## _cr1459

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---

### Executive summary
- Spain undertook a major program of financial sector reform during the last 18 months with support from the European Stability Mechanism (ESM).
- On June 25, 2012, Spain requested financial assistance from the European Financial Stability Facility (EFSF) to support the ongoing restructuring and recapitalization of its financial sector.
- The Eurogroup approved this support; the Memorandum of Understanding on Financial Sector Policy Conditionality (MoU) was dated July 20, 2012.
- In November 2012, responsibility for providing financial support was transferred from the EFSF to the ESM without this assistance gaining seniority status.
- The program concluded as scheduled in January 2014.
- IMF staff provided monitoring via quarterly reports at the request of the Ministry of Economy and Competitiveness, the Bank of Spain (BdE), and the European Commission (EC). This is the fifth and final such report.
- IMF staff monitoring was conducted as a form of technical assistance under Article V, Section 2(b), of the IMF’s Articles of Agreement.

### Program objectives and strategy
- Objective: increase the long-term resilience of the banking sector as a whole, restoring its market access and supporting economic recovery by promoting financial stability.
- Strategy (three pillars):
  - Strengthen system capital by (a) identifying undercapitalized banks via an independent asset quality review and stress test and (b) requiring banks to address shortfalls, including bail-ins of junior debt, injections of public capital, and restructuring/resolution where necessary.
  - Reduce uncertainty and boost liquidity by segregating the most illiquid and difficult-to-value assets (REDs and foreclosed assets) of state-aided banks into a newly-created asset management company (SAREB).
  - Reform frameworks for regulation, supervision, and resolution to facilitate the clean-up and better promote financial stability going forward.
- The strategy was consistent with IMF staff’s June 2012 Financial Stability Assessment Program (FSAP) and Article IV recommendations.

### Key outcomes and macro-financial effects
- All specific program measures are now complete.
- Measures implemented included:
  - Identifying undercapitalized banks via a comprehensive asset quality review and independent stress test.
  - Requiring banks to address capital shortfalls, including bail-ins of junior debt and injections of public capital where necessary.
  - Segregating state-aided banks’ most illiquid assets into SAREB.
  - Adopting and beginning implementation of restructuring or resolution plans for state-aided banks, with divestment of government ownership envisaged by no later than end-2017.
  - Reforming Spain’s frameworks for bank resolution, regulation, and supervision.
- System-wide capital, liquidity, and loan-loss provisioning were significantly strengthened.
- The stress test identified capital shortfalls totaling €56 billion (5½ percent of GDP).
- Financial market improvements during the program: risk premia on external borrowing by Spain’s banks and sovereign down more than 75 percent; equity prices up more than 50 percent during the program period.
- Spain’s real economy: output growing and the unemployment rate falling.

### Remaining challenges and risks
- System-wide profits through the first three quarters of 2013 moved back into the black in part due to one-off factors; core pre-provision profits continue to decline.
- The nonperforming loan (NPL) ratio is still rising (though at a declining pace).
- Private-sector deleveraging and fiscal consolidation remain headwinds for growth and bank profitability, potentially slowing credit recovery.
- Uncertainties include the methodology of the Single Supervisory Mechanism’s (SSM) forthcoming comprehensive assessment and the unwinding of the state’s ownership interest in intervened banks over the next few years.
- Upside outcomes are possible, especially with strong policy implementation in Spain and Europe.

### Progress on program implementation (high-level)
- Ten banks were identified in the September 2012 independent stress test as having capital shortfalls relative to a 6 percent CT1 benchmark by end-2014 under an adverse scenario.
- Banks were grouped into: Group 1 (state-controlled and unable to fill needs on their own), Group 2 (unable to fill shortfalls on their own), and Group 3 (able to fill shortfalls on their own).
- Measures to fill the €56 billion shortfall were completed mostly in Q1 2013:
  - Approximately 70 percent of the shortfall was filled by public capital injections.
  - 23 percent by bailing-in junior debt.
  - 6 percent by private capital injections.
- As a result of recapitalization, the state (via the FROB) became the controlling owner of a significant part of the banking sector (holding an estimated 18 percent of system loans).
- The FROB sold NCG to the Banesco group in December 2013 for €1 billion, with payments spread over several years.

### SAREB: segregation of REDs and foreclosed assets
- All state-aided banks were required to transfer their REDs and foreclosed assets over a minimum size to SAREB in exchange for government-guaranteed senior bonds issued by SAREB.
- Nearly 200,000 real estate-related assets were transferred to SAREB at a total transfer price of €51 billion, or 47 percent of these assets’ gross book value.
- The government owns (via the FROB) 45 percent of SAREB’s equity.
- SAREB completed due diligence on 80 percent of its assets; the due diligence found that the average market value of SAREB’s assets was broadly similar to the average transfer price.

### Intended effects of SAREB on the banking system
- Liquidity:
  - Transfer boosted system liquidity because transferred assets had little collateral value while SAREB’s bonds can be used as collateral in the Eurosystem’s repos and in the Spanish Treasury’s liquidity management operations (use as repo collateral with private counterparties has been negligible).
  - Transfer avoided further large bank losses due to forced “fire sales” of relatively illiquid REDs and foreclosed assets.
- Banks’ valuation:
  - Transfer reduced uncertainty regarding asset values, expected to help lower banks’ funding (and hence lending) rates and increase attractiveness of state-owned banks to potential buyers.
- Solvency:
  - Assets were generally transferred to SAREB at prices close to valuations used to calculate banks’ capital shortfalls under the adverse scenario in the Oliver Wyman stress tests; the transfer did not have material effects on banks’ projected capital shortfalls.
  - Exchange of assets for safer SAREB bonds reduced banks’ risk-weighted assets, lowering the amount of capital needed to reach target capital ratios for most banks (effect described as modest).
- Focus:
  - Transfer of distressed asset classes should enable management of state-aided banks to better focus on core banking activities.
- Real estate market:
  - Gradual liquidation of SAREB’s assets may contribute to reactivation and normalization of Spain’s real estate market.

### SAREB financial performance and outlook (2013–2014)
- 2013:
  - SAREB estimates it registered a loss in 2013, an outcome expected given start-up costs; audited accounts for 2013 were not yet available.
  - Drivers of the 2013 loss included slow H1 sales, falling real estate prices, time required to develop commercial strategies, and a difficult start for servicing arrangements.
  - Sales accelerated during 2013 but profit margins declined due to falling real estate prices and wholesale deals with narrower margins.
  - Expenses mostly comprised debt service, maintenance of foreclosed assets, capital expenditure, and asset management fees.
  - SAREB expected total cash inflows in 2013 to have exceeded operating expenses, debt service, and credit line drawdown, enabling redemption of part of its senior debt and only partial rollover of bonds maturing in late 2013–early 2014.
- 2014 outlook:
  - SAREB expects to increase its sales volume in 2014; profitability will depend heavily on the evolution of house prices.
  - Supporting factors: acceleration of asset liquidation, full deployment of commercial strategies developed in 2013, and lower debt-servicing costs as SAREB starts to repay its bonds and benefits from improvement in Spain’s sovereign spreads.
  - Primary risk: uncertainty regarding future real estate prices as REDs increasingly become nonperforming and profitability and cash flows depend more on sale of collateral.
  - Recommendation: SAREB should continue devising and implementing effective liquidation strategies geared toward supporting cash flow and profitability and adjust nimbly to changing macro and market conditions.

### Fiscal and contingent liability considerations
- The transfer increased the government’s contingent liabilities due to government guarantees on SAREB’s bonds.
- Ensuring sound management of SAREB’s assets is key to ensuring a net positive public benefit.

### Structural and regulatory reforms
- Capital requirements:
  - The minimum capital requirement during 2013-14 was increased to 9 percent CT1 (EBA definition).
- Bank resolution (law adopted as part of a Royal Decree Law on August 31, 2012; subsequently ratified by parliament):
  - Broader toolkit available: bridge banks, purchase and assumption transactions without shareholders’ or creditors’ approval; FROB can promptly recapitalize ailing institutions and require troubled banks to transfer problem assets to an asset management company.
  - More burden-sharing: FROB can impose losses on holders of hybrid capital and subordinated debt instruments when banks access public financing; mandatory burden-sharing may be preceded by voluntary exercises under FROB steering and has been extended indefinitely.
  - Balance between financial stability and private property rights preserved: judicial review and “no creditor worse off” principle; requires independent valuation when public money is injected.
  - Institutional responsibilities: FROB designated as authority in charge of restructuring and resolving credit institutions, acting in coordination with the BdE; reforms include making FROB fully state-owned so the Deposit Guarantee Fund no longer sits on its board.

### Savings bank reform
- Pre-crisis weaknesses: savings banks had no formal shareholders, limited ability to raise external equity, governance by public and private stakeholders, did not distribute profits, and faced political interference; supervisory responsibilities were split between BdE and regional governments.
- Measures implemented:
  - Spin-off of the vast majority of savings banks’ activity to newly formed commercial banks under exclusive BdE supervision and able to raise capital.
  - Strengthened conflict-of-interest rules and fit and proper requirements.
- Remaining concerns:
  - Savings banks remained major shareholders of some commercial banks; commercial banks resulting from spin-offs still account for roughly one-sixth of the assets of banks included in the stress tests.
  - Concerns whether savings banks have sufficient financial strength to support commercial banks and ensuring arms’ length relationships given political connections.
- December 2013 reforms transforming former savings banks into “banking foundations”:
  - For foundations that control a commercial bank, required measures include:
    - (i) a management protocol describing ownership policies;
    - (ii) investments in a pool of diversified assets;
    - (iii) a reserve fund of liquid assets usable for capital needs of controlled commercial banks, unless implementing a BdE-approved plan to reduce ownership below controlling levels within the next few years.
  - Requirements intended to incentivize foundations to lose control over commercial banks as envisaged in the MoU; implementing regulations and BdE circulars will specify technical details.
- Emphasis: strong and timely implementation is key.

