This Selected Issues paper analyzes Spain’s sustainable growth rate. It sheds some light on Spain’s medium-term growth prospects by looking into the key factors driving potential growth, both in the past and likely in the future, and international experience of countries in the aftermath of financial crisis. The paper suggests Spain is likely to face a long period of moderate growth (about 1½–2 percent) and high unemployment, but policy action—especially that directed toward reducing structural unemployment and raising productivity—could lead to much better outcomes.


This Selected Issues paper analyzes Spain’s sustainable growth rate. It sheds some light on Spain’s medium-term growth prospects by looking into the key factors driving potential growth, both in the past and likely in the future, and international experience of countries in the aftermath of financial crisis. The paper suggests Spain is likely to face a long period of moderate growth (about 1½–2 percent) and high unemployment, but policy action—especially that directed toward reducing structural unemployment and raising productivity—could lead to much better outcomes.

Spain’s Banks: Boom/Bust and Beyond—A Long-Term Perspective of the System1

Spain’s banking system has made substantial progress in recovering from the bust that followed a domestic credit-fuelled real estate boom and the euro area sovereign debt crisis. Public and private capital injections, retention of earnings, disposal of problem assets and deleveraging have helped to strengthen banks’ capital ratios and increase provisions against loan losses. Along with key complementary reforms at the European level, Spanish banks’ funding costs have declined, share valuations have risen, and lending conditions have started to ease. Nonetheless, credit to the private sector is still contracting faster than desirable and lending rates remain relatively high within the euro area, posing headwinds for growth. The policy challenge is thus to further improve conditions for banks to lend to creditworthy borrowers in order to support the recovery. To achieve this end, banks should continue to raise high-quality loss-absorbing capital, address problem assets, reduce costs, and ensure adequate provisions. Such steps would also further strengthen the outlook for Spanish banks in the ECB’s ongoing Comprehensive Assessment. The Bank of Spain (BdE) is appropriately conducting a forward-looking assessment of its banks pro-actively.

A. From the End of the Boom to Today

1. Spain’s banking system came under major stress in recent years. During the boom of the last decade, lending grew rapidly, particularly for real estate purchase and development, leading to a large excess supply of housing by 2008. Following the collapse of Lehman Brothers, banks faced tighter funding conditions, prompting tighter lending conditions. This accelerated the bursting of the real estate boom, increasing credit losses for banks. These developments hurt profits and capital, as did subsequent financial market stress related to the euro area crisis. At the same time, tougher post-Lehman regulatory standards raised the need for capital.


Credit to the private sector has been contracting

(year-on-year % change)

Citation: IMF Staff Country Reports 2014, 193; 10.5089/9781498330862.002.A004

Sources: Haver; and BdE.

2. In response, Spain’s banks have bolstered capital ratios and provisioning through a variety of resources. Key contributors include retained earnings, with a considerable share of earnings coming from foreign operations; public and private capital injections; asset sales, including to the asset management company (SAREB); and credit contraction. This process has been fostered by repeated domestic policy actions to require banks to repair their balance sheets and restructure their operations, culminating in the financial sector program of 2012–13. This program started with an asset quality review and stress test that identified a capital shortfall of about 5½ percent of GDP—which has subsequently been filled—at Spain’s weakest banks. Attention has now switched from restructuring and resolution to reviving lending and disposing of public stakes in financial institutions.

3. This section explores in more detail how banks’ balance sheets have evolved during this period of bust and recovery. In particular, it examines the evolution of banks’ assets, liabilities, earnings, capital, liquidity, and efficiency.



NPLs have been rising

(% of total)

Citation: IMF Staff Country Reports 2014, 193; 10.5089/9781498330862.002.A004

Source: BdE.

4. Spain’s real estate bust and associated financial crisis led to major changes in banks’ assets. In particular:

  • The real estate bust and broader Euro-area crisis caused credit quality to deteriorate sharply. After more than doubling over a 5-year period prior to 2007, house prices fell sharply, some 30–40 percent through end-2013. Commercial property prices followed a similar trend. This led to significant deterioration in the quality of loans to property developers. By end-February 2014, the overall NPL ratio on banks’ portfolios had risen to 13.4 percent compared with only 0.9 percent in 2007. The NPL ratio stabilized in the first quarter of 2014.

