Insurance guarantee scheme for victims of road traffic accidents being strengthened.

### Selected FSAP key recommendations and timing (high-level)
- Systemic risk analysis and monitoring:
  - Enhance data collection and monitoring of foreign investments in real estate market. (BdE, CNMV, DGSFP) Timing: NT
  - Create infrastructure for granular cash-flow analysis and report regular stress testing results. (BdE) Timing: NT
- Financial sector oversight:
  - Ensure alignment of supervisory resources to workload; grant full autonomy to CNMV over recruitment. (Government, BdE, CNMV, DGSFP) Timing: I / I
- Macroprudential policy:
  - Deploy policies including introducing a positive neutral CCyB. (BdE, AMCESFI) Timing: I
  - Increase AMCESFI meeting frequency, publish minutes/summaries, and timely Annual Reports. (AMCESFI) Timing: I
  - Review case for appointing external AMCESFI members. (MINECO, AMCESFI) Timing: I
- LSIs supervision:
  - Enhance BdE independence and increase onsite inspection activities focused on governance, liquidity and IRRBB. (MINECO, BdE) Timing: NT / I
- FMIs and cyber:
  - Ensure international supervisory coordination for BME Clearing and Iberclear; conduct onsite FMI examinations; involve BdE and CNMV in critical infrastructure matters. (CNMV, BdE, MINECO) Timing: MT / NT
- Fintech:
  - Delegate powers to Coordination Commission and regulators to modify sandbox operations and streamline administrative processes. (Government, BdE, CNMV, DGSFP) Timing: NT
- Financial integrity:
  - Complement NRA, ensure CBOR data accuracy, and extend AML-CFT supervision to professional enablers and virtual asset providers. (SEPBLAC, Treasury, BdE, The Registrars’ AML Centre, Ministry of Justice) Timing: NT
- Crisis management:
  - Integrate preventative and FROB executive resolution authority functions. (MINECO) Timing: I
  - Establish and operationalize approach to address liquidity needs in resolution. (BdE) Timing: I

### Macroeconomic outlook selected figures (from Table 2)
- Real GDP growth:
  - 2020: -11.2
  - 2021: 6.4
  - 2022: 5.8
  - 2023: 2.5
  - 2024: 2.4
  - 2025: 2.1
  - 2026: 1.8
- Private consumption:
  - 2023: 1.8
  - 2024: 1.8
- Gross fixed investment:
  - 2023: 0.8
  - 2024: 4.5
- Inflation (average):
  - Headline: 2023: 3.4; 2024: 2.9; 2025: 2.3
  - Core: 2023: 5.8; 2024: 3.0; 2025: 2.1
- Labor market:
  - Unemployment rate: 2023: 12.2; 2024: 11.8; 2025: 11.5
- Public finances:
  - General government balance: 2023: -3.6; 2024: -3.0; 2025: -2.9
  - Primary balance: 2023: -1.8; 2024: -0.6; 2025: -0.3
  - General government debt: 2023: 107.7; 2024: 105.6; 2025: 104.4
- External:
  - Current account balance: 2023: 2.6 percent of GDP; 2024: 2.6; 2025: 2.3
  - Net international investment position: 2023: -52.8; 2024: -46.5

*Source: EXECUTIVE SUMMARY and selected chapters, Spain Financial Sector Stability Assessment (FSAP) — IMF.*

### EXECUTIVE SUMMARY _________________________________________________________________________ 7

### EXECUTIVE SUMMARY

### Macroeconomic context and outlook
- Spain’s economy remains near potential and growth is projected to continue its robust performance in the coming quarters, reaching an average of 2.4 percent in 2024.
- Headline inflation rebounded to above 3 percent after falling below target levels; headline and core inflation are expected to return close to the ECB’s target before mid-2025.
- The unemployment rate reached a post-GFC low at below 12 percent.
- Disbursements of Next Generation EU (NGEU) grants, followed by NGEU loans, will continue to support investment.

### Financial sector structure and recent performance
- The financial system is well-developed and bank dominated; nonbank financial intermediation (NBFI) comprises a smaller share of the financial system.
- The banking sector:
  - Has a global footprint and operates a traditional business model.
  - Is deposit-funded, with low intra-financial system and limited intra-group exposures.
  - Generates a significant share of business and earnings of the largest banks from foreign subsidiaries.
  - Is profitable with profitability having grown significantly as lending margins rose in-step with rising interest rates.
  - Has stable asset quality, allowing increased dividend payouts and accelerated share buybacks while holding solvency buffers steady.
  - Maintains ample liquidity buffers, reflecting a high share in funding of retail deposits and large reserves of high-quality liquid assets.
- Spanish banks are among the most exposed to sovereign risk in Europe; the financial sector’s sovereign exposures are significant.
- Activity is cooling and overvaluation is receding in the housing market; commercial real estate valuations remain contained.
- The long running trend of deleveraging by households and nonfinancial corporates continues, mitigating the impact of rising borrowing costs on private consumption and on debt servicing capacity.

### Key risks to financial stability
- Downside risks are prominent and existing vulnerabilities could amplify the impact of exogenous shocks:
  - Further escalation of global geopolitical tensions and renewed volatility in commodity markets, especially energy markets, could create critical supply chain bottlenecks, further raise inflation, increase the likelihood of recession, and result in tighter domestic monetary and financial conditions.
  - Tighter conditions could challenge debt servicing of households and firms.
  - Incumbent solvency buffers of banks do not compare favorably to European peers on a risk-weighted basis, due in part to lower voluntary buffers.

### Stress test findings and systemic resilience
- Significant institutions (SIs) display resilience in the aggregate under the adverse stress test scenario, albeit with significant credit deleveraging and a weak tail of SIs:
  - In the aggregate, SIs maintain adherence to overall capital requirements through the adverse scenario horizon, with two of the ten breaching them after two years.
  - Aggregate solvency resilience is in important part built on substantial credit deleveraging.
- Liquidity stress:
  - Stress tests show that SIs use up significant liquidity buffers only in the face of unusually large withdrawals of retail deposits.
- Policy implication from stress results:
  - An increase in profit retention by banks in the immediate term, when profitability is high and projected to remain robust under the baseline, would have material economic payoff should downside tail risks materialize because larger capital buffers would permit banks to better satisfy credit demand and mitigate macroeconomic costs.
  - The authorities should deploy policies, including but not necessarily limited to, the introduction of a positive neutral countercyclical buffer (CCyB) rate to ensure that banks raise capital buffers to be better positioned against downside tail risks.

### Financial sector oversight: gaps and recommended enhancements
- Ensuring supervisory authorities are well resourced is paramount:
  - Grant full autonomy to the CNMV over its recruitment process and ensure alignment of resources at the BdE and CNMV to current and expected workloads.
- Macroprudential framework and governance:
  - Further enhancements to the framework and toolkit for macroprudential policy are necessary to increase the transparency, impact, and accountability of Spain’s macroprudential authority (AMCESFI) while preserving the operational independence of the sectoral regulators.
  - The FSAP recommends that a decision to introduce a positive neutral CCyB on top of existing buffers be taken as soon as feasible.
- Supervision and regulation of Less Significant Institutions (LSIs):
  - Strengthen BdE operational independence, increase onsite activities of LSIs’ risk management, streamline offsite monitoring, ensure LSIs adequately manage concentration risk (including sovereign risk), and embed climate-related financial risks into supervisory activities.
- Financial Market Infrastructures (FMIs):
  - A few enhancements, notably to recovery planning, would make the supervision framework for CCPs and CSDs more robust.
- Cyber resilience:
  - The regulatory and supervisory framework for cyber risk is comprehensive; benefits would accrue from conducting onsite examinations as part of FMI supervision and more thematic reviews of LSIs.
  - The BdE and CNMV should be involved in critical infrastructure related matters, such as designation and compliance assessments.
- Fintech oversight:
  - The inter-agency sandbox is an important tool; administrative procedures could be streamlined and greater flexibility should be extended to authorities to rely on their wider range of tools to monitor market developments, convey supervisory expectations, and assess the adequacy of the regulatory perimeter.
- Financial integrity:
  - Complement the National Risk Assessment, ensure accuracy of data stored in centralized beneficial ownership register, and extend AML-CFT risk-based supervisory activities to professional enablers and virtual asset providers.