### BdE supervision and supervisory procedures
- Supervisory powers:
  - BdE’s supervisory powers strengthened by gradual transfer of sanctioning and licensing powers to it (Ministry of Economy remains first forum for appeals against BdE sanctions, notwithstanding possibility of court appeals).
  - Recommendation: consider transferring the few remaining financial supervisory powers to the BdE in a manner compatible with forthcoming SSM regulation and establish consultative processes for checks and balances.
- Supervisory procedures:
  - BdE completed a comprehensive review of supervisory procedures in October 2012.
  - Reforms include extension of on-site continuous monitoring to all significant Spanish banks, reorganization of the Directorate General of Banking Supervision, new by-laws, and an internal circular formalizing supervisory planning, on-site inspections, and off-site monitoring.
  - Further reforms await development of the Single Supervisory Mechanism (SSM) and will need adaptation for smooth transition.

### Financial services reform and other initiatives
- Consumer protection: bank resolution law includes provisions strengthening disclosure and suitability obligations of investment services providers.
- Strengthening nonbank financing: November 2012 report with recommendations implemented included an alternative bond market for SMEs (first issuance in December 2013), measures to increase private equity investment, and creation of an inter-agency working group on financial disintermediation.
- BdE recommended banks limit cash dividends in 2013 to no more than 25 percent of profits and published its Mortgage Loan Access Guide in July 2013.
- BdE announced plans in November 2013 to review cooling-off periods for director generals.

### Macro-financial developments and outlook
- Financial markets and real economy:
  - Financial market conditions improved dramatically during the program; risk premia on sovereign and bank bonds down by more than 75 percent since the program started; sovereign yields touched record lows.
  - Output grew by 0.3 percent (q-o-q) in Q4 2013—the second consecutive quarter of growth, ending two years of recession.
  - The seasonally-adjusted unemployment rate began to decline during 2013 but remained very high at 26 percent at end-2013.
  - Exports estimated to have risen by 5½ percent in 2013 and shifted the current account into surplus for the first time in two decades.

### Program impact on financial stability and remaining vulnerabilities
- Program impact:
  - Actions under the program significantly bolstered system capital and liquidity; market funding costs dropped sharply.
  - ECB’s OMT-related announcements were a key factor in improvement in funding costs across stressed euro-area economies.
  - Absence of action would likely have entailed a disorderly unwinding of a significant portion of Spain’s banking system.
- Remaining vulnerabilities:
  - Private credit continues to contract rapidly; contraction is among the fastest in advanced economies.
  - NPLs continue to rise; pre-provision profits for lending and fees are down 21 percent in the first three quarters of 2013 compared to the same period of 2012.
  - Buffers as measured by CT1 ratios are still below-average for advanced Europe, though Spanish banks perform more favorably in leverage ratios.

### Stress test, monitoring tools, and supervisory measures
- Stress test:
  - Complete bank-by-bank stress test conducted in second half of September 2012 — Implemented.
  - The stress test identified capital shortfalls totaling €56 billion (5½ percent of GDP).
- Enhanced monitoring tools developed under the program:
  - Forward-Looking Exercise on Spanish Banks (FLESB): permanent framework to regularly assess solvency with multi-year and top-down elements.
  - Funding and Capital Plans (FCPs): major Spanish banks required to submit FCPs with balance sheet projections through 2015 and quarterly updates; three submissions made with latest based on actual data through Q2 2013.
- Supervisory and MoU implementation highlights:
  - Majority of MoU measures implemented on schedule (examples include BdE Circular 6/2012; RDL 24/2012).
  - Require all Spanish credit institutions to meet a Common Equity Tier 1 ratio of at least 9 percent until at least end-2014 — Effective 1 January 2013 — Implemented.

### Key statistics and financial soundness indicators (selected figures preserved exactly)
- Stress-test identified capital shortfalls: €56 billion (5½ percent of GDP).
- Nearly 200,000 real estate-related assets transferred to SAREB at total transfer price of €51 billion (47 percent of gross book value).
- Government (via FROB) owns 45 percent of SAREB’s equity.
- SAREB initial capital: €4.8 billion (equity €1.2 billion; subordinated debt €3.6 billion).
- Coverage ratio (specific reserves as percent of nonperforming loans): rose to 44 percent at end-September 2013, up from 38 percent a year earlier.
- New loan-loss provisioning: Jan-Sept 2012 = €34.9 billion; Jan-Sept 2013 = €16.3 billion.
- NPL ratio: 13 percent at end-November 2013, up 1½ percentage points since end-June.
- Pre-provisioning profits through 3Q 2013: €23 billion, decreased 8 percent from a year earlier.
- Domestic pre-tax profits first three quarters of 2013: €4.7 billion.
- Net profit on domestic activities, first nine months of 2013: €5.8 billion (change of sign from loss €-15.2 billion one year earlier).
- DTA conversion affects about €30 billion of DTAs (out of total €50 billion), representing about 3 percent of the system’s risk-weighted assets.
- Bank-by-bank asset-class projected losses (Projected losses, 2014, percent):
  - Repossessed assets: 63.4
  - Real estate developers: 42.8
  - Retail mortgages: 4.1
  - Large Corporates: 10.0
  - SMEs: 16.7
- Selected Financial Soundness Indicators (2006–2013 highlights):
  - Regulatory capital to risk-weighted assets (series): 11.9, 11.4, 11.3, 12.2, 11.9, 12.2, 11.5, 12.1
  - Tier 1 capital to risk-weighted assets (series): 7.5, 7.9, 8.2, 9.4, 9.7, 10.3, 9.9, 10.9
  - Non-performing to total loans (series): 0.7, 0.9, 3.4, 5.1, 5.8, 7.8, 10.4, 13.0
  - Use of ECB refinancing (billions of euro, series): 21.2, 52.3, 92.8, 81.4, 69.7, 132.8, 357.3, 206.8
  - Loan-to-deposit ratio (series): 165.0, 168.2, 158.0, 151.5, 149.2, 150.0, 137.3, 124.9

### Policy recommendations and priorities
- Safeguarding and building upon program gains:
  - Continue close monitoring of financial sector health via new tools developed during the program (¶32-36).
  - Focus supervisory actions to bolster solvency while avoiding measures that exacerbate tight credit conditions (include extending limits on cash dividends to 2014 and encouraging banks to issue shares in buoyant equity markets) (¶37-38).
  - Ensure recently adopted DTA conversion mechanism complements, and does not substitute for, bank actions to strengthen balance sheets (¶37-38, Annex 1).
  - Facilitate distressed asset disposal and voluntary debt workouts by ensuring adequate provisioning, reducing tax impediments to asset disposal, and exploring measures to facilitate corporate debt restructuring and debt-for-equity swaps (¶39).
  - In the context of rising NPLs, ensure banks maintain adequate reserve coverage by swiftly provisioning for new credit risk (¶39).
- Savings bank reform: ensure vigorous implementation of the recently adopted savings bank reform (¶20).
- SAREB: continue efforts to devise and implement effective liquidation strategies (¶11).
- Europe’s contribution to recovery:
  - Ease funding costs by making swift progress toward more complete banking union and by more monetary easing (¶40).
  - Ensure the upcoming comprehensive assessment is rigorous and credible (¶40).
  - Keep restructuring plans under state-aid rules under review to ensure flexibility, maximize return on the taxpayer’s investment, and avoid unnecessary constraints on credit provision (¶40).
- Strategies to help ensure banks remain sufficiently capitalized to support recovery:
  - Prioritize absolute increases in core capital via equity issuance and retained earnings.
  - Apply limits on cash profit distributions (dividends and equivalent mechanisms) to raise retained capital; BdE recommended cash dividends in 2013 not exceed 25 percent of attributable consolidated profits and extension to 2014 is recommended.
  - Remove barriers and improve incentives for distressed-asset disposal, debt restructuring, and insolvency efficiency.
  - Consider strengthening supervisory powers to impose dividend limits on a macroprudential basis.

*Source: PREFACE and chapters from IMF staff report, _cr1459 (IMF staff compilation).*

### PREFACE

### PREFACE

### Executive summary
- Spain undertook a major program of financial sector reform during the last 18 months with support from the European Stability Mechanism (ESM).  
- On June 25, 2012, Spain requested financial assistance from the European Financial Stability Facility (EFSF) to support the ongoing restructuring and recapitalization of its financial sector.  
- The Eurogroup approved this support; the Memorandum of Understanding on Financial Sector Policy Conditionality (MoU) was dated July 20, 2012.  
- In November 2012, responsibility for providing financial support was transferred from the EFSF to the ESM without this assistance gaining seniority status.  
- The program concluded as scheduled in January 2014.  
- IMF staff provided monitoring via quarterly reports at the request of the Ministry of Economy and Competitiveness, the Bank of Spain (BdE), and the European Commission (EC). This is the fifth and final such report. IMF staff monitoring was conducted as a form of technical assistance under Article V, Section 2(b), of the IMF’s Articles of Agreement. Views expressed are those of IMF staff and do not necessarily represent those of the IMF’s Executive Board.

### Program objectives and strategy
- Objective: increase the long-term resilience of the banking sector as a whole, restoring its market access and supporting economic recovery by promoting financial stability.  
- Strategy (three pillars):  
  - Strengthen system capital by (a) identifying undercapitalized banks via an independent asset quality review and stress test and (b) requiring banks to address shortfalls, including bail-ins of junior debt, injections of public capital, and restructuring/resolution where necessary.  
  - Reduce uncertainty and boost liquidity by segregating the most illiquid and difficult-to-value assets (REDs and foreclosed assets) of state-aided banks into a newly-created asset management company (SAREB).  
  - Reform frameworks for regulation, supervision, and resolution to facilitate the clean-up and better promote financial stability going forward.  
- The strategy was consistent with IMF staff’s June 2012 Financial Stability Assessment Program (FSAP) and Article IV recommendations.