  • NPL ratios varied sharply across different loan types. NPLs have reached 34 percent of lending in the construction sector, whereas household sector NPLs, including mortgages and other consumer loans, remain much lower at 6.9 percent. The relatively low NPLs on household sector loans despite very high unemployment reflect several factors, including the following: a strong payment culture, in which banks have full recourse to the debtor’s assets in case of default; relatively low loan-to-value ratios on Spanish mortgages at origination; the transformation of mortgage NPLs into foreclosed assets; and a large drop in debt-servicing costs during the crisis due to lower interest rates in a context of variable-rate mortgages.

  • In this deteriorating loan environment, the authorities increasingly required banks to strengthen provisions. The build-up in provisions on real estate portfolios was especially rapid during 2012 in response to government royal decrees, which required both higher specific provisions on non-performing loans and generic provisions on performing loans. During 2013, some generic provisions have been used up as previously performing loans have become delinquent. As a result, nearly half of all non-performing loans are now covered by specific provisions.

  • Financial stress prompted a sharp decline in lending. Loans in proportion to banking sector assets dropped from 78 percent in 2007 to 64 percent in 2013, in part due to (i) banks seeking to strengthen capital ratios by reducing risk-weighted assets, (ii) concerns of falling credit quality among borrowers, and (iii) weaker loan demand amidst recession, among other factors. Between 2008 and 2013, deleveraging, including asset transfers to SAREB, represented a 21 percent contraction in lending, a reduction equal to 50 percent of annual GDP. The contraction in bank lending was partly offset by increased bond issuance by large corporates, but this effect was modest as bank lending remains by far the major funding source for Spanish corporates.

  • Lending to corporates contracted especially quickly. Between 2008 and 2013, banks cut back lending to corporates, including SMEs, by 30.2 percent. Most affected was the construction industry, for which banks’ loan portfolio contracted by 60 percent. In comparison, banks’ lending to households contracted by 13 percent, of which banks’ lending for mortgages fell by 7 percent.2 As noted above, the decline in lending to large corporates has been partially offset by increased bond issuance.

  • Banks were initially slow to dispose of impaired assets, but this process has accelerated during the last two years.

    • A key component of the recent reform program was the clean-up of weak banks’ problem assets, which consisted mainly of real estate loans to developers (REDs) and foreclosed assets. In late 2012 and early 2013, banks receiving state aid were required to transfer most of these assets to SAREB, in order to create conditions for these banks to resume lending and to make state-owned banks more attractive to potential buyers.3 Nearly 200,000 real estate-related assets with a gross book value of €108 billion were transferred at an average transfer price equal to 47 percent of the assets’ gross book value.

    • In early 2014, the sale of problem assets to other distressed debt funds also picked up. For instance, Catalunya Bank was able to dispose of its low-quality mortgage portfolio.

    • By freeing up space on banks’ balance sheets, such asset sales are contributing to a pickup in new lending to corporates, especially to SMEs, which has increased 7 percent year-on-year in February 2014 and have registered positive year-on-year growth rates since October 2013 and up until the latest available data (March 2014), which marks a clear change in trend given that these year-on-year rates had been systematically negative since April 2008. Nevertheless, total bank lending to corporates continues to decline at a pace of about 14 percent year-on-year since repayments are still higher than new credit flows. This overall decline may be partially explained by the recent increase in issuance of debt securities by large non-financial corporations as financial market conditions have improved.

  • With loans declining sharply, there has been an increase in holdings of securities, particularly government issuance. Since 2007, banks’ holdings of government securities have more than tripled to €257 billion, representing 8.5% of total assets versus 2.6% in 2007, while loans to the government have doubled to €87 billion. Equity holdings have nearly doubled to €189 billion, representing 6.2% of total assets versus 3.5% in 2007.


