Bank of Spain asks banks to guard against defaulting loans amid economic uncertainty

OVIEDO, Spain 

The Bank of Spain governor on Tuesday asked banks to guard against defaulting loans and pay attention to risks amid economic uncertainty.

“We find ourselves in a highly complex macro-financial situation, characterized by high inflation, tightening of financial conditions, and increased uncertainty, which has already led to a slowdown of economic activity,” Pablo Hernandez de Cos said at a forum organized by Spanish daily El Economista.

Amid such unsettled conditions, he said it is hard to predict what will happen to the country’s banking sector. On one hand, higher interest rates would boost profitability. On the other, economic risks pose a major threat.

“Although the starting position of the banking sector is positive, being extremely prudent is necessary, as is closely monitoring risks, which could rapidly evolve and bring about new stress scenarios,” he said.

Hernandez de Cos also suggested that banks’ risks stretch beyond the short term. He said he is focusing on a two-year horizon during which many households and companies could begin having trouble paying their debts.

Given the situation, he said banks must “increase provisions to cover potential losses,” referring to funds set aside to cover loans going into default.

At the same time, Spain’s housing market has experienced a degree of exuberance over the last year, with prices jumping 8%.

Hernandez de Cos said that real estate appears slightly overvalued and suggested that changing economic forces could signal a trend reversal in Spain’s housing sector.

Although growing headwinds may be in the cards for Spain’s banking sector, Hernandez de Cos said in recent years financial entities have boosted their solvency and profitability.