### Key outcomes and macro-financial effects
- All specific program measures are now complete. Key actions implemented included:  
  - Identifying undercapitalized banks via a comprehensive asset quality review and independent stress test.  
  - Requiring banks to address capital shortfalls, including bail-ins of junior debt and injections of public capital where necessary.  
  - Segregating state-aided banks’ most illiquid assets into SAREB to reduce uncertainty and boost liquidity.  
  - Adopting and beginning implementation of restructuring or resolution plans for state-aided banks, with divestment of government ownership envisaged by no later than end-2017.  
  - Reforming Spain’s frameworks for bank resolution, regulation, and supervision.  
- System-wide capital, liquidity, and loan-loss provisioning were significantly strengthened.  
- The stress test identified capital shortfalls totaling €56 billion (5½ percent of GDP).  
- Financial market improvements during the program: risk premia on external borrowing by Spain’s banks and sovereign down more than 75 percent; equity prices up more than 50 percent during the program period.  
- Spain’s real economy: output growing and the unemployment rate falling.

### Remaining challenges and risks
- System-wide profits through the first three quarters of 2013 moved back into the black in part due to one-off factors; core pre-provision profits continue to decline.  
- The nonperforming loan (NPL) ratio is still rising (though at a declining pace).  
- Private-sector deleveraging and fiscal consolidation remain headwinds for growth and bank profitability, potentially slowing credit recovery.  
- Uncertainties include the methodology of the Single Supervisory Mechanism’s (SSM) forthcoming comprehensive assessment and the unwinding of the state’s ownership interest in intervened banks over the next few years.  
- Upside outcomes are possible, especially with strong policy implementation in Spain and Europe.

### Progress on program implementation (high-level)
- The authorities have steadfastly implemented the program (Annex 3).  
- Ten banks were identified in the September 2012 independent stress test as having capital shortfalls relative to a 6 percent CT1 benchmark by end-2014 under an adverse scenario.  
- Banks were grouped into: Group 1 (state-controlled and unable to fill needs on their own), Group 2 (unable to fill shortfalls on their own), and Group 3 (able to fill shortfalls on their own).  
- For Group 1 and Group 2 banks, EC-approved restructuring or resolution plans were adopted under EU state-aid rules. These multi-year plans include management overhauls, lending restrictions, and cost-cutting. Divestment of government ownership is envisaged by no later than end-2017.  
- Measures to fill the €56 billion shortfall were completed mostly in Q1 2013. Approximately 70 percent of the shortfall was filled by public capital injections, 23 percent by bailing-in junior debt, and 6 percent by private capital injections.  
- As a result of recapitalization, the state (via the FROB) became the controlling owner of a significant part of the banking sector (holding an estimated 18 percent of system loans). The FROB sold NCG to the Banesco group in December 2013 for €1 billion, with payments spread over several years.

### SAREB
- SAREB (asset management company) was created to segregate illiquid and difficult-to-value assets (REDs and foreclosed assets) from state-aided banks.  
- SAREB made major progress in 2013 in developing its organization and accelerating asset liquidation.  
- Challenges for SAREB: property price declines and deterioration of loans’ credit quality, which pose risks to SAREB’s cash flow and profitability. Implementation of effective liquidation strategies will be critical.

### Summary of recommendations
- Safeguarding and building upon the program’s gains:  
  - Continue close monitoring of financial sector health, including via new tools developed during the program (¶32-36).  
  - Focus supervisory actions to bolster solvency while avoiding measures that exacerbate tight credit conditions. This includes extending limits on cash dividends to 2014 and encouraging banks to issue shares in buoyant equity markets (¶37-38).  
  - Ensure the recently adopted DTA conversion mechanism complements, and does not substitute for, bank actions to strengthen balance sheets (¶37-38, Annex 1).  
  - Facilitate distressed asset disposal and voluntary debt workouts by ensuring adequate provisioning, reducing tax impediments to asset disposal, and exploring measures to facilitate corporate debt restructuring and debt-for-equity swaps (¶39).  
  - In the context of rising NPLs, ensure banks maintain adequate reserve coverage by swiftly provisioning for new credit risk (¶39).  
- Savings bank reform: Ensure vigorous implementation of the recently adopted savings bank reform (¶20).  
- SAREB: Continue efforts to devise and implement effective liquidation strategies (¶11).  
- Europe’s contribution to recovery:  
  - Ease funding costs by making swift progress toward more complete banking union and by more monetary easing (¶40).  
  - Ensure the upcoming comprehensive assessment is rigorous and credible (¶40).  
  - Keep restructuring plans under state-aid rules under review to ensure flexibility, maximize return on the taxpayer’s investment, and avoid unnecessary constraints on credit provision (¶40).

*Source: PREFACE, _cr1459 (IMF staff report).*

### 6.      A second key element of the program was the segregation of state-aided banks

### 6.      A second key element of the program was the segregation of state-aided banks

### Segregation of REDs and foreclosed assets into SAREB
- All state-aided banks were required to transfer their REDs and foreclosed assets over a minimum size to SAREB in exchange for government-guaranteed senior bonds issued by SAREB.
- Nearly 200,000 real estate-related assets were transferred to SAREB at a total transfer price of €51 billion, or 47 percent of these assets’ gross book value.
- The government owns (via the FROB) 45 percent of SAREB’s equity.
- SAREB completed due diligence on 80 percent of its assets; the due diligence found that the average market value of SAREB’s assets was broadly similar to the average transfer price.

### Intended effects on the banking system
- Liquidity
  - The transfer boosted the banking system’s liquidity because the transferred assets had little collateral value while SAREB’s bonds can be used as collateral in the Eurosystem’s repos and in the Spanish Treasury’s liquidity management operations (the use of the bonds as repo collateral with private counterparties has been negligible).
  - The transfer avoided further large bank losses due to forced “fire sales” of these relatively illiquid REDs and foreclosed assets.
- Banks’ valuation
  - Transfer reduced uncertainty regarding asset values, expected to help lower banks’ funding (and hence lending) rates and increase attractiveness of state-owned banks to potential buyers.
- Solvency
  - Assets were generally transferred to SAREB at prices close to the valuations used to calculate banks’ capital shortfalls under the adverse scenario in the Oliver Wyman stress tests; the transfer did not have material effects on banks’ projected capital shortfalls.
  - Exchange of assets for safer SAREB bonds reduced banks’ risk-weighted assets, lowering the amount of capital needed to reach the target capital ratio for most banks (effect described as modest).
- Focus
  - Transfer of distressed asset classes should enable management of state-aided banks to better focus on core banking activities.
- Real estate market
  - Gradual liquidation of SAREB’s assets may contribute to the reactivation and normalization of Spain’s real estate market.

### SAREB financial performance and developments (2013–2014)
- 2013
  - SAREB estimates it registered a loss in 2013, an outcome expected given start-up costs; audited accounts for 2013 were not yet available.
  - Drivers of the 2013 loss:
    - Slow pace of property sales in H1 2013 due to worse-than-expected liquidity and prices in the real estate market, time required to develop and deploy commercial strategies, and a difficult start for servicing arrangements.
    - Sales accelerated during 2013, but profit margins declined due to falling real estate prices and introduction of wholesale deals with narrower profit margins than retail transactions.
  - Expenses mostly comprised debt service, maintenance of foreclosed assets, capital expenditure, and asset management fees.
  - SAREB expected total cash inflows in 2013 to have exceeded operating expenses, debt service, and credit line drawdown, enabling redemption of part of its senior debt and only partial rollover of bonds maturing in late 2013–early 2014.
- 2014 outlook
  - SAREB expects to increase its sales volume in 2014; profitability will depend heavily on the evolution of house prices.
  - Supporting factors for profitability include acceleration of asset liquidation, full deployment of commercial strategies developed in 2013, and lower debt-servicing costs as SAREB starts to repay its bonds and benefits from improvement in Spain’s sovereign spreads during the last year.
  - Primary risk: uncertainty regarding the future path of real estate prices, which will become more important over time as REDs increasingly become nonperforming and profitability and cash flows depend more on sale of collateral.
  - Recommendation: SAREB should continue devising and implementing effective liquidation strategies geared toward supporting cash flow and profitability and adjust nimbly to changing macro and market conditions.

### Fiscal and contingent liability considerations
- The transfer increased the government’s contingent liabilities due to government guarantees on SAREB’s bonds.
- Ensuring sound management of SAREB’s assets is key to ensuring a net positive public benefit.

### Structural reforms to enhance resilience
- Capital requirements
  - The minimum capital requirement during 2013-14 was increased to 9 percent CT1 (EBA definition).
- Bank resolution (law adopted as part of a Royal Decree Law on August 31, 2012; subsequently ratified by parliament)
  - Broader toolkit
    - Authorities can deploy a wider range of tools quickly and effectively, including special resolution techniques such as bridge banks and purchase and assumption transactions without shareholders or creditors’ approval.
    - The FROB can promptly recapitalize ailing institutions, including through emergency procedures, and can require troubled banks to transfer problem assets to an asset management company.
  - More burden-sharing
    - When banks access public financing, the FROB can impose losses on holders of hybrid capital and subordinated debt instruments.
    - Mandatory burden-sharing may be preceded by voluntary exercises under FROB steering; these powers were initially set to expire on June 30, 2012, but have since been extended indefinitely.
  - Balance between financial stability and private property rights
    - Law preserves judicial review and introduces the “no creditor worse off” principle.
    - Requires an independent valuation of banks’ assets and liabilities whenever public money is injected.
  - Institutional responsibilities
    - The law designates the FROB—acting in coordination with the BdE—as the authority in charge of restructuring and resolving credit institutions, separating supervisory (BdE) and resolution (FROB) competencies.
    - Reforms to FROB governance include making it fully state-owned so the Deposit Guarantee Fund no longer sits on its board.