Specific provisions have risen over time

(Provisions -to-NPLs, %)

Citation: IMF Staff Country Reports 2014, 193; 10.5089/9781498330862.002.A004

Source: BdE.

Banks’ assets comprise fewer loans and more government bonds

(Trillions of euro)

Citation: IMF Staff Country Reports 2014, 193; 10.5089/9781498330862.002.A004

Sources: BdE; and IMF staff estimates.

Banks’ loans have fallen

(Trillions of euro)

Citation: IMF Staff Country Reports 2014, 193; 10.5089/9781498330862.002.A004

Sources: BdE; and IMF staff estimates.


5. The crisis had a significant impact on banks’ liability structure.


ECB borrowing has increased as debt securities have fallen

(% liabilities)

Citation: IMF Staff Country Reports 2014, 193; 10.5089/9781498330862.002.A004

Source: BdE.
  • Between 2007 and 2012, the proportion of deposits in liabilities fell mainly due to a decline in non-resident deposits, including non-resident bank liabilities, which has more than offset an increase in domestic household deposits. Deposit growth rates improved considerably throughout 2013 and have been broadly flat so far in 2014. The ratio of deposits to liabilities has returned to 2007 levels.

  • Wholesale funding exposure has remained largely stable: interbank exposure, including to central banks, increased from 9 percent of the total in 2007 to 13 percent in 2013; but was largely offset by a decline in debt securities issuance. Correspondingly, the average maturity of funding has shortened, as interbank borrowing tends to be at shorter maturities than debt issuance.

  • ECB funding rose sharply during the crisis, but now plays a reduced role. As of end-April 2014, ECB funding amounted to €182 billion, of which LTROs are €161 billion (about 5 percent of liabilities), compared with a peak amount of €357 billion at end-2012.


Household deposits rose as non-resident deposits fell

(Deposits, trillions of euro)

Citation: IMF Staff Country Reports 2014, 193; 10.5089/9781498330862.002.A004

Source: BdE.

6. Banks’ funding costs rose during 2010–11 as the euro crisis intensified and have since eased as it abates. Average funding costs have closely tracked the average interest rate on resident deposits, as this is banks’ main source of funding.



The cost of bank funding has declined

(%, average rate)

Citation: IMF Staff Country Reports 2014, 193; 10.5089/9781498330862.002.A004

Sources: BdE; and IMF staff calculations.

Earnings are mainly affected by expenses

(Billions of euro)

Citation: IMF Staff Country Reports 2014, 193; 10.5089/9781498330862.002.A004

Source: BdE.

7. Banks’ pre-provision profits have been affected by changes in funding costs. Net interest income was supported during the initial phase of the bust (2008–09), rising to a peak toward the end of 2009, after funding costs declined from their peak at the time of the Lehman collapse in late 2008. However, with the advent of the Euro area crisis, rising yields on sovereign debt led to higher costs on securities, raising marginal funding costs and eroding interest income. Nevertheless, during this period banks’ non-interest income picked up as did earnings from foreign operations. Since 2012, deleveraging of banks’ lending portfolios has reduced banks’ ability to earn interest income even though funding costs have declined. During 2013, falling sovereign yields have contributed to capital gains on banks’ holdings of government securities, supporting non-interest income. Throughout 2007–13, income from foreign operations, principally from two large internationally-active banks, has supported consolidated operating income of the overall banking system, making up more than 30 percent of the total each year. For these two banks, the use of autonomous subsidiaries and multiple-point-of-entry resolution models helps to reduce stability risks.


Expenses are dominated by impairment

(Billions of euro)

Citation: IMF Staff Country Reports 2014, 193; 10.5089/9781498330862.002.A004

Source: BdE.

