Published on Tuesday, December 27, 2022

Spain | Banking, reflections and purposes

2022 has been a year of transition for banking. It started off with a lot of dynamism, as the economic recovery was expected to consolidate, leaving the pandemic behind us. But the war initiated by Russia in Ukraine radically changed the course of events.

Key points

  • Key points:
  • Nevertheless, the direct exposure of European banking as a whole was of little significance, representing less than 0.5% of the assets and 5% of the capital of European banks. In particular, the exposure of Spanish banks was even smaller.
  • Then came the second-round effects that are very difficult to quantify. Despite the uncertainty, one aspect was obvious: inflation was much more permanent than anticipated and therefore central banks had to act decisively by raising interest rates.
  • In principle, the rise in these rates has a positive impact on banking, but there are many effects that can offset each other. There are basically two transmission channels. On one side, higher interest rates improve net interest income, but on the other, they cool down the economy, slowing down business activity and household income decreases, thus reducing the ability to repay debts.
  • The various financial stability reports published this fall highlight the main risks to financial stability: geopolitical tensions, higher and persistent inflation, the risk of economic downturn and disorderly adjustments in more volatile financial markets.
  • Even so, they generally highlight the strength of banks to face a deteriorating environment with good levels of solvency and liquidity and a profitability that they expect to improve, after several years of reduced profitability.

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