### Savings bank reform
- Pre-crisis weaknesses
  - Savings banks had no formal shareholders, limited ability to raise external equity, were governed by public and private stakeholders, did not distribute profits, and were subject to political interference; supervisory responsibilities were split between BdE and regional governments.
- Measures prior to and under the program
  - Spin-off of the vast majority of savings banks’ activity to newly formed commercial banks placed under exclusive BdE supervision and able to raise capital.
  - Strengthened conflict-of-interest rules and fit proper requirements to reduce political interference.
- Remaining concerns
  - Savings banks remained major shareholders of some commercial banks; commercial banks resulting from spin-offs still account for roughly one-sixth of the assets of banks included in the stress tests.
  - Issues:
    - Whether savings banks would have sufficient financial strength to provide capital to commercial banks.
    - Ensuring an arms’ length relationship given political connections.
- December 2013 reforms transforming former savings banks into “banking foundations”
  - For foundations that control a commercial bank, required measures include:
    - (i) a management protocol describing ownership policies;
    - (ii) investments in a pool of diversified assets;
    - (iii) a reserve fund of liquid assets usable for capital needs of controlled commercial banks, unless implementing a BdE-approved plan to reduce ownership below controlling levels within the next few years.
  - Requirements are intended to incentivize foundations to lose control over commercial banks as envisaged in the MoU; implementing regulations and BdE circulars will specify additional technical details.
- Implementation emphasis
  - Strong and timely implementation is key, including sufficiently stringent requirements, steady progress toward reducing stakes to non-controlling levels, monitoring concerted exercise of shareholding rights by different foundations, and monitoring lending to related parties by commercial banks with significant foundation stakes.

### BdE supervision and supervisory procedures
- Supervisory powers
  - BdE’s supervisory powers strengthened by gradual transfer of sanctioning and licensing powers to it (Ministry of Economy remains first forum for appeals against BdE sanctions, notwithstanding possibility of going to court).
  - Recommendation: consider transferring the few remaining financial supervisory powers to the BdE in a manner compatible with forthcoming SSM regulation and establish consultative processes for checks and balances.
- Supervisory procedures (October 2012 review)
  - BdE completed a comprehensive review of supervisory procedures in October 2012.
  - Implemented reforms include extension of on-site continuous monitoring to all significant Spanish banks, reorganization of the Directorate General of Banking Supervision, new by-laws, and an internal circular formalizing procedures for supervisory planning, on-site inspections, on-site continuous monitoring, and off-site monitoring.
  - Further reforms await development of the Single Supervisory Mechanism (SSM) and will need adaptation to SSM procedures for a smooth transition.

### Financial services reform and other initiatives
- Consumer protection
  - The bank resolution law includes provisions strengthening disclosure and suitability obligations of investment services providers, e.g., additional information for placement of securities other than stocks by credit institutions and documented actions with written evidence when providing investment advice.
- Strengthening nonbank financing
  - November 2012 report with recommendations to strengthen nonbank financial intermediation; measures implemented include regulatory changes to allow an alternative bond market for SMEs (first issuance in December 2013), measures to increase private equity investment, and creation of an inter-agency working group on financial disintermediation.
- Other initiatives not explicit MoU commitments
  - BdE recommended banks limit cash dividends in 2013 to no more than 25 percent of profits.
  - BdE published its Mortgage Loan Access Guide in July 2013 to help educate and protect mortgage borrowers.
  - In November 2013, the BdE announced plans to review cooling-off periods for director generals.

### Macro-financial developments and outlook
- Financial markets and real economy
  - Financial market conditions improved dramatically during the program; risk premia on sovereign and bank bonds down by more than 75 percent since the program started; sovereign yields touched record lows.
  - Output grew by 0.3 percent (q-o-q) in Q4 2013—the second consecutive quarter of growth, ending two years of recession.
  - The seasonally-adjusted unemployment rate began to decline during 2013 but remained very high at 26 percent at end-2013.
  - Exports estimated to have risen by 5½ percent in 2013 and shifted the current account into surplus for the first time in two decades.

*IMF staff compilation from the chapter text*

### 27.      Efforts under the program have substantially lessened risks emanating from banks

### 27. Efforts under the program have substantially lessened risks emanating from banks

### Program impact on financial stability
- Actions under the program have significantly bolstered the system’s capital and liquidity, and market funding costs have dropped sharply.
- The ECB’s OMT-related announcements have been a key factor in the improvement in funding costs across stressed euro-area economies.
- Isolating Spain’s program effect on funding-cost declines is difficult relative to the counterfactual; absence of action would likely have entailed a disorderly and disruptive unwinding of a significant portion of Spain’s banking system, with heavy costs for bank depositors, further deposit outflows, and even sharper tightening of credit conditions.
- The strong reduction in risk premia across stressed euro-area economies since mid-2012 suggests an important positive impact from the package of crisis measures adopted during this period (e.g., OMT, SSM), to which Spain’s financial sector program contributed.

### Remaining vulnerabilities and areas of concern
- Credit contraction and lending conditions
  - Credit to the private sector continues to contract rapidly; the contraction is almost certainly less rapid than it would have been absent program actions and partially reflects unavoidable deleveraging pressures.
  - The pace of credit contraction is one of the fastest amongst advanced economies and is significant even in asset classes not related to the construction sector.
  - Tight credit conditions partly reflect weak credit demand, elevated default risk amidst recession, and sub-optimal policies related to incomplete banking union contributing to euro-area financial fragmentation.
- Asset quality and profitability
  - Nonperforming loans (NPLs) continue to rise; NPL stock is a lagging indicator and remains an area of concern.
  - Pre-provision profits from lending and fees are down 21 percent in the first three quarters of 2013 compared to the same period of 2012.
  - Profitability has improved to a positive return on assets (RoA), but pre-provision profits in 2013 were boosted by some non-recurring items (e.g., capital gains on bonds) and further cost reduction is needed.
- Capital and buffers
  - Buffers as measured by CT1 ratios are still below-average for advanced Europe, though Spanish banks perform more favorably in terms of leverage ratios.
  - Europe: Core Tier 1 and Leverage Ratios (percent, as of end-June 2013): 12.0 3.9 10.1 4.8
    - (As presented in the source: the four numeric values appear in sequence under the CT1 ratio / Leverage ratio and Total, excl. Spain / Spain labels.)

### Box 1 — Program’s main achievements: preserving financial stability
- Bank capital and liquidity
  - Bank capital has been bolstered since 2011 in terms of both CT1 and leverage ratios due to recapitalization measures, increased profit retention, recent equity issuances, and shrinking denominators.
  - Liquidity has been boosted by capital injections in the form of ESM bonds and the transfer of illiquid assets to SAREB in exchange for SAREB bonds; both bond types can be used as collateral for ECB or private-sector borrowing.
  - Banks now have substantial collateral space that could be used for ECB borrowing, if necessary.
- Asset quality and provisioning
  - The stock of NPLs continues to rise (though recently at a lower speed); the coverage ratio has improved due to stepped-up provisioning.
- Funding and market conditions
  - Banks’ funding structures became more stable due to halting of deposit outflows at the system level; stabilization of deposits has allowed banks to reduce reliance on volatile wholesale funding.
  - Market funding conditions improved dramatically: risk premia on unsecured bank debt down more than 75 percent, deposit rates down in line with euro-area trends, and equity prices up sharply.
  - Example: Bankia’s common stock price more than doubled since its May 2013 restructuring; in January 2014 it issued unsecured bank debt at 5-year maturity and yield of 3.6 percent.
- Profitability and costs
  - The sector returned to a positive RoA; pre-provision profits are on a downward trend partly due to asset shrinkage from deleveraging and were supported in 2013 by non-recurring capital gains on bonds.
- Summary indicator table (2011 = 100; direction of progress as presented)
  - Stock of NPLs: 83 100 114 — Negative
  - Coverage ratio 1/: 87 100 104 — Positive
  - Yearly provisions 2/: 25 100 29 — Positive
  - Pre-provision profits 3/: 88 100 94 — Negative
  - Cost-Income: 110 100 103 — Negative
  - RoA: Zero Negative Positive Positive
  - Loan-to-Deposit: 109 100 91 — Positive
  - ECB refinancing 4/: 37 100 74 — Positive
  - Customer deposits 5/: 111 100 101 — Positive
  - Core Tier 1 ratio: 99 100 119 — Positive
  - Leverage ratio 6/: 104 100 111 — Positive
  - Household loans: 105 100 96 — Negative
  - Corporate loans 7/: 120 100 89 — Negative
  - (Sources for table entries: BdE, Bloomberg. Footnotes retained as in source: 1/ Specific credit reserves, as percent of nonperforming loans. 2/ Yearly provisions for loan losses, as percent of loans. 3/ Latest refers to September 2013, annualized. 4/ As percent of banks' assets. 5/ Includes promissory notes (pagarés). 6/ Core Tier 1 equity, as percent of assets. 7/ Excludes loans to construction sector. 8/ Basis points, euro senior 5-year.)
- Bank-group developments
  - Balance-sheet trends held broadly for state-aided banks (G1 and G2) and those not receiving state aid (G0 and G3).
  - G1 banks’ capital ratios and profits improved more than other banks; much of capital-raising was used to bolster provisions.