8. Credit losses and associated provisioning needs have weighed heavily on earnings. System-wide earnings fell from €33.6 billion in 2007 to -€69.5 billion in 2012.4 During 2013, earnings turned positive again, at €16.1 billion, but remain below the level of the boom period and were partly boosted by non-recurring gains on financial assets and liabilities. The large variation in earnings, particularly in 2012, has been driven mainly by financial asset impairments and provisions. The latter has been a significant charge to the P&L account of banks, amounting to some €185 billion cumulatively over 2007–13 and reflecting a sharp step-up in provisioning requirements in 2012.5


9. Capital ratios have been substantially strengthened.


Greater range of capital ratios for smaller banks, 2013

Citation: IMF Staff Country Reports 2014, 193; 10.5089/9781498330862.002.A004

Source: SNL.
  • Since the end of the boom in 2007, Spanish banks have made substantial progress in strengthening capital buffers and improving the quality of capital. The Tier 1 ratio of the system has increased from 7.6 percent of risk-weighted assets at the start of 2007 to 11.8 percent at end-2013. Moreover, this improvement in solvency has been accompanied by an improvement in the quality of capital, with a decrease in subordinated debt (Tier 2) and preferential shares (low-quality Tier 1). All large and mid-sized banks are now operating above the new minimum regulatory capital requirement of 9 percent Core Tier 1 ratio although there is considerable variation in capital ratios for smaller banks.

  • This improvement is owed to a combination of (i) falling risk-weighted assets (RWA), the denominator of the ratio, and (ii) higher capital, the numerator of the ratio. Over 2007–13, the impact of lower RWA on capital ratios has been greater than that of higher capital. This was especially the case during 2011–2012 when capital fell in absolute levels, though this trend reversed in 2013 under the program. RWA has fallen by some 22 percent since 2007 to €1.6 trillion, the result of both deleveraging of banking sector portfolios (for example, contraction of credit) as well as declining risk-weightings of portfolios, falling from 65 percent of assets in 2007 to 45 percent at end-2013, due in large measure to transfer of problem assets out of the banking system, particularly in response to the crisis in 2012. The shift in 2013toward increased reliance on capital generation (rather than just deleveraging) to boost capital ratios has positive implications for economic growth.


Capital ratios improved

Citation: IMF Staff Country Reports 2014, 193; 10.5089/9781498330862.002.A004

Source: IMF, Financial Soundness Indicators.1/ Based on consolidated data for banks domiciled in Spain.

Capital change owed to many sources

(Billions of euro)

Citation: IMF Staff Country Reports 2014, 193; 10.5089/9781498330862.002.A004

Sources: BdE; and IMF staff estimates.

10. Banks’ capital has been strengthened from a variety of sources. Over 2007–13, the net increase in banking system Tier 1 capital has amounted to €16 billion. This has raised the overall level of capital to €179 billion and is due to a combination of factors, including capital injections from public sources, capital-raising in markets, bail-in of subordinated debt, and retained earnings supported by recent constraints on dividend distribution. The relative importance of each of these factors has varied over time: during 2007–09, higher capital was mainly achieved by earnings retention and to a lesser extent by issuance of new capital in markets. During the Euro-area crisis period (2010–12), as net domestic earnings turned negative and access to private capital declined, public capital injections became significant in stabilizing weak banks within the system. During 2013, use of the bail-in mechanism was important in improving the capital profile of the banking system, as was earnings retention amidst dividend restrictions. Public capital injections, including through purchase of equity shares and issuance of convertible preferred shares, over 2007–13 have amounted to €60 billion, while private capital has amounted to €33 billion.6 Bail-in of subordinated debt has contributed a further €13 billion. Throughout 2007–13, net foreign earnings, estimated at some €55 billion, have provided substantial support to the system’s capital, providing evidence of benefits from a geographically-diversified business model followed by the two largest banks.

11. The authorities have also preserved banks’ recorded capital by changing the tax treatment of deferred tax assets (DTAs). This change applied only to domestic DTAs arising from certain types of “temporary differences”.7 The change allows banks (and other firms) to convert these DTAs into refundable tax credits in the event

  • the bank becomes insolvent;

  • the DTA is still unused after 18 years, at which point it would have previously expired; or

  • the bank has an accounting loss for a year (in this case, the percent of DTAