The Bank of Spain warns that the balance sheet clean-up process that financial institutions have carried out in recent years has come to a halt as a result of the pandemic. Doubtful or failed loans that banks must prevent with provisions that allow absorbing their impact are once again one of the greatest risks to the health of the financial system, as the agency warns in its Supervisory Report.
“The pandemic, as well as its effects on the banking sector, and the uncertainty about the expectations of recovery in the economy have played a fundamental role in identifying the main risks for 2021”, explains the Bank of Spain , which ranks first “the prolonged impact of the pandemic on economic activity and the potential increase in NPLs (Non Permorming Loans or bad loans as they are known in the financial world)”.
Currently, the stock of doubtful loans in Spanish entities amounts to about 80,000 million euros, making it the third in the European Union with a higher volume of NPL, only behind France, with 126,600 million euros, and Italy, with 108,400 million.
Of the almost 80,000 million non-performing loans, 55% correspond to loans for the purchase of a home, while 43.6% are loans to non-financial entities. However, the volume of these bad debts could double as the economy manages to recover, according to different estimates. In these circumstances, the agency’s pressure on the banks would intensify once again through regulation and the requirement for entities to have profitability ratios that are difficult to achieve with NPL backpacks. For this reason, the settlement of bad debts was a determining factor for entities such as Santander, BBVA or Sabadell to transfer more than 82,000 million between 2015 and 2019. Or, in the opposite case, for Banco Popular to end up being intervened and sold for one euro .
The supervisor has warned on numerous occasions that the greatest risk facing the Spanish economy is that the prolongation of the crisis suffered by companies and workers could lead to a crisis in the financial system, a contagion that would come precisely through of an escalation of bad loans that would damage the balance sheets of the entities and would reissue the problems of a decade ago.
For this reason Pablo HernÃ¡ndez de Cos, governor of the Bank of Spain, maintains the criteria for the distribution of 11,000 million euros in aid to companies, they must be rigorous to reach only viable ones, something that within the organism he acknowledges that it is difficult from a political point of view.
In this latest report, HernÃ¡ndez de Cos urges streamlining the liquidation processes of non-viable companies “to avoid” consuming resources “that could be more beneficial in other activities.” His lawsuit considers that the aid proposed by the Government may be “a useful tool precisely to reduce the risk that the pandemic will cause the closure of those companies and businesses that are going through a situation of special difficulty as a result of the pandemic, but that are still viable. ” De Cos stresses that this support would also help “prevent the crisis from incorporating an additional financial element that would potentially make it much more persistent, as demonstrated by the previous international financial crisis.”