### Box 2 — Would slower private-sector deleveraging be good or bad? (analysis and scenario)
- Main tradeoffs
  - Argument for slower deleveraging: would boost aggregate demand, facilitating higher private consumption and investment, and faster closing of the wide output gap; private agents do not internalize the macro externality.
  - Argument against slower deleveraging: private-sector debt levels remain high; further adjustment may be needed before reaching “normal” levels agents will maintain.
- Staff assessment: on balance, supporting growth and rebalancing its sources are higher priorities now.
- Key factual points
  - Nonfinancial private sector flow of net financial borrowing is nearly minus 7 percent of GDP (i.e., the private sector is lending to other sectors).
  - The private-sector debt ratio is falling steadily and deleveraging could be slowed while keeping the debt ratio on a downward path.
  - Markets are likely to view less rapid credit contraction and faster fiscal improvement as supportive of financial stability, possibly lowering Spain’s risk premia and external borrowing costs.
- Quantitative scenario (as presented)
  - Suppose monetary easing induces increased borrowing of 5 percentage points of GDP (pp), used to fund: 3 pp of increased spending on domestically produced goods, 1 pp of higher tax payments, and 1 pp of imports.
  - Using standard rules-of-thumb, the scenario implies: output would rise by 3 percent; unemployment would fall by more than 2 percentage points; the fiscal deficit would improve by 1 pp; the current account would fall by 1 pp (but remain near balance); the nonfinancial private-sector’s net financial saving would fall by 2 pp to 5 percent of GDP (still enough to keep the private-sector’s net financial debt falling rapidly as a percent of GDP).
  - The scenario is judged to be a favorable tradeoff, even before second-round effects from lower external borrowing costs due to improved market confidence.
- Policy recommendations to reduce the trade-off and achieve “win-win” outcomes (as recommended by staff)
  - Encourage increased reliance on equity funding (e.g., banks should be encouraged to build core capital in absolute terms via dividend restraint and share issuance).
  - Reduce real interest rates (measures include more monetary easing by the ECB and further progress toward banking union).
  - Reform insolvency procedures to improve resolution of debt distress and boost demand while accelerating deleveraging.
  - Boost net external demand through continued monetary support and labor market reforms.

*Sources: BdE; Bloomberg; EBA; SNL; ECB; IMF staff calculations.*

### Box 3. Credit Supply Shocks and GDP Growth in Spain

### Box 3. Credit Supply Shocks and GDP Growth in Spain

### Empirical assessment and identification
- Analysis based on a parsimonious VAR at quarterly frequency including:
  - real GDP growth,
  - expected GDP growth over the next quarter,
  - changes in bank lending standards on loans to enterprises.
- Identification rule: shocks that move lending standards and contemporaneous actual or expected GDP growth within the same quarter are not interpreted as credit supply shocks. Only shocks that cause an immediate change in lending standards without a contemporaneous impact on current or expected GDP growth are identified as credit supply shocks.
- Identification limitations noted:
  - The restriction may be too strong: a credit supply shock realized early in a quarter may already affect GDP or expectations within the same quarter, introducing a downward bias and yielding a conservative assessment of credit supply shocks.
  - Current and expected GDP growth may not fully capture banks’ perceptions of borrowers’ creditworthiness, risking an overestimate of credit supply shocks.
  - Omitted variable bias is possible due to the limited time-series of lending standards (available only from 2003 onwards), preventing a larger VAR.

### Estimated impact on GDP
- A one standard deviation negative shock to credit supply:
  - has a relatively muted effect in the first year, but grows over time,
  - leads to an overall reduction in GDP by more than 1.5 percent (cumulative impact).
  - Confidence bars indicate the effect is statistically different from zero.
- Cumulative contribution of all credit supply shocks since end-2007:
  - Spain suffered less from credit supply shocks than France and Germany during 2008, consistent with lower exposure of Spanish banks to US asset-backed securities.
  - While credit conditions in France and Germany started to improve in 2009, tighter credit supply contributed to a further large reduction in Spanish GDP in both 2009 and 2010 as sovereign debt market pressures intensified.
  - The negative impact of credit supply on GDP began to moderate in the second half of 2012.
  - As of the report’s date, GDP remains about 5 percent below the level in the first quarter of 2008.

### Macro context and outlook implications
- Ongoing adjustments expected to restrain recovery:
  - Growth to continue receiving impetus from expanding net exports.
  - Ongoing private-sector deleveraging, fiscal consolidation, and house price adjustment likely to weigh on domestic demand.
- Near-term and medium-term outlook:
  - IMF staff project a moderate pace of recovery over the medium term (Table 1 referenced).
  - Cumulative growth over 2012-14 expected to be similar to the base case of the September 2012 stress test.
  - Some variables (e.g., unemployment) are running closer to the adverse case, while others (e.g., house prices) are between base and adverse scenarios.

### Risks
- Downside risks:
  - Reversal of recent improvements in market sentiment (e.g., faster-than-expected withdrawal of monetary support; policy slippages).
  - Larger-than-expected headwinds from fiscal consolidation and deleveraging, causing more extended weak growth and rising NPLs.
  - Turmoil in emerging markets damping profits from abroad for Spain’s largest banks.
  - Uncertainties about the SSM’s comprehensive assessment methodology and the unwinding of state ownership in intervened banks.
  - With moderate capital buffers, banks may respond to adverse shocks with excessive credit contraction, reinforcing stagnation.
- Upside risks:
  - High-frequency indicators (e.g., PMI) suggest near-term growth could surprise to the upside, lowering borrowing costs for banks and sovereigns if reform momentum continues.

### Policy implications and recommended actions
- Strong financial sector policies at European and Spanish levels to reduce downside risks and promote recovery, including:
  - continued pro-active monitoring and supervision to identify and address risks early and ensure adequate provisioning;
  - encouraging banks to bolster capital in ways that do not exacerbate already-tight credit conditions;
  - reducing impediments to asset disposal and corporate debt restructuring;
  - further reducing funding costs and easing credit conditions via swift progress toward more complete banking union and more monetary easing by the ECB.
- Objective: shift from a vicious cycle (credit contraction, weaker growth, higher funding costs) to a virtuous cycle (lower funding costs, stronger capital, easier credit, higher growth and confidence).

### Enhanced monitoring tools developed under the program
- Forward-Looking Exercise on Spanish Banks (FLESB):
  - Permanent framework to regularly assess solvency; flexible to incorporate different macro scenarios; granular top-down approach with some bottom-up elements; multi-year timeframe.
  - Intended to help prepare Spanish banks for the SSM/EBA balance sheet review and stress test and to assess non-credit risks not covered by FLESB.
- Funding and Capital Plans (FCPs):
  - Major Spanish banks required to submit FCPs (balance sheet projections through 2015) and update quarterly; three submissions made with latest based on actual data through Q2 2013.
  - Observations on latest FCPs:
    - Banks’ projections for credit contraction are close to IMF staff projections.
    - Banks envisage a rapid decline in exposure to the sovereign and in ECB financing, a divergence from staff projections.
    - Staff view a rapid decline in banks’ holdings of public debt as unlikely given projected growth in the stock of public debt over the next two years.
    - Banks’ exposure to the sovereign through the first nine months of 2013 was significantly underestimated compared to initial FCP forecasts.
    - Domestic banks reduced holdings of public debt in the second half of 2013, possibly reflecting one-off effects ahead of the SSM comprehensive assessment.

### Sovereign debt holdings and implications (Box 4)
- Stylized facts on Spanish banks’ holdings of domestic sovereign debt:
  - Spanish sovereign debt as a share of banks’ assets: 9 percent as of end-October 2013.
  - Spanish sovereign debt as a share of banks’ assets: 11 percent at end-1998 (pre-euro comparison).
  - Spanish banks’ share of all Spanish sovereign debt is still near 2003 levels despite the run-up during the crisis; share remains well below late 1990s levels.
  - From a cross-sectional perspective, holdings as a share of capital are only moderately above the eurozone median; higher levels observed in some advanced economies (e.g., Japan).
  - Trend toward higher domestic sovereign holdings observed across many advanced economies during the crisis due to:
    - rapid increase in supply of public debt relative to private debt;
    - more demanding liquidity requirements;
    - use of sovereign debt as collateral for central bank financing;
    - increased home bias from ringfencing and regulatory treatment and higher sovereign default risk for foreign banks.
- Uncertainty about future steady-state of holdings:
  - Some forces may ease as crisis recedes and sovereign risk premia decline; others (higher supply of public debt relative to private debt; liquidity requirements under Basel III) likely to persist or intensify.
  - Domestic banks’ reduction of sovereign holdings in the second half of 2013 may reflect one-off adjustments ahead of the SSM comprehensive assessment rather than a durable reversal.
- Policy implication:
  - If banks reduce sovereign holdings less rapidly than in FCPs and offset by lower private-sector credit, private-sector credit growth could be nearly 7 percent lower than envisaged in FCPs in 2015, with adverse headwinds for recovery.
  - To avoid excessive credit contraction, ECB repayments may need to be slower than projected in the FCPs, requiring continuation of supportive ECB policies and avoiding stigma from use of ECB facilities.

*Prepared by Andrea Pescatori and Damiano Sandri; Box 3. Credit Supply Shocks and GDP Growth in Spain.*

### 37.      Strategies to help ensure that banks remain sufficiently capitalized to support

### 37.      Strategies to help ensure that banks remain sufficiently capitalized to support recovery

### Boosting capital to facilitate lending
- Supervisory actions should prioritize measures that boost banks’ core capital in absolute terms (the numerator of banks’ capital ratios) over measures that reduce lending (the denominator) or “optimize” risk weights.
- Recommended measures for banks:
  - Take advantage of buoyant equity markets to increase share issuance.
  - Bolster profitability through further gains in operational efficiency.
  - Restrain cash dividends and cash remuneration.
- Specific policy action noted:
  - The BdE issued a letter to banks in June 2013 recommending that they limit dividend distributions and that, in any event, cash dividends in 2013 not exceed 25 percent of attributable consolidated profits.
  - The recommendation is welcome and should be extended to 2014.
  - Strengthening the BdE’s powers to limit dividend distribution (rather than to simply recommend limits) on a macroprudential basis would further support this objective.

### Facilitating distressed asset disposal and debt workouts
- Accelerated asset disposal could free capital space on banks’ balance sheets for new lending to the growing parts of the economy.
- Increased voluntary workouts of distressed debt will accelerate reduction of debt overhang.
- Supervisory and policy priorities:
  - Avoid artificial hindrances to distressed asset disposal and debt workouts.
  - Ensure banks adequately provision for loan losses so they do not delay asset disposal simply to avoid recognizing losses.
  - Strong implementation of efforts to ensure accurate classification of refinanced and restructured loans (Annex 1) is key.
  - Explore tax reforms to further facilitate asset disposal while improving tax efficiency (e.g., replacing real estate transaction taxes with higher taxes on property values or with other revenue measures that are more efficient than transaction taxes).
  - Explore reforms to improve the speed and efficiency of insolvency proceedings and to promote voluntary debt restructurings and debt-for-equity swaps, including via a broad review of related financial, commercial, and fiscal laws and regulations.

### Key policy recommendation summary
- Prioritize absolute increases in core capital via equity issuance and retained earnings.
- Apply limits on cash profit distributions (dividends and equivalent mechanisms) to raise retained capital.
- Remove barriers and improve incentives for distressed-asset disposal, debt restructuring, and insolvency efficiency.
- Consider strengthening supervisory powers to impose dividend limits on a macroprudential basis.

### Box 5 — Dividend Limits: Questions and Answers (condensed findings)
- Rationale for limits:
  - Limiting cash dividends increases banks’ capital through higher profit retention and avoids incentives to accelerate credit contraction because the limit is a function of profits rather than assets.
  - A dividend limit can be complemented by measures encouraging share issuance and operational efficiency.
  - One variation: set the limit as a percent of the absolute increase in a bank’s regulatory capital (effectively similar to a percent of profits, but excluding items that increase profits but not regulatory capital and encouraging new share issuance).
- Use elsewhere:
  - The U.S. Federal Reserve expects “conservative common dividend payout ratios. In particular, requests that imply common dividend payout ratios above 30 percent of projected after-tax net income ... will receive particularly close scrutiny.”
- Scope of “dividend limit”:
  - Term used as shorthand for limits on all cash profit distributions, direct or indirect (cash dividends, share buybacks, large bonus payments to senior bank employees who are also major shareholders, or other means).
- Fairness and signaling considerations:
  - Dividend limits differ across banks in line with profits and avoid incentivizing credit contraction; profitability can complement capital-asset ratio measures.
  - Applying a uniform, publicly announced limit to all banks avoids adverse firm-specific signaling that can arise from unilateral dividend cuts and resolves a coordination “prisoners’ dilemma” among banks.
  - Alternative: banks could specify dividend policy as a percentage of a relatively stable indicator (e.g., core profits or capital), possibly using a moving average to smooth payouts.
- Effects on equity issuance:
  - A successful dividend limit will increase bank equity, which can reduce the marginal return on equity and the effective subsidy from government guarantees.
  - For a given amount of bank equity, a temporary dividend limit should not increase the cost of issuing shares by standard economic reasoning (example illustrating identical capital paths under different dividend/share issuance mixes).
  - Market imperfections (taxes, transaction costs, inadequate aggregate demand, asymmetric information) could make dividend limits raise equity values because retention avoids transaction costs, dividends may be taxed at a higher effective rate than capital gains, macro improvements can raise equity values, and signaling rigidities can be reduced.
  - Alternatively, valuations could fall if the limit is perceived as an adverse systemic signal, but such effects are common to public prudential measures and may be offset by improved confidence.
  - Experience with the 2013 limit: in the 3-day window surrounding the BdE announcement on June 27, 2013, equity prices of Spain’s largest private banks were essentially unchanged relative to European peers; since then, Spanish bank equities are up more than 40 percent and have outperformed peers by more than 30 percent.
  - Conclusion: any effect on the ability to issue equity seems unlikely to be highly negative and could be positive.

### Europe’s contribution to recovery (priority actions)
- Monetary easing and more complete banking union:
  - More monetary easing to raise prospects of achieving the ECB’s inflation objective and swift progress toward more complete banking union would ease borrowing and debt-servicing costs for households, businesses, and banks, and boost domestic demand and net exports.
- Comprehensive assessment:
  - The SSM’s forthcoming comprehensive assessment is an important opportunity to reduce uncertainty about the health of European banks, ensure adequate bank capital to support recovery, and promote confidence.
  - The exercise should be credible and rigorous, incorporating lessons from past asset quality reviews and EBA stress tests, and designed to avoid incentives that prolong the credit crunch in peripheral countries.
- Restructuring plans:
  - EC-approved restructuring plans for intervened banks should be kept under review to ensure they optimize the risk-adjusted return on the taxpayer’s investment, avoid unnecessary constraints on credit provision, and allow appropriate adjustments to changing circumstances.

### Annex 1 — Banking sector developments: Asset quality (key statistics and findings)
- Overall summary:
  - Banking trends during the first nine months of 2013: return to profit (driven by a slower pace of provisioning for credit losses while revenues remain under pressure), better funding and liquidity conditions, and a further rise in NPLs.
  - Spain’s banking system is stronger and safer than before, but vulnerabilities remain. Priority: maintain adequate capitalization and swiftly provision for new credit risk.
- NPLs and coverage:
  - The NPL ratio reached 13 percent at end-November 2013, up 1½ percentage points since end-June.
  - The rising ratio was partly due to a falling stock of loans as banks delever, but a rising numerator accounted for 72 percent of the increase.
  - The rise in NPL ratios is broad-based across types of loans and banks; NPL ratios for real estate development loans are much higher than for mortgages.
  - Coverage (specific credit reserves as percent of nonperforming loans) has improved in 2013 despite the rise in NPLs.
  - New loan-loss provisioning: Jan-Sept 2012 = €34.9 billion; Jan-Sept 2013 = €16.3 billion.
  - Coverage ratio (specific reserves) rose to 44 percent at end-September 2013, up from 38 percent a year earlier.
- Reclassification of refinanced/restructured loans:
  - As part of the MoU, banks are requested to disclose data on refinanced (or restructured) loans.
  - BdE asked banks to review classification following clarification in May 2013 and to provision accordingly.
  - Based on preliminary data by end-September 2013, the BdE estimates the reclassification exercise will increase NPLs by €20.6 billion, substandard loans by €3.7 billion, and provisions by around €5 billion.
  - Final numbers will not be available before March 2014, following further review by the BdE.
- Impairment rates and stress test comparisons:
  - Staff estimates based on data covering about 90 percent of Spain’s banking system indicate impairment rates for most asset categories at end-September 2013 were generally close to the impairment rates expected in the stress test’s base-case scenario.
  - Exception: RED loans are already provisioned at close to the adverse scenario if generic provisions on performing RED loans are included (according to RDL 18/2012).
  - Repossessed assets show the highest gap between impairments as of end-September 2013 and the stress test estimate for end-2014.
- Refinanced/restructured loans: stock before and after reclassification (billions of euros)
  - Starting stock, March 2013 — Normal: 73.6; Substandard: 37.2; NPL: 71.7
  - Stock after reclassifications, September 2013 — Normal: 48.2; Substandard: 40.9; NPL: 92.2
- Uncertainty:
  - Much uncertainty remains regarding the eventual extent of credit quality deterioration, which is likely to continue for some time.
  - IMF staff’s baseline projection as of the January 2013 WEO is that the pace of recovery is likely to be restrained.
  - The time lag between macroeconomic developments and their effect on credit quality implies provisioning needs will likely remain high for some time across all asset classes.
  - Supervisors should ensure any further weakening of asset quality is matched by increased provisions (for loans) or impairments (for repossessed assets).

### Annex 1 — Profitability (partial data)
- System-wide profits were up in 2013 through September.
- Domestic pre-tax profits during the first three quarters of 2013 rose to €4.7 billion, up from a loss of €- (text truncates here).

*Source: IMF staff, from the provided IMF report content.*

### 21.7 billion one year earlier. The

### _cr1459 - 21.7 billion one year earlier. The

### Bank profitability and income generation
- Pre-provisioning profits, at €23 billion through 3Q 2013, decreased 8 percent from a year earlier, but were already above the level assumed for the full-year 2013 (€17 billion) in the base case of the September 2012 stress test.
- Jan-Sept 2013 vs Jan-Sept 2012 (data in thousands of euros; Spain business only, source: BdE):
  - A Total Revenues: 43,073,600 (Jan-Sept 2013) vs 45,019,575 (Jan-Sept 2012) — Change: -4
  - Net Interest Income: 20,290,176 vs 25,038,607 — Change: -19
  - Net Income from Fees and Shares: 15,161,181 vs 19,644,189 — Change: -23
  - Income from Shares: 6,971,845 vs 11,108,244 — Change: -37
  - Net Fees: 8,189,336 vs 8,535,945 — Change: -4
  - Other Gains 1/: 7,622,244 vs 336,779 — Change: 2163
  - B Total Expenses: 20,085,915 vs 20,090,750 — Change: 0
  - C = A - B Pre-Provisioning Profits: 22,987,685 vs 24,928,825 — Change: -8
- Core banking income trends:
  - Net income from core banking activities (lending, fees, dividends from shares) was down 21 percent from a year earlier.
  - Lower interest income drivers: less interest income on loans linked to EURIBOR (EURIBOR down 1 percentage point from a year earlier), lower loan volumes, higher NPLs.
- Near-term earnings outlook:
  - Net profit on domestic activities, first nine months of 2013: €5.8 billion (change of sign from loss €-15.2 billion one year earlier).
  - Main near-term challenges: further credit deterioration; falling interest income on variable-rate mortgages (resets at lower rates); removal of interest rate floors on some retail mortgage loans; falling loan volumes due to deleveraging; growing stock of non-productive assets (NPLs and repossessed assets).
  - Funding costs could rise if LTROs expire and are not renewed or replaced; offsetting factors include cheaper deposit and wholesale funding and possible further income from domestic government bonds.
- External exposures:
  - Emerging markets accounted for 23 percent and 32 percent of the loan book of Spain’s largest and second-largest bank, respectively, at end-2012.
  - The U.S. and U.K. together accounted for 39 percent and 10 percent of the loan book of Spain’s largest and second-largest bank, respectively, at end-2012.

### Credit losses and asset-class materialization (as of end-September 2013)
- Losses materialized, current (percent) 1/ and Projected losses, 2014 (percent) 2/ by asset class:
  - Repossessed assets: Base case 35.7; Adverse case 55.5; Projected 63.4
  - Real estate developers 3/: Base case 0.1; Adverse case 28.6; Projected 42.8
  - Retail mortgages: Base case 1.7; Adverse case 1.8; Projected 4.1
  - Large Corporates: Base case 5.7; Adverse case 5.8; Projected 10.0
  - SMEs: Base case 7.5; Adverse case 10.6; Projected 16.7
- Notes:
  - 1/ As of end-September, 2013. Measured as stock of credit impairments, as percent of total gross stock of assets.
  - 2/ Source: Oliver Wyman stress test exercise.
  - 3/ Includes generic provisions on performing real estate developer loans from RDL 18/2012.

### Capital buffers and regulatory developments
- At end-September 2013, all banks exceeded the minimum Core Tier 1 ratio (EBA definition) level of 9 percent except for one relatively small bank, CEISS, which is in the process of being sold to a stronger bank.
- Many banks’ buffers above the regulatory minimum are not large; Spanish banks compare unfavorably with the Eurozone average in Core Tier 1 but compare favorably in leverage ratios due to higher risk-weighting.
- Policy actions and recommendations:
  - Continue efforts to maintain recently achieved capital levels without relying excessively on credit contraction: support profitability through operational efficiency gains, issuing equity, and exercising restraint on cash dividends and remuneration.
  - BdE recommendation: limit cash dividends to no more than 25 percent of net income for the year 2013.
- DTA conversion legislation (December 2013):
  - Converts DTAs arising from certain types of temporary differences into transferable claims on the government in the event banks (i) have accounting losses (maximum percentage convertible equals the accounting loss as a percent of capital); (ii) become insolvent; or (iii) are not able to use the DTAs before 18 years.
  - Affects about €30 billion of DTAs (out of a total €50 billion), related to timing differences generated by provisions on loans, foreclosed assets, and pension assets.
  - This amount represents about 3 percent of the system’s risk-weighted assets.
  - IMF staff note: ensure measure is accompanied by additional bank actions to strengthen balance sheets and lending capacity and that net fiscal implications are minor.

### Liquidity, funding, and deposits
- Deposits in 2013:
  - Increase in government deposits and non-resident deposits year-to-date more than compensated for decline in retail funding (domestic deposits plus retail promissory notes).
  - Trends affected by shift from deposits to bank promissory notes during 2011 and H1 2012 and reversal starting H2 2012.
- Spain: Change in Deposits, 2013 (change during period, billions of euro; source: BdE)
  - Total domestic deposits, retail promissory notes, and non-resident deposits 1/: Q1 490, Q2 -25, Q3 -61, Oct -7
  - Household and corporate deposits and retail promissory notes: Q1 -26, Q2 -8, Q3 -2, Oct -7
  - Bank promissory notes held by retail customers: Q1 -15, Q2 -10, Q3 -7, Oct -1, Year-to-date -34
  - Domestic household and corporate deposits: Q1 141, Q2 6, Q3 -1, Oct -1, Year-to-date 27
  - Household: Q1 81, Q2 4, Q3 -3, Oct 2, Year-to-date 18
  - Corporate: Q1 52, Q2 2, Q3 11, Q4 0, Year-to-date 10
  - Government deposits: Q1 19, Q2 -5, Q3 -40, Oct 10
  - Net non-resident deposits 2/: Q1 310, Q2 -10, Q3 -13, Oct -4, Year-to-date 14
  - Net deposits with MFIs abroad 3/: Q1 211, Q2 -5, Q3 -3, Oct 14
  - Notes:
    - 1/ Excludes deposits of domestic financial institutions.
    - 2/ Non-resident deposits deducted by loans to non-residents.
    - 3/ Deposits of foreign banks in Spanish banks minus loans from Spanish banks to foreign banks.
- Funding costs and market funding:
  - Borrowing rates in wholesale funding markets declined 150 bps in Q3, though still higher than other funding sources.
  - Banks increased reliance on wholesale market funding in Q4 compared to previous two quarters, but cumulative gross issuances during 2013 still well below 2012.
- ECB funding:
  - Net borrowing from the Eurosystem declined by 38 percent during the twelve months through November 2013.
  - Repayments, higher collateral asset prices, and capital injections to intervened banks created headroom to rely on ECB funding if needed.

### SAREB developments (Annex 2)
- First-year organizational progress and portfolio:
  - Nearly 200,000 real estate-related assets transferred to SAREB by Group 1 (€37 billion) and Group 2 (€14 billion) banks in December 2012 and February 2013, respectively.
  - REDs represented 78 percent of SAREB’s initial portfolio; the rest were foreclosed assets.
  - Average transfer price: 47 percent of gross book value.
- Capital structure:
  - Initial capital: €4.8 billion (equity €1.2 billion; subordinated debt €3.6 billion in 15-year callable convertible bonds).
  - FROB ownership: 45 percent of equity and 46 percent of subordinated debt; 27 private investors own the rest.
- Senior bonds and hedging:
  - Banks received government-guaranteed senior bonds (maturities 1-3 years) paying quarterly floating coupons linked to 3-month EURIBOR and spread at issuance between Spain’s sovereign yield and EURIBOR.
  - SAREB hedged EURIBOR-related interest-rate risk on about 85 percent of its foreseen debt via a chain of interest-rate swap agreements effective December 31, 2013.
- Due diligence and servicing:
  - Due diligence completed on 80 percent of assets in 2013; found average market value broadly similar to average transfer price.
  - Servicing initially by transferring banks under servicing contracts; SAREB hired staff deployed inside servicers and created weekly budgets and benchmarks; may move to specialized competing servicers.
- 2013 financials and cash flows:
  - SAREB estimates it registered a loss in 2013 due to start-up costs and slow H1 sales; audited accounts not yet available.
  - Sales of foreclosed assets below expectations in H1 2013 but accelerated in H2 2013; retail foreclosed sales in November nearly seven times higher than in March 2013.
  - RED cash inflows above expectations due to higher-than-expected redemptions, amortizations, and loan sales; approximately 70 percent of gross cash collections derive from REDs’ redemptions, amortization, and sales.
  - SAREB expected cash inflows in 2013 to exceed operating expenses, debt service, and credit line drawdown; planned to partly amortize 1-year senior bonds maturing Dec 2013 and Feb 2014 and to call some outstanding 2- and 3-year bonds, reducing outstanding debt by approximately €2 billion.
  - Profit margins on property sales positive on average but narrowing due to ongoing drop in real estate prices and introduction of wholesale deals with narrower margins.
- 2014 outlook and risks:
  - SAREB expects to increase sales volume in 2014; profitability will depend heavily on the future evolution of house prices.
  - Factors supporting profitability: recent acceleration of asset liquidation; deployment of commercial strategies developed in 2013; lower debt-servicing costs as SAREB repays bonds and benefits from improved sovereign spreads.
  - Primary risk: uncertainty in future real estate prices as REDs become increasingly nonperforming and sales of collateral become more central to cash flows.
  - Recommendation: continue devising and implementing effective liquidation strategies to support cash flow and profitability and adjust nimbly to changing macro and market conditions.

### IMF staff views on MoU conditionality (Annex 3, selected measures and status)
- Measure implementation status examples:
  - Provide data needed for monitoring the entire banking sector and of banks of specific interest: Regularly throughout the program, starting end-July 2012 — Implemented.
  - Prepare restructuring or resolution plans with the EC for Group 1 banks to be finalized in light of the Stress Tests results for EC approval in November: July—mid-August 2012 — Implemented. (Plans adopted on November 28, 2012.)
  - Finalize proposal for enhancement and harmonization of disclosure requirements for all credit institutions: End-July 2012 — Implemented. (BdE Circular 6/2012.)
  - Provide information required for the Stress Test to the consultant, including results of the asset quality review: Mid-August 2012 — Implemented.
  - Introduce legislation to introduce the effectiveness of SLEs, including to allow for mandatory SLEs: End-August 2012 — Implemented. (RDL 24/2012 (Law 9/2012).)
  - Upgrade bank resolution framework to strengthen resolution powers of the FROB and DGF: End-August 2012 — Implemented. (RDL 24/2012.)

*Source: IMF staff compilation from the supplied document content.*

### 8. Complete bank-by-bank stress test (Stress Test).

### 8. Complete bank-by-bank stress test (Stress Test)

### Implementation of stress-test related measures and supervisory reforms
- Second half of September 2012: Complete bank-by-bank stress test — Implemented.
- Finalize a regulatory proposal on enhancing transparency of banks — Deadline: End-September 2012 — Current status: Implemented — Comment: BdE circular 6/2012.
- Banks with significant capital shortfalls will conduct SLEs — Deadline: Before capital injections in Oct./Dec. 2012 — Current status: Implemented.
- Banks to draw up recapitalization plans to indicate how capital shortfalls will be filled — Deadline: Early-October 2012 — Current status: Implemented.
- Present restructuring or resolution plans to the EC for Group 2 banks — Deadline: October 2012 — Current status: Implemented.
- Identify possibilities to further enhance the areas in which the BdE can issue binding guidelines or interpretations without regulatory empowerment — Deadline: End-October 2012 — Current status: Implemented — Comment: "A report has been submitted and the authorities have formally complied with the MoU. However, further clarity would be warranted, and BdE regulatory powers could be possibly expanded."

### Supervisory review, AMC, credit register, and governance
- Conduct an internal review of supervisory and decision-making processes; propose procedural changes to guarantee timely remedial actions; ensure macro-prudential supervision feeds into micro supervision — Deadline: End-October 2012 — Current status: Implemented — Comment: "The authorities have already implemented some recommendations in the report. Some remaining recommendations are expected to be implemented in the context of the SSM."
- Adopt legislation for the establishment and functioning of the AMC to make it fully operational — Deadline: Autumn 2012 — Current status: Implemented.
- Submit for consultation envisaged enhancements of the credit register — Deadline: End-October 2012 — Current status: Implemented.
- Prepare proposals for strengthening non-bank financial intermediation including capital market funding and venture capital — Deadline: Mid-November 2012 — Current status: Implemented — Comment: "Action plan under implementation."
- Propose measures to strengthen fit and proper rules for governing bodies of savings banks and introduce incompatibility requirements regarding governing bodies of former savings banks and commercial banks controlled by them — Deadline: End-November 2012 — Current status: Implemented — Comment: "Law 26/2013. Forceful implementation will be key."
- Provide a roadmap (including justified exceptions) for eventual listing of banks included in the stress test which have benefited from state aid as part of restructuring — Deadline: End-November 2012 — Current status: Implemented.

### Legal, reporting, and capital requirements
- Prepare legislation clarifying the role of savings banks as shareholders to reduce their stakes to non-controlling levels; strengthen fit and proper rules; provide roadmap for listing of banks that benefited from State aid — Deadline: End-November 2012 — Current status: Implemented — Comment: "Law 26/2013. Forceful implementation will be key to the success of the law."
- Banks to provide standardized quarterly balance sheet forecasts and funding plans for credit institutions receiving state aid or with capital shortfalls revealed in the bottom-up stress test — As of 1 December 2012 — Current status: Implemented — Comment: "Third set of results were provided to international partners at end-November."
- Submit a policy document on amendment of the provisioning framework if and once Royal Decree Laws 2/2012 and 18/2012 cease to apply — Deadline: Mid-December 2012 — Current status: Implemented.
- Issues CoCos under the recapitalization scheme for Group 3 banks planning a significant (more than 2% of RWA) equity raise — Deadline: End-December 2012 — Current status: Not relevant — Comment: "Group 3 banks recapitalized without State aid."
- Transfer the sanctioning and licensing powers of the Ministry of Economy to the BdE — Deadline: End-December 2012 — Current status: Implemented — Comment: "RDL 24/2012. The possibility to further expand BdE supervisory powers should be considered."
- Require credit institutions to review, and if necessary, prepare and implement strategies for dealing with asset impairments — Deadline: End-December 2012 — Current status: Implemented.
- Require all Spanish credit institutions to meet a Common Equity Tier 1 ratio of at least 9 percent until at least end-2014; require application of the definition of capital established in the Capital Requirements Regulation (CRR) observing the gradual phase-in period — Effective: 1 January 2013 — Current status: Implemented — Comment: "RDL24/2012. Additional technical details implemented by BoE (Circular 7/2012)."
- Review governance arrangements of the FROB and ensure active bankers will not be members of the Governing Bodies of FROB — Effective: 1 January 2013 — Current status: Implemented — Comment: "RDL 24/23012."
- Review the issues of credit concentration and related party transactions — Deadline: Mid-January 2013 — Current status: Implemented.
- Propose specific legislation to limit the sale by banks of subordinate debt instruments to non-qualified retail clients and to substantially improve the sale process for any instruments not covered by the deposit guarantee fund to retail clients — Deadline: End-February 2013 — Current status: Implemented — Comment: "RDL 24/2012."
- Amend legislation for enhancement of the credit register — Deadline: End-March 2013 — Current status: Implemented.

### Group 3-specific measures (status)
- Raise the required capital for banks planning a more limited (less than 2% of RWA) increase in equity — Deadline: End-June 2013 — Current status: Not relevant — Comment: "Group 3 banks recapitalized without State aid."
- Group 3 banks with CoCos to present restructuring plans — Deadline: End-June 2013 — Current status: Not relevant — Comment: "Group 3 banks recapitalized without State aid."

### Key macroeconomic projections and headline indicators (Table 1: Spain: Main Economic Indicators, 2010-18)
- Gross domestic product: -0.2, 0.1, -1.6, -1.2, 0.6, 0.8, 1.0, 1.1, 1.2, 1.3 (2010–2019)
- Private consumption: 0.2, -1.2, -2.8, -2.5, 0.4, 0.5, 0.6, 0.9, 1.0, 1.1
- Public consumption: 1.5, -0.5, -4.8, -1.3, -2.0, -2.3, -2.4, -2.4, -2.4, -2.4
- Gross fixed investment: -5.5, -5.4, -7.0, -6.0, -1.2, -0.1, 1.1, 1.7, 1.9, 2.1
- Net exports (contribution to growth): 0.4, 2.1, 2.5, 1.7, 1.0, 0.9, 0.9, 0.7, 0.7, 0.7
- Exports of goods and services: 11.7, 7.6, 2.1, 5.4, 5.9, 5.6, 5.2, 5.1, 5.1, 5.1
- Imports of goods and services: 9.3, -0.1, -5.7, 0.3, 3.4, 3.3, 3.3, 3.9, 3.9, 4.1
- HICP (average): 2.0, 3.1, 2.4, 1.5, 0.6, 0.9, 1.0, 1.1, 1.1, 1.1
- Unemployment rate (percent): 20.1, 21.7, 25.0, 26.4, 26.0, 25.8, 25.4, 24.9, 24.1, 23.1
- Current account balance (percent of GDP): -4.5, -3.8, -1.1, 1.0, 1.7, 2.5, 3.0, 3.5, 4.1, 4.9
- General government balance (percent of GDP): -9.6, -9.1, -6.8, -6.7, -6.0, -5.0, -4.1, -3.2, -2.2, -1.2
- General government debt (index): 62, 70, 86, 96, 101, 104, 106, 107, 107, 105
- Note: "The headline deficit for Spain excludes financial sector support measures equal to 0.5 percent of GDP for 2011 and 2013, and 3.8 percent of GDP for 2012."

### Financial soundness indicators (Table 2: Selected Financial Soundness Indicators, 2006-2013)
- Regulatory capital to risk-weighted assets: 11.9, 11.4, 11.3, 12.2, 11.9, 12.2, 11.5, 12.1 (2006–2013 series)
- Tier 1 capital to risk-weighted assets: 7.5, 7.9, 8.2, 9.4, 9.7, 10.3, 9.9, 10.9
- Capital to total assets: 6.0, 6.3, 5.5, 6.1, 5.8, 5.7, 5.5, 6.1
- Returns on average assets: 1.0, 1.1, 0.7, 0.5, 0.5, 0.0, -1.4, 0.5
- Returns on average equity: 19.5, 19.5, 12.0, 8.8, 7.2, -0.5, -21.5, 7.4
- Non performing loans (billions of euro): 10.9, 16.3, 63.1, 93.3, 107.2, 139.8, 167.5, 191.0
- Non-performing to total loans: 0.7, 0.9, 3.4, 5.1, 5.8, 7.8, 10.4, 13.0
- Specific provisions to non-performing loans: 43.6, 39.2, 29.9, 37.7, 39.6, 37.1, 44.7, 44.3
- Exposure to construction sector (billions of euro): 378.4, 457.0, 469.9, 453.4, 430.3, 396.9, 300.4, 258.0
  - of which: Non-performing: 0.3, 0.6, 5.7, 9.6, 13.5, 20.6, 28.2, 33.0
- Households - House purchase (billions of euro): 523.6, 595.9, 626.6, 624.8, 632.4, 626.6, 605.3, 586.3
  - of which: Non-performing: 0.4, 0.7, 2.4, 4.9, 2.4, 2.9, 4.0, 5.2
- Use of ECB refinancing (billions of euro): 21.2, 52.3, 92.8, 81.4, 69.7, 132.8, 357.3, 206.8
  - in percent of total ECB refin. operations: 4.9, 11.6, 11.6, 12.5, 13.5, 21.0, 32.0, 28.8
  - in percent of total assets of Spanish MFIs: 0.8, 1.7, 2.7, 2.4, 2.0, 3.7, 10.0, 6.4
- Loan-to-deposit ratio: 165.0, 168.2, 158.0, 151.5, 149.2, 150.0, 137.3, 124.9
- Market indicators (ytd) IBEX 35: 31.8, 7.3, -39.4, 29.8, -17.4, -13.4, -6.4, 21.4
- CDS (spread in basis points) Spain senior 5 years in euro: 2.7, 12.7, 90.8, 103.8, 284.3, 466.3, 294.8, 157.5

### Aggregated balance sheet of Other Monetary Financial Institutions (OMFIs) and monetary aggregates (Table 3: Monetary Survey, 2010-15)
- Total assets (billions of euros): 3,471; 3,621; 3,581; 3,171; 3,064; 3,017 (2010–2015 series)
- Cash: 877; 777; 777 (first three entries shown)
- Deposits at the ECB: 275; 172; 353; 535; 35 (entries as provided)
- Claims on non MFIs: 1,936; 1,887; 1,733; 1,495; 1,442; 1,438
- Shares and other equity: 103; 163; 167; 181; 177; 173
- Securities other than shares: 520; 544; 566; 614; 632; 653
  - of which General government: 158; 193; 243; 303; 335; 356
- Claims on non-residents: 374; 386; 408; 375; 370; 343
- Capital and reserves: 283; 367; 403; 423; 408; 401
- Borrowing from the ECB: 621; 683; 612; 271; 93; 174
- Deposits of non MFIs: 1,728; 1,650; 1,535; 1,533; 1,489; 1,493
- Private sector credit (percent of GDP): 177.6; 171.8; 157.3; 137.0; 130.6; 128.3
- Private sector credit (percentage change): 0.8; -3.2; -9.9; -13.3; -3.7; -0.2
- Memo: Loans to deposits (%, other resident sector): 149.2; 150.0; 137.4; 111.2; 107.1; 104.9
- Memo: Capital and reserves (% total assets): 8.1; 10.1; 11.2; 13.3; 13.3; 13.3

*International Monetary Fund — excerpt from the content unit titled "8. Complete bank-by-bank stress test (Stress Test)"*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr1459.pdf_