### Financial safety net and crisis management
- The Spanish financial safety net and crisis management arrangements rest on sound statutory foundations, but further work is required to enhance the operational capacity of the resolution regime:
  - Preventative and executive resolution authority functions should be vested in a single agency.
  - Authorities should expand the set of resolution options and establish an approach to addressing liquidity needs in resolution.

### Selected FSAP key recommendations and timing
- Systemic risk analysis and monitoring:
  - Enhance data collection and monitoring of foreign investments in the real estate market. (BdE, CNMV, DGSFP) Timing: NT
  - Create infrastructure for a more granular cash-flow analysis and report regular stress testing results. (BdE) Timing: NT
- Financial sector oversight:
  - Ensure alignment of resources of supervisory authorities to current and expected future workload. (Government, BdE, CNMV, DGSFP) Timing: I
  - Grant full autonomy to CNMV over recruitment and retention processes. (Government, CNMV) Timing: I
- Macroprudential policy:
  - Deploy policies, including introduction of a positive neutral CCyB, to ensure banks raise capital buffers against downside tail risks. (BdE, AMCESFI) Timing: I
  - Increase the minimum frequency of AMCESFI Council meetings and raise transparency by publishing meeting minutes/summaries and timely Annual Reports. (AMCESFI) Timing: I
  - Review case for appointing two or three external members to AMCESFI to strengthen diversity. (MINECO, AMCESFI) Timing: I
  - Further develop and deepen the macroprudential framework by addressing remaining data and information gaps and strengthening reporting requirements. (BdE, CNMV, DGSFP, AMCESFI) Timing: NT
- Supervision and regulation of LSIs:
  - Enhance BdE’s independence by removing MINECO appeal powers against BdE supervisory decisions and sanctions and limiting role of government representatives in BdE Governing Council. (MINECO) Timing: NT
  - Streamline offsite monitoring and apply proportionality in SREPs while performing more frequent and targeted onsite inspections and thematic activities. (BdE) Timing: I
  - Strengthen BdE onsite inspection activities on LSIs’ governance and risk management, particularly liquidity risk and interest rate risk in the banking book. (BdE) Timing: I
- FMIs and cyber:
  - Ensure international supervisory coordination arrangements reflect scope and degree of interconnectedness of BME Clearing, Iberclear and their foreign parent company. (CNMV) Timing: MT
  - Conduct onsite examinations as part of FMI supervision; conduct more thematic reviews while maintaining short onsite visits to a sample of LSIs; develop a lighter threat intelligence based red-teaming framework based on TIBER-ES principles. (CNMV, BdE, MINECO) Timing: NT
  - Involve the BdE and CNMV in critical infrastructure related matters, such as designation and compliance assessments. (Government) Timing: NT
- Fintech:
  - Delegate powers to the Coordination Commission and regulators to make changes to sandbox operation, streamline administrative processes, and provide greater flexibility to supervisory authorities. (Government, BdE, CNMV, DGSFP) Timing: NT
- Financial integrity:
  - Complement the National Risk Assessment, ensure accuracy of data in centralized beneficial ownership register, and extend AML-CFT risk-based supervisory activities to professional enablers and virtual asset providers. (SEPBLAC, Treasury, BdE, The Registrars’ AML Centre, Ministry of Justice) Timing: NT
- Crisis management and financial safety nets:
  - Integrate preventative resolution authority functions and FROB’s executive resolution functions for banks. (MINECO) Timing: I
  - Improve statutory resolution regime so FROB has resolution power to override shareholders rights, update statutory insolvency creditor hierarchy, and enable liquidators to transfer deposit accounts. (MINECO) Timing: NT
  - Establish and operationalize an approach to address liquidity needs in resolution. (BdE) Timing: I

*Source: EXECUTIVE SUMMARY, Spain Financial Sector Stability Assessment (FSAP) — IMF.*

### 2. Deleveraging in key sectors over the last decade has contributed to a sustained

### 2. Deleveraging in key sectors over the last decade has contributed to a sustained 

### Credit-to-GDP gap and deleveraging
- Deleveraging across key sectors over the last decade has contributed to a sustained downward trend in the credit-to-GDP gap which remains in negative territory.
- Aggregate assets of credit institutions amounted to 285 percent of GDP in 2023.
- The NBFI sector accounts for 25 percent of domestic financial sector assets.

### Households: debt, resilience, and vulnerabilities
- Total outstanding household debt declined by 2.4 percent y-o-y as of November 2023 to 47 percent of GDP, reflecting prepayment of mortgages and tighter lending standards.
- The household sector has weathered recent surges in interest rates well, with stable performance of household loans amid repricing of variable rate mortgages in 2023 due to continued deleveraging and strong performance of income and employment.
- Limited take-up thus far of the end-2022 package of measures adopted by the government to support low- and middle-income households most affected by the increase in borrowing costs confirms resilience of household balance-sheets.
- As at Sept-2023, the share of floating rate loans to households stood at 63 percent.
- Vulnerability projections:
  - The share of households with debt-service-to-income ratios (DSTI) greater than or equal to 40 percent would drop from 6½ percent in 2022 to 6 percent in 2024 under the baseline.
  - Under an alternative cost-of-living adjusted definition, the share of vulnerable households in the baseline is 26 percent and would increase to 34 percent in 2024 under the adverse scenario.
  - The share of household debt-at-risk would increase by 8.4 percentage points in the adverse scenario.

### Nonfinancial Corporates (NFCs): debt reduction and stress indicators
- NFC debt-to-GDP ratio fell to 82 percent in 2023Q3 after continuous decline since the euro crisis, positioning Spain among the least indebted corporate sectors in Europe.
- Firms’ liquidity indicators improved since the GFC and profitability trended upward over the past decade except during the pandemic.
- As at Sept-2023, the share of floating rate loans to NFCs stood at 57 percent.
- Recent tightening of lending standards and higher interest rates reduced new credit to NFCs in 2022, resulting in a rebound in debt repayment capacity.
- NFC vulnerability projections:
  - The debt-at-risk is projected to increase by 1.7 percentage points compared to the baseline by 2026, reaching 29.5 percent of the total debt of the firms analyzed.
  - The proportion of firms with an interest coverage ratio (ICR) of less than one rises by over 6 percentage points in the adverse scenario relative to the baseline by end-2024.
  - The relative severity of cashflow problems in the adverse scenario peaks in 2025, with the share of firms with expenses greater than income higher by 4 percentage points.

### Residential real estate (RRE)
- Housing transaction volumes fell by 13.4 percent on average during the first three quarters of 2023.
- Nominal house prices in Spain registered small increases in recent quarters due to large immigration flows and supply shortages; cumulative increase since 2019Q3 is in line with the EA average.
- Real RRE prices remain significantly below pre-GFC levels.
- Lending standards are prudent with low average loan-to-value (LTV) ratios and a declining share of loans with LTV ratios higher than 80 percent.
- New dwellings: price appreciation exceeded 10 percent y-o-y as of 2023Q3 and there is an increasing share of transactions completed by non-mortgage buyers, including foreign ones.
- Valuation assessment:
  - FSAP demand-side analysis: house price overvaluation relative to fundamentals dropped from around 6 percent in 2022Q1 to 2.1 percent by 2023Q3.
  - Adding credit cycle and supply-side constraints reduces estimated price misalignment to around 0.9 percent in the last two quarters.

### Commercial real estate (CRE)
- CRE prices remain below pre-pandemic levels as of 2023Q3; transaction volumes and new mortgage credit growth slower than in 2021-22.
- Tighter lending standards and digitalization could exert further downward pressure on CRE prices.
- Downside risks to banks are limited given the relatively small size of the Spanish CRE market compared to European peers.
- The sector’s increasing reliance on foreign funding points to the importance of enhancing data collection on foreign investments in CRE.

### Public debt and sovereign exposures
- Public debt rose by around 25 percentage points in 2020 and then decreased over the next two years, reaching 107 percent in December 2023.
- 26 percent of Spanish sovereign debt securities is held by Spanish banks and the domestic NBFI sector.
- Sovereign debt (including EA securities) accounts for:
  - 11 percent of assets held by banks,
  - 44 percent of assets held by insurance firms,
  - 30 percent of assets held by pension funds,
  - 30 percent of assets held by open-ended investment funds (OEF).
- Spanish banks remain among the most exposed to sovereign risk across European peers.

### Banking sector structure, profitability, capital, liquidity, and asset quality
- Bank-dominated system with strong retail orientation: nearly 90 percent of bank lending is to mortgages and NFCs.
- Spanish SIs represent almost 95 percent of banking sector assets.
- International footprint:
  - Largest banks have significant presence in Brazil, Mexico, Türkiye, the United Kingdom, and the United States.
  - Exposures to counterparties in those jurisdictions accounted for 66 percent of consolidated foreign claims of Spanish banks (EUR 1.8 trillion in total).
  - Exposures by counterparty type of consolidated foreign claims: NFCs 58 percent, sovereigns 25 percent, banks 10 percent.
- Profitability and earnings:
  - Return on equity stood at 12.1 percent, return on assets was 0.76 percent in June 2023.
  - Recent increase in net interest income (NII) boosted profitability, but deposit migration and rising funding costs could reverse trends in 2024.
- Capital and liquidity:
  - CET1 ratio at 12.6 percent as of June 2023 for aggregate Spanish SIs.
  - Spanish SIs’ LCR stood at 182 percent in June 2023; internationally active Spanish SIs had LCR of 153 percent in June 2023.
  - Leverage ratios comparable to most EA peers.
- Nonperforming loans and provisioning:
  - Banking sector NPL ratio decreased by three-percentage points in the five years up to June 2023.
  - NPL ratios slightly increased in 2023 for households and declined for NFCs.
  - Share of Stage 2 loans averaged 7.6 percent of lending to the private sector in 2023Q3.
  - ICO-backed loans of euro 67 billion face Stage 2 loans of 20.6 percent and NPLs of 9.6 percent.
  - Provisioning coverage of NPLs reached 46.5 percent for NFCs and 40.2 percent for households in the twelve months prior to June 2023.
  - Compared to EU averages, provisioning coverage of NPLs in 2023Q2 was lower for households and higher for NFCs.

### Less Significant Institutions (LSIs) and fintech
- LSIs: 67 institutions (42 credit cooperatives, 23 banks, 2 saving banks); financed almost completely domestically (92 percent Spanish counterparties).
- LSIs have low loan-to-deposit ratios, high liquid assets, and are eligible for ECB monetary operations.
- LSIs’ CET1 ratio was 21 percent in June 2023.
- Fintech:
  - Banks dominate fintech activity, concentrated in payments.
  - Nonbank fintech activity is diverse but small and facing scaling/monetization challenges.
  - Crypto sector is small, concentrated, and limited to small investors.

### Systemic risk assessment and stress testing
- Key risks: escalation of geopolitical tensions, higher-for-longer interest rates, commodity market volatility (especially energy), domestic policy miscalibration, cyber threats, and climate-related physical risks.
- FSAP stress tests:
  - Solvency adverse scenario spans a three-year horizon (2024-2026) and entails a significant and persistent recession with a cumulative loss of 7 percentage points of real GDP over two years with gradual recovery in 2026.
  - Adverse scenario includes rising geopolitical concerns, energy price spikes, higher inflation, interest rates and term premia, and associated increases in borrowing costs reducing economic activity.
- Household and corporate results under scenarios:
  - Baseline: deleveraging and robust income growth support households; overall household vulnerability expected to continue decreasing from 2022 peak.
  - Adverse: households on average resilient from a debt-servicing perspective; lowest income quintile more affected; share of vulnerable households rises (26 percent baseline to 34 percent adverse in 2024).
  - NFCs: debt-at-risk projected to rise to 29.5 percent by 2026 under the adverse scenario; proportion of firms with ICR<1 rises by over 6 percentage points by end-2024; cashflow problems peak in 2025.

*Source: 1espea2024003*

### 22. The FSAP solvency stress test is a top-down exercise that covers consolidated global

### 22. The FSAP solvency stress test is a top-down exercise that covers consolidated global exposures of 10 SIs accounting for almost 95 percent of the banking system’s total assets

### Solvency stress-test framework and scope
- Top-down exercise based on the IMF’s internally developed solvency stress-testing framework covering credit, earnings, and market risks (Table 7).
- Covers consolidated global exposures of 10 SIs accounting for almost 95 percent of the banking system’s total assets.
- Projections of revenues, expenses, and loan losses are based on modelled output of the balance-sheet for each bank over the scenario horizon.
- Exercise model described in Tressel and Ding (2021).

### Baseline scenario results
- Aggregate CET1 capital ratio rises from 12.6 percent in Q3-2023 to 15.4 percent at end-2026.
- Drivers: interest income generating capacity of loan portfolios, relatively low cost of retail funding, and stable loan loss provisioning.
- Caveat: results may overestimate capital due to exclusion of share buy-backs and potential liability composition shifts (e.g., migration from sight-to-term deposits).

### Adverse scenario results (aggregate and bank-level)
- Aggregate CET1 ratio of the 10 SIs declines up to 3 percentage points to 9.6 percent at end-2025, with a peak of losses in the second year, and recovers to just over 10 percent by end-2026.
- Two SIs fail to meet Capital Conservation Buffer (CCB) and Other Systemically Important Buffer (O-SII); one also breaches the leverage ratio requirement.
- Aggregate resilience owed materially to significant scale and rapid deleveraging of domestic credit exposures by banks under the adverse scenario (Table 5; Figure 20).
- Without such deleveraging, solvency on a risk-weighted basis for more banks would likely have been threatened.
- Macroeconomic cost: pruning balance-sheets to absorb losses worsens banks’ ability to meet credit demand.

### Key drivers of solvency outcomes under the adverse scenario
- Loan loss provisions (LLP) are the primary driver of reduced bank profitability; majority of credit risk impairments recorded in foreign portfolios (Figure 22 c-f).
- Interest rate increases initially attenuate credit loss impact via NII growth in year 1 due to pass-through differentials, especially on domestic exposures; this mitigant wanes in the last two years as negative credit growth and rising non-performing exposures persist.
- Market risk losses material only in the first year; gains on securities contribute positively in outer years as rates normalize (Figure 22g).

### Sensitivity to interest-rate pass-through calibrations
- Alternative calibrations of pass-through of interest rate shocks to domestic loans and deposit rates have at most modest impact on SIs’ solvency (Figure 22h).
- Lowering pass-through to assets or increasing pass-through for deposits—under any alternative approach—causes one additional CET1 breach.
- A milder pass-through on deposits does not affect results.

### Policy recommendations on capital buffers and CCyB
- Authorities should deploy policies to ensure banks raise usable capital buffers against downside tail risks.
- Stress-test results indicate increased profit retention by banks in the immediate term—when profitability is high—would materially pay off if downside tail risks materialize.
- FSAP recommends authorities deploy policies, including but not necessarily limited to, the introduction of a positive neutral CCyB rate to ensure banks raise capital buffers to be better positioned against downside tail risks.

### Structural liquidity analysis: approach
- Assesses resilience of 10 SIs to funding shocks and market-driven stress using intensity of LCR buffer use and granular cash-flow (CF) analysis over one week and three months.
- LCR analysis based on four scenarios ranging from Basel III LCR (benchmark) to “aggressive” (severe stress combining market valuation losses on liquid assets and a spike in funding outflows).
- CF analysis considers 25 scenarios affecting haircuts, runoff rates and rollover rates of maturing obligations; a liquidity gap arises when a bank exhausts counterbalancing capacity.

### Liquidity stress-test findings
- SIs demonstrate robust resilience-to-liquidity-stress even under aggressive scenarios, but use of liquidity buffers increases significantly with abrupt funding outflows.
- Aggregate LCR falls below regulatory hurdle rate of 100 percent under outflow and aggressive scenarios:
  - Number of banks with LCR falling below 100 percent by scenario: Basel III: 0; Market: 0; 25% Outflow: 0; 50% Outflow: 1; 75% Outflow: 2; 100% Outflow: 6; Aggressive: 7.
- CF analysis: aggregate marginal liquidity surplus over a 1-week horizon under aggressive scenario; small shortfall over three months.
  - Three banks have a marginal one-week shortfall at the “aggressive” severity.
  - Four banks (66 percent of the banking sector by assets) have a three-month shortfall under “aggressive”.
- Withdrawal of wholesale funds is the largest source of cash outflow; impact attenuated by retail deposits being the preeminent source of bank financing.

### Liquidity-solvency interactions and forced sales scenario
- If LCR breaches prevent access to ECB standing liquidity facility and BdE emergency liquidity assistance (ELA) is not provided, banks could be compelled to sell government bonds held at amortized cost, realizing losses where market value is below book value.
- Unencumbered euro area sovereign bonds at cutoff date constitute 39 percent of bond portfolio, total carrying amount EUR 105 billion (team FSAP estimate).
- Estimated potential sale losses (if SIs breaching LCR sell all unencumbered sovereign debt at market value) induce a median firm-level CET1 ratio decline between 1.3 and 3.5 percentage points.
- Prioritizing sale of bonds with lower maturity could allow liquidation of up to half of portfolios with less than one quarter of these loss estimates.

### Interconnectedness analysis
- Cross-border bank contagion spillovers between Spanish and foreign banks are modest (Figure 25), reflecting that most cross-border claims of Spanish banks are to customers other than banks (Figure 12e).
- Domestic interbank contagion vulnerability is small (Figure 26). Contagion analysis focused on 16 domestic banks (SIs and LSIs) and two foreign subsidiaries, consistent with modest share of interbank exposures of Spanish banks.

### Financial sector oversight: progress and remaining gaps
- Significant progress in implementing 2017 FSAP recommendations, but gaps remain (Table 6).
  - Spanish banks have reduced NPL stocks under close supervisory scrutiny.
  - Improving governance of LSIs remains work-in-progress.
  - Legislative initiatives to facilitate soundness and governance of cooperative banks are still pending.

### Macroprudential framework and policy recommendations
- AMCESFI established in 2019 bringing together BdE, CNMV, DGSFP, and MINECO; responsibilities include systemic risk oversight, warnings, recommendations, and opinions on sectoral regulator measures.
- AMCESFI has relatively low profile; recommendations to reinforce role, credibility, transparency, and accountability include:
  - More frequent Council meetings—quarterly rather than minimum twice a year.
  - Publish summary minutes of meetings and timely Annual Reports.
  - Appoint external members to strengthen diversity of perspectives and guard against potential inaction bias.
- Further steps to bolster risk analysis and policy implementation:
  - Continue investments in improving data and information (e.g., borrower income, cross-border exposures of investment funds).
  - Explore more cross-agency work on cross-sectoral topics (e.g., system-wide liquidity effects from household deposits switching to insurance products and investment funds; business model risks from bancassurance; cyber risk).
  - Strengthen reporting requirements so CNMV and DGSFP are immediately notified of activation of liquidity management tools by fund managers, investment firms, and insurance companies domiciled in Spain.
  - For cross-border-marketed funds, addressing information gaps will require EU-level measures.
  - Enhance capability to monitor fund and firm behavior under stress to inform activation of regulatory tools.

### CCyB recommendation and procedural improvements
- CCyB has remained at zero percent since 2016; no sectoral or borrower-based measures introduced.
- BdE actively considering adopting a positive neutral CCyB rate to increase usable buffers and preserve lending capacity in adverse structural shocks.
- FSAP supports adoption of a positive neutral buffer as soon as feasible and recommends simplifying and streamlining administrative and consultation procedures to shorten implementation lag.

### Banking supervision and LSIs
- Targeted review of regulation and supervision of LSIs: progress made but some 2017 FSAP recommendations outstanding.
- Recommendations to strengthen BdE operational independence:
  - Remove MINECO’s appeal powers over BdE supervisory decisions and sanctions.
  - Limit role of official political representatives on BdE’s Governing Council in supervisory and sanction decisions.
  - Grant BdE greater autonomy in issuing prudential regulations in areas not harmonized at EU level (e.g., framework for related party transactions).
- Enhance effectiveness of BdE risk-based supervision by:
  - Increasing targeted and thematic onsite activities for medium-and-high-risk and medium-and-high-impact LSIs.
  - Streamlining offsite processes and reducing overlaps in alert-based offsite indicators.
  - Applying more proportionality in offsite processes such as SREP, which is performed annually for all LSIs.
  - Ensuring BdE has adequate forward-looking resources.

*Source: IMF FSAP chapter on Spain (selected excerpts).*

### 41. Performing additional onsite activities remains key to further improving LSIs’

### 41. Performing additional onsite activities remains key to further improving LSIs’

### Governance and risk management of LSIs
- Finding: The BdE has made significant progress but should continue targeted and thematic onsite activities to follow up on LSIs’ governance.
- Recommendation: Increase onsite supervisory scrutiny of LSIs’ risk management, particularly:
  - management of liquidity risks; and
  - interest rate risk in the banking book (IRRBB).
- Recommendation: Reform the related-parties framework to address gaps relative to international standards.
- Recommendation: Continue BdE’s proactive approach to climate-related financial risks so that assessment of these risks becomes embedded in supervisory activities and processes.
- Recommendation: Take into account excessive concentration risk for a broader range of exposure types, including sovereign risk concentration, through Pillar 2 requirements for LSIs.

### Supervision and oversight of Financial Market Infrastructures (FMIs)
- Scope: FSAP focused on regulation, supervision, and oversight of two systemic FMIs—the CCP (BMEC) and the CSD (IC)—under the Principles for Financial Market Infrastructures (PFMIs); CNMV’s supervision of BMEC’s margining practices; and supervision of crisis management procedures of BMEC and IC.
- Legal/Institutional roles:
  - CNMV and BdE are responsible for ensuring national securities clearing, settlement and registry systems operate consistent with financial stability.
  - CNMV supervises BMEC and IC; BdE acts as overseer of BMEC and IC.
- Finding: CNMV’s supervision of BMEC and IC is of high quality despite significant resource constraints.
  - Constraint: CNMV lacks full autonomy over recruitment of supervisors, including in key specialist areas, due to government approval needed on a case-by-case basis.
  - Recommendation: Provide the CNMV full functional autonomy over its recruitment process.
- Margining practices:
  - Finding: CNMV’s supervision of BMEC’s margining practices is comprehensive and thorough.
  - Recommendations:
    - Ensure CNMV’s recommendations to BMEC are implemented in timely fashion.
    - Implement enhancements to margin models addressing CNMV’s recommendations in all segments, to the extent possible.
    - Disclose results of the sensitivity analysis to clearing members.
- Crisis management and recovery planning:
  - Finding: CNMV performs extensive periodical reviews of crisis management procedures for BMEC and IC.
  - Recommendations:
    - Request improvement on IC’s plan narrative, e.g., results of materialization of recovery scenarios and consequences where several scenarios occur simultaneously.
    - Ensure adequate ongoing supervisory coordination with the home supervisor for both FMIs that belong to a foreign financial group, including through joint crisis simulation exercises.

### Cyber Resilience
- Focus: Regulation and supervision of cyber risk at Spanish LSIs and FMIs; cyber resilience included in BdE’s 2023 supervisory priorities.
- Legal/regulatory powers: Adequate powers to collect information in any form; assess compliance; impose corrective actions; and impose sanctions and enforcement action as a last resort.
- Strengths in supervisory practices:
  - clear and well communicated supervisory expectations;
  - effective risk-based approach and application of proportionality in supervision;
  - horizontal reviews by the BdE regarding LSIs;
  - strong emphasis on evidence-based, onsite examinations by the BdE and thorough and detailed offsite oversight at CNMV and BdE;
  - strong emphasis on security testing;
  - proactive approach to regulatory changes, e.g., to ensure future DORA compliance;
  - effective internal coordination and cooperation at the BdE and CNMV.
- Challenge: Resource constraints are the most prominent challenge.
  - Need for higher cyber risk specialist headcount given current gaps (e.g., no onsite examinations of FMIs, limited coverage of LSIs) and projected future workload.
- Recommendations:
  - BdE and CNMV should execute onsite examinations as part of FMI supervision.
  - BdE should conduct more, and more focused, thematic reviews while maintaining short on-site visits to a sample of LSIs.
  - BdE should develop a lighter threat intelligence-based red teaming framework based on TIBER-ES principles, considering lower complexity, maturity and cost-bearing ability of a typical LSI.
  - Both BdE and CNMV should be involved in national critical infrastructure related matters, such as designation and compliance assessments.

### Fintech developments and oversight
- Tools used: sandbox, Innovation Hub, ad-hoc horizontal assessment and thematic studies, database of fintech companies.
- Sandbox:
  - Operated by an inter-agency Coordination Commission including Treasury, BdE, CNMV, DGSFP, SEPBLAC, and the Data Privacy Authority.
  - Experience: six cohorts of applicants provided supervisory learning and communication of supervisory expectations.
  - Cost issue: Testing and preparatory phases can have a combined average length of greater than 10 months.
  - Problem: Rates of acceptance and post-testing take-to-market are low; promoters occasionally exit testing midway after significant supervisory resources expended.
  - Legislative limitation: Legislation does not provide flexibility regarding semi-annual frequency of new cohorts nor to regulators to decide if alternatives could serve applications.
- Recommendations:
  - Consider legislative changes to delegate powers to the Coordination Commission and regulators to modify sandbox operational arrangements.
  - Streamline administrative procedures.
  - Extend greater flexibility to supervisory authorities to rely on wider range of tools to monitor market developments, convey supervisory expectations, and assess adequacy of the regulatory perimeter.

### Financial integrity (AML/CFT)
- Finding: Spain has a mature AML/CFT framework; FSAP conducted targeted review to spotlight areas for strengthening.
- Recent changes: Framework recently strengthened through legal amendments implementing new EU-wide AML/CFT directives and regulations.
- Beneficial ownership:
  - Finding: Spain’s approach is well regarded internationally; scope to further strengthen the centralized beneficial ownership registry (CBOR), established in September 2023.
  - Note: CBOR relies on input from other registries, including that managed by the notarial sector; authorities should ensure data remain accurate and up-to-date in accordance with international standards.
- Supervision:
  - Finding: Established AML/CFT supervisory framework implementing risk-based approach; certain sectors need closer scrutiny.
  - Recommendation: Devote greater attention to implementation of AML/CFT controls by professional enablers, such as lawyers and accountants.
  - Recommendation: SEPBLAC should complement oversight by the General Council of Notaries with direct thematic reviews of customer due diligence and record keeping processes for the notarial sector.
  - Recommendation: Step up registration enforcement and onsite inspections on a risk-based basis over Virtual Asset Service Providers.
- National Risk Assessment (NRA):
  - Status: 2020 NRA being revised with update expected in 2024.
  - Recommendations:
    - Proceed with plans to introduce a dedicated AML/CFT strategy.
    - Continue multifaceted measures and ongoing analysis of cross-border flows in the banking sector to maintain understanding and mitigation of exposures to transnational risks (e.g., illicit financial flows, organized crime, complex international structures, and the Golden Visa Program).
    - Timely complete the formal process necessary to share the Sectoral Risk Assessment on Cryptoassets that was approved in July 2023.

### Financial safety net and crisis management
- Scope: Examination of the Spanish financial safety net and crisis management arrangements, including bank resolution and contingency planning.
- Institutional setup:
  - BdE and Spain’s Executive Resolution Authority (FROB) currently share the resolution authority mandate for banks.
- Progress since 2017: Significant progress noted; further work needed for a fully operational resolution regime.
- Legal foundations: Banking Recovery and Resolution Directive and Single Resolution Mechanism Regulation establish comprehensive statutory regime.
- Achievements: Supported the Single Resolution Board in setting resolution plans for SIs and agreed on resolution plans for LSIs; enhanced cross-authority coordination; developed crisis management manuals; participated in crisis simulation exercises.
- Areas needing refinement:
  - Recommendation: Provide FROB with the administrative resolution power to override shareholders and management rights and take control of a bank subject to a bail-in resolution without needing to appoint a special manager or demonstrate “reasons of special urgency”.
  - Recommendation: Provide bank liquidators with power to transfer deposit accounts backed by bank loan assets out of liquidation and to an acquirer where one has been identified.
  - Recommendation: Consider expanding resolution options by transposing government stabilization tools as last resort options in a manner allowed under European law.
  - Recommendation: Vest both preventative and executive resolution authority functions in the same authority to align incentives with responsibility.
- Liquidity in resolution:
  - Recommendation: BdE should establish an approach to addressing liquidity needs for banks recapitalized through the resolution process.
  - Mission recommended:
    - (a) BdE put in place a policy framework on its role as lender of last resort; and
    - (b) ensure operational capability, including establishing testing arrangements to verify effectiveness of crisis lending capabilities, covering ELA and liquidity in resolution lending arrangements, and by assessing liquidity needs of banks as part of firm-specific resolution planning processes.
  - Note: All banks seeking access to any central bank liquidity facility need to meet eligibility criteria including solvency requirements.

### Authorities’ views
- Overall: Authorities valued the FSAP engagement and cooperative discussions.
- Agreement: Broad agreement with the systemic risk assessment; findings largely in line with authorities’ own assessment.
- Nuances raised by authorities:
  - Diversification benefits from banks’ international business may be limited when risk factors have a global range.
  - The forced sale scenario considered in the liquidity-solvency interaction analysis was considered unrealistic by the authorities.
  - Deleveraging in the adverse scenario is not that significant and is only one option among others for banks to maintain solvency; resulting macroeconomic costs should not be overemphasized.
  - Elevated macroeconomic impact is based on assumptions to generate the stress scenario; only a fraction of this impact on GDP growth can be associated with credit deleveraging.
  - On voluntary capital buffers, noted that other banks in the EA have also chosen high dividend payouts and buy-back shares over retaining earnings.

*Source: 1espea2024003 - 41. Performing additional onsite activities remains key to further improving LSIs’*

### 65. The authorities were supportive of most recommendations and emphasized their

### 1espea2024003 - 65. The authorities were supportive of most recommendations and emphasized their

### Authorities’ reaction and policy stance
- Authorities were supportive of most recommendations and emphasized their commitment to strengthen resilience in the financial sector.
- The CNMV welcomed recommendations to improve the macroprudential framework and tools but noted that addressing data gaps to improve supervision of open-ended funds requires measures at the EU level because funds marketed in a given jurisdiction are often domiciled in another jurisdiction.
- The CNMV noted a lack of specific reporting on activation of liquidity management tools but emphasized permanent and close engagement with asset managers in crisis situations.
- On banking resolution and crisis management, authorities broadly agreed with main recommendations but considered that liquidity needs of banks recapitalized through resolution should be addressed at the EA level rather than nationally, to preserve a common approach.

### Macroeconomic outlook and key projections (selected figures from Table 2)
- Real GDP growth:
  - 2020: -11.2
  - 2021: 6.4
  - 2022: 5.8
  - 2023: 2.5
  - 2024: 2.4
  - 2025: 2.1
  - 2026: 1.8
- Private consumption:
  - 2023: 1.8
  - 2024: 1.8
- Gross fixed investment:
  - 2023: 0.8
  - 2024: 4.5
- Credit developments:
  - Outstanding loans started contracting at end-2022 with credit growth of -4 percent in 2023Q3.
  - Memo: Credit to the private sector: 2023: -3.2; 2024: 0.0; 2025: 0.5.
- Inflation:
  - Headline inflation (average): 2023: 3.4; 2024: 2.9; 2025: 2.3.
  - Core inflation (average): 2023: 5.8; 2024: 3.0; 2025: 2.1.
- Labor market:
  - Unemployment rate: 2023: 12.2; 2024: 11.8; 2025: 11.5.
- Public finances:
  - General government balance: 2023: -3.6; 2024: -3.0; 2025: -2.9.
  - Primary balance: 2023: -1.8; 2024: -0.6; 2025: -0.3.
  - General government debt: 2023: 107.7; 2024: 105.6; 2025: 104.4.
- External and savings:
  - Current account balance: 2023: 2.6 percent of GDP; 2024: 2.6; 2025: 2.3.
  - Net international investment position: 2023: -52.8; 2024: -46.5.

Note: Projections incorporate EU Recovery and Resilience Facility spending amounting to about 0.4, 0.9, 1.0, 1.0, 1.0, 0.9, and 0.2 percent of GDP from 2021 to 2027.

### Financial cycle, credit and leverage
- Output gap closed in 2023; Spanish economy expected to grow near potential.
- Credit developments:
  - Outstanding loans contraction began end-2022, credit growth -4 percent in 2023Q3.
  - Credit-to-GDP gap remains in negative territory and on a downward trend.
- Household and corporate leverage:
  - Corporate and household sectors have reduced debt relative to GDP, extending a decade-long trend.
  - Household debt (memo): 2023: 48.4 percent of GDP (Table 4).
  - Corporate debt (memo): 2022: 71.2 percent of GDP (Table 4).

### Financial sector structure and vulnerabilities
- Banking system composition and funding:
  - SIs (significant institutions) hold 95 percent of banking sector assets.
  - Lending is the dominant asset and primarily extended to households and NFCs; household mortgages have the highest share.
  - Household and NFC deposits constitute the lion’s share of bank funding; the overwhelming majority are sight deposits.
- Sovereign exposures:
  - Banks increased exposures to sovereign bonds held at amortized cost, which now account for 60 percent of total sovereign bonds.
  - Pension funds and insurance firms remain the most exposed in their portfolios despite reductions.
- Asset quality and provisioning (selected indicators from Table 4):
  - Nonperforming loans to total loans (consolidated): 2023: 3.0 percent.
  - Specific provisions to nonperforming loans: 2023: 35.1 percent (consolidated).
  - Domestic nonperforming loans to total loans: 2023: 3.4 percent.
- Profitability and funding:
  - Return on assets (consolidated): 2023: 1.1 percent.
  - Return on equity (consolidated): 2023: 11.8 percent.
  - Loans to deposits (funding): 2023: 74.8.
- Real estate and CRE:
  - House price growth remained positive y/y through 2023, especially for new dwellings; housing transactions declined sharply.
  - CRE market did not experience a boom in 2023 as in some other advanced economies; CRE loan share of NFC loans is relatively small compared to peers.
  - NPL ratios in CRE remain relatively high due to legacy issues but have been declining since 2021.

### Risk assessment (highlights from the Risk Assessment Matrix)
- Intensification of regional conflict(s) and geo‑economic fragmentation:
  - Overall level of concern: High; Relative Likelihood: Medium.
  - Expected impacts: trade disruptions, higher energy and food prices, inflationary pressures, supply chain issues, migration and political division.
- Abrupt global slowdown or recession triggering systemic financial instability:
  - Overall level of concern: Medium; Relative Likelihood: High; Expected Impact: High.
  - Expected impacts: tighter financial conditions, weaker external demand, adverse cross-border spillovers from Spanish banks, bond repricing, housing corrections, deterioration in asset quality due to high share of floating-rate debt.
- Commodity price volatility:
  - Overall level of concern: High; Relative Likelihood: Medium.
  - Expected impacts: higher energy prices, inflation, adverse effects on vulnerable households.
- Monetary policy miscalibration:
  - Overall level of concern: Medium; Relative Likelihood: Medium-High.
  - Expected impacts: de-anchoring inflation expectations, wage-price spiral, asset price and market disruptions.
- Weak implementation of fiscal commitments or delays in EU-funded projects:
  - Overall level of concern: Medium; Relative Likelihood: High.
  - Expected impacts: higher sovereign risk premium, weakened confidence, worsened public debt dynamics.
- Extreme climate events:
  - Overall level of concern: Medium; Relative Likelihood: Medium.
  - Expected impacts: loss of lives, infrastructure damage, loan quality deterioration, supply-chain disruption.
- Cyberthreats:
  - Overall level of concern: Medium; Relative Likelihood: High.
  - Expected impacts: triggers financial and economic instability.

### Stress tests, liquidity and resilience findings
- Stress scenarios and results:
  - Stress-testing exercises include baseline and adverse macro scenarios and specific scenarios for banks, NFCs, households, and markets.
  - Solvency stress tests show distributions of losses; estimates of unrealized losses on amortized cost securities in the adverse scenario are presented (figure summary).
- Liquidity (LCR and cash-flow analyses for 10 SIs):
  - Aggregate LCR falls below the hurdle rate under the “outflow” and “aggressive” stress scenarios, though currency-specific LCR capturing EUR exposures would perform better for the three largest banks.
  - If 75 percent of the run-off rates in the “outflow” scenario materialize, SIs in aggregate would still exceed the hurdle rate.
  - Cash-flow analysis: SIs maintain a marginal liquidity surplus under the aggressive scenario over a 1-week horizon but display a marginal shortfall that persists for 3 months under the aggressive scenario.
  - Depletion of counterbalancing capacity is primarily driven by outflows on wholesale deposits and credit lines.
  - Aggregate NSFR for the 10 SIs has been well above the hurdle rate for the last two years.
- Cross-border contagion:
  - Contagion and vulnerability indices indicate limited impact within the domestic interbank system overall, though a few banks are more vulnerable to inward spillovers.
  - Outward spillovers are driven by SIs; LSIs and foreign subsidiaries are relatively more vulnerable to inward spillovers.
  - Cross-border contagion analysis identifies concentrated foreign claims (UK, US, Brazil, Mexico) and an increase in Spanish banks’ international presence since the euro-crisis.

### Key policy implications and priorities (implied by findings)
- Strengthen macroprudential framework and tools, including addressing data gaps for open‑ended funds (noting the need for EU-level measures for cross-jurisdictional fund domiciliation).
- Enhance reporting on activation and use of liquidity management tools for investment funds while maintaining CNMV engagement protocols with asset managers in crisis situations.
- Coordinate at the EA level on liquidity support arrangements and approaches to banks recapitalized through resolution processes to ensure common treatment across jurisdictions.
- Monitor sovereign exposures and manage potential unrealized losses on amortized cost securities; consider liquidity and capital buffers to mitigate sovereign-related risks.
- Continue monitoring LCR and NSFR positions under severe funding stress scenarios, and address reliance on wholesale funding and potential deposit runoffs.
- Maintain vigilance on cross-border bank exposures and contagion channels given the significant international footprint of Spanish banks.
- Incorporate climate and cyber risks into financial stability monitoring and stress-testing frameworks.

*Source: IMF staff, Spain FSAP material (excerpts provided).*

### 1. Enforce   implementation   of   the   ECB

### 1. Enforce implementation of the ECB guidance on NPLs, including promoting banks’ disclosure of targets and progress (⁋19)

### ECB/SSM framework and supervisory practice on NPLs
- Since 2016, the SSM requires "high NPL banks" to submit annual NPL reduction strategies and specific quarterly NPL reporting.
- Joint Supervisory Teams (JSTs) assess NPL reduction plans' credibility and ambition and consider progress twice a year.
- Enhanced disclosure requirements on asset quality and NPLs to all banks have been mandated since end-2018.
- The EBA implemented additional disclosure items on nonperforming exposures, forbearance and foreclosed assets for all EU banks.
- Regulation (EU) No 575/2013 established minimum loss coverage requirements for nonperforming exposures, which apply to exposures originated after April 26, 2019.
- The ECB established supervisory expectations on prudential provisioning levels for non-performing exposures originated before April 26, 2019.
- In April 2022 the EBA published results of the EBA peer review on the supervision of NPE management, noting that jurisdictions with higher NPE levels (as in Spain) have implemented more sophisticated supervisory processes and are more engaged with credit institutions on NPE management.
- The peer review findings suggest that the EBA Guidelines on management of nonperforming and forborne exposures have been largely implemented by competent authorities and applied in supervisory practices.

### Spain: outcomes and quantitative indicators
- Average NPL ratio in Q2 2022 for the Spanish significant institutions is 3.4 percent (versus 2.35 percent for all SSM banks).
- NPL gross book value decreased from EUR 134 billion in December 2016 to EUR 79 billion in June 2022.
- Foreclosed assets (FAs) decreased by 74 percent in Spain since December 2016, from EUR 76 billion to EUR 20 billion in June 2022.
- During Dec 2016–June 2022, total amount of wholesales was 129 bn€ (66 bn€ NPLs; 63 bn€ FA) in gross book value.

### Supervisory contribution to NPL reduction
- Supervisory actions have played a positive role alongside banks' higher solvency, positive macroeconomic evolution, and wholesale market appetite for NPE sales.

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### 2. Improve recovery of viable businesses; pre-insolvency processes and OCAP for SMEs (⁋21)

### Insolvency law reform (Law 16/2022)
- Reform entered into force on September 26, 2022, transposing the Insolvency EU Directive.
- Derogates previous pre-insolvency procedures (out-of-court agreements for SMEs and refinancing agreements) and introduces:
  - A special procedure for microenterprises.
  - Restructuring plans for companies that are not microenterprises.

### Key features and improvements
- Procedures can be used at an earlier stage (when there is a mere likelihood of insolvency).
- Procedures allow for a cross-class cram-down.
- Procedures can affect public credit (only through deferrals in restructuring plans) and can impose a stay on public credit enforcement actions.
- Special procedure for microenterprises is simplified and cost-reduced: insolvency practitioner required only in certain cases; liquidation of assets can be implemented through an electronic platform.
- Restructuring plans are designed with minimum procedural regulation.
- Second chance procedure enhancements:
  - Reduces period for effective exoneration of debtors from five to three years.
  - Allows exoneration without previous liquidation of production assets of the self-employed or the main residence of the debtor.
  - Increases the array of credits that can be exonerated.
  - Public credit can be exonerated up to a maximum of EUR 20,000.

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### 3. Evaluate scope for further banking consolidation (⁋22)

### Recent consolidation and restructuring examples
- Bankia merged by absorption into CaixaBank in March 2021; technological integration completed in November 2021.
  - Main shareholders CriteriaCaixa (40 percent of Caixabank) and FROB (62 percent of Bankia) continue as main shareholders of merged entity with 30 percent and 17.6 percent, respectively.
  - Resulting entity market shares of over 25 percent in assets, loans and deposits domestically.
  - Restructuring envisaged significant adjustments: -10 percent FTEs and -28 percent number of branches.
  - Cost synergies estimated at EUR 900 million per year, 80 percent achieved.
  - Additional revenue synergies expected around EUR300 million per year.
- Unicaja Banco merger with Liberbank completed July 30, 2021.
  - Targets: reduction in branch network and headcount by 26 percent and 29 percent until 2024 (reached in June 2022 the 72 percent and 31 percent of this target).
  - Business model remains retail-focused (mortgages and SMEs).
- Abanca pursued inorganic growth: acquired business of Deutsche Bank in Portugal and Banco Caixa Geral in Spain in 2019; integrated Bankoa and Novo Banco Spain in 2021.
- Cooperative sector consolidation: creation in March 2018 of an IPS grouping 30 credit cooperatives and a bank (Banco Cooperativo Español); only 4 cooperatives remain independent.

### Supervisory stance on consolidation
- ECB published guide on supervisory approach to consolidation beginning of 2021.
- ECB will use supervisory tools to facilitate sustainable consolidation projects that:
  - Are based on a credible business and integration plan.
  - Improve sustainability of the business model.
  - Respect high standards of governance and risk management.

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### 4. Monitor interest rate and bond market risks; ensure appropriate capital requirements (⁋23)

### Monitoring and supervisory actions
- IRRBB is regularly monitored quarterly and in the annual SREP, with specific activities focusing on this risk.
- Onsite inspections (OSIs) have been performed at Spanish significant institutions in context of negative interest rates and narrow margins.
- Spanish significant institutions included in ECB horizontal targeted reviews/analyses.
- Regular monitoring of sovereign portfolio market risks considers recent monetary policy changes; potential impacts on banks’ capital ratios from scenarios based on credit spread volatilities experienced during the last sovereign debt crisis are calculated and analyzed.
- Less significant institutions: regular monitoring and prudential approach reflected in ICAAP/ILAAP Guideline, where a rule for capital allocation is defined.

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### 5. Improve liquidity monitoring; review funding structures and reliance on ECB liquidity (⁋23)

### Liquidity assessment for Significant Institutions (SIs)
- Individualized assessment of liquidity and funding risk under SREP methodology, supplemented with horizontal analysis of short/long-term key indicators.
- Monitoring includes LCR (with stress test simulations) and NSFR metrics.
- Supervisors assess institutions’ capacity to address immediate cancellation of the TLTRO and potential impacts on LCR under different scenarios; JSTs perform individual analyses of specific funding plans and actions foreseen by banks.

### Historical exercises and Less Significant Institutions (LSIs)
- In 2019, all Spanish SIs participated in the Liquidity Stress Test (LiST) conducted by the ECB; results were taken into account in the SREP.
- LSIs monitoring is based on a trigger system using key risk indicators.

### Regulatory reporting
- EU introduction of a new financial statement for banks, "maturity ladder", in March 2018; BdE was already collecting this information.

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### 6. Insurer asset-liability mismatch monitoring (⁋24)
- DGSFP carries out ongoing monitoring of durations and returns on assets and liabilities in insurers' balance sheets.
- Monitoring performed through offsite analysis based on quantitative reporting templates and onsite activities.

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### 7. Foster market-based financing and nonbank financial services (⁋25)

### Initiatives and platforms
- CNMV promoted two alternative exchanges: BME Growth (stock) and MARF (fixed income) for small-cap firms, venture capital financing, and development of crowdfunding platforms.
- CNMV encourages and participates in informative sessions set up by secondary markets and established a contact point for firms that intend to go public.
- Innovation Hub and Spanish regulatory sandbox analyze viability of new business models and use of new digital technologies in financial markets.
- Implementation of the European framework for simple, transparent and standardized securitization established tools to foster market-based financing to provide credit to households and corporates.

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### 8. Enhance monitoring of macrofinancial linkages, interconnectedness, and cross-border spillovers; close data gaps (⁋31)

### Institutional work and reporting
- Since 2019, BdE increased analysis of banking sector interconnectedness in its half-yearly Financial Stability Report.
- CNMV analyzes direct connectedness between banks and other financial institutions (OFI) in its annual NBFI Report; in 2020 published a working paper on connectedness and systemic risk for collective investment schemes.
- DGSFP performs macro financial interlinkages analysis regarding investments and business models.
- AMCESFI (created March 2019) set up a Subcommittee on Interconnectedness evaluating intra-system connections via direct exposures, indirect interconnections, and common portfolio exposures; assessment published in AMCESFI's Annual Reports.

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### 9. Review SAREB’s medium-term outlook and set up tripartite committee (⁋57)

### Institutional and financial status
- In December 2020, SAREB became part of the Public Administrations sector; SAREB's debt is computed as State debt.
- RDL 1/2022 (January 2022) allowed FROB to obtain majority of SAREB's capital; in April 2022 FROB increased stake to 50.14 percent of the capital.
- SAREB Monitoring Commission disappeared after public control takeover; monitoring is carried out by FROB through company control bodies.
- SAREB is not expected to have additional financing needs in the medium term.
- SAREB has had negative equity since December 2021 but a comfortable liquidity position and no obligation to repay its debt except for the cash portion generated.
- Situation expected to persist until statutory duration expires at the end of 2027, when the State must assume payment of pending debt as guarantor.

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### 10. Set up Systemic Risk Council for inter-agency coordination (⁋33)
- Royal Decree 102/2019 created AMCESFI in March 2019 as the national macroprudential authority.
- AMCESFI's mandate includes identification and surveillance of systemic risk factors and coordination of sectoral macroprudential policies.
- Functions are discharged by AMCESFI's Council and Financial Stability Technical Committee (comprising MoE, BdE, CNMV and DGSyFP officials).

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### 11. Expand macroprudential toolkit to include borrower-based tools (⁋39)

### Legal and regulatory developments
- Royal Decree-law 18/2018 and Circular 5/2021 (BdE, December 22, 2021) developed a set of macroprudential tools for the banking sector including:
  - Limits and conditions on lending (borrower-based instruments).
  - Limits to sectoral concentration of credit.
  - Sectoral countercyclical capital buffer.
- European Commission under article 513 of Regulation (EU) 575/2013 started a comprehensive review assessing sufficiency of macroprudential rules, focusing on:
  - Flexibility in use of CCyB.
  - Widening macroprudential space by designing new tools/mechanisms.
  - Calibration of O-SIIs.
  - Inclusion of harmonized borrower-based measures.
- No legislative proposal foreseen in short term; expected that Commission will issue a report to co-legislators and potential targeted changes in CRR/CRD in ongoing Basel III implementation.

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### 12. Increase supervisory focus on corporate governance across credit institutions and nonbank sector (⁋46,51,52)

### Supervisory priorities and actions
- Internal governance and risk management included as ECB supervisory priorities.
- 2015 SSM thematic review found governance deficiencies; supervisory actions and SREP focus followed.
- Several horizontal reviews and ad-hoc onsite inspections on governance and risk management for SIs and LSIs have been conducted; identified weaknesses are followed up for remediation.
- Governance and risk control assessed in annual SREP, with continuous revision of board minutes and communication frameworks between JSTs and entities across multiple levels.
- Lines of defense reinforced with enhanced independence and greater board involvement, plus improved technical and human resources.
- Requirements and/or recommendations are sent when weaknesses are identified to comply with SSM regulation, EBA guidelines, and BCBS principles.
- Fit and Proper process reinforced with transparent and harmonized selection criteria including comprehensive candidate analyses and in-depth interviews for directors.

### Sectoral supervisory focus
- CNMV focuses supervisory activities on audit committees, oversight of financial reporting and internal control systems, and compliance with criteria for independent board directors.
- For insurance (2018–2022), DGSFP supervisory priorities included:
  - Key functions policies, reporting lines, and role of internal control and internal audit.
  - Involvement of the AMSB in decision, orientation and monitoring of main business drivers.
  - Analysis of outsourcing of functions, particularly IT and cyber-risks.
  - AMSB members selection.
  - Remuneration policies.

*Source: 1espea2024003 — 1. Enforce implementation of the ECB guidance on NPLs*

### 13. Assign  the  BdE full  regulatory  powers

### 13. Assign the BdE full regulatory powers in matters not harmonized at the European level including authorizing mergers (⁋48)

### Current status and context
- No specific action has been taken.
- The draft European Commission CRD Directive VI (April 2023) is set to harmonize this aspect at the EU level, in particular acquisitions by a credit institution of a material holding in a financial or nonfinancial entity, the material transfer of assets or liabilities and merger or divisions.
- If the proposal is approved, authorization powers for mergers (no opposition) would be given to the supervisor, and therefore the FSAP recommendation would be superseded.
- The final proposal is not expected before end-2023.

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### Resolution, crisis management, and safety nets (related FSAP follow-ups)

### 14. Develop a credible resolution strategy for credit cooperatives and other LSIs; prepare recovery and resolution plans for significant insurance companies (⁋63–64)
Findings and actions taken by the authorities:
- Banco de España (BdE) has drafted and adopted resolution plans for all LSIs, including credit cooperatives.
- There are 48 entities subjected to simplified obligations (SOs) and 6 entities with full obligations, under the remit of BdE.
- During the Resolution Planning Cycle 2022, BdE will update resolution plans for 31 LSIs (25 SOs and 6 full obligations).
- In relation to entities with a resolution strategy in case of failure and taking into account their specificities, the default preferred resolution tool is the sale-of-business.
- The BdE conducts an annual risk assessment system (as part of the annual SREP) for all LSIs, so that changes in the risk profile can be identified in order to keep recovery plans updated.
- Regarding the cooperative sector, in 2018, a platform to mutualize losses among several credit cooperatives and a bank (Banco Cooperativo Español) was created to facilitate any future resolution. Nowadays, 30 credit cooperatives and a bank are the members of such platform.
- In addition, there are pending legislative initiatives to facilitate the resolution of the said credit institution:
  - An amendment safeguarding compliance with the principle of NCWO in resolution vis-a-vis liquidation.
  - Bank of Spain proposal (not formalized) to amend Cooperatives legal framework to require Banco Cooperativo Español to set up a central body accountable for solvency, liquidity and resolution requirements.
- For insurance, a national regulation on recovery planning is currently being prepared, and at European level, a new Directive on recovery and resolution for the insurance sector is being discussed.

### 15. Strengthen and upgrade the deposit guarantee scheme; create a protection scheme for insurance policyholders (⁋66)
Findings and actions:
- At the European level, in June 2022, the Eurogroup invited the Commission to table legislative proposals regarding the crisis management and deposit insurance (CMDI) framework.
- It is expected that the Commission will seek to promote the use of DGS funds to facilitate the resolution for small/medium sized banks with a large deposit base.
- No specific action is expected in the coming future regarding the creation of a common European deposit insurance (EDIS).
- In the insurance sector, the guarantee scheme for victims of road traffic accidents is being strengthened.

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*Source: 1espea2024003 - 13. Assign the BdE full regulatory powers*

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_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1espea2024003.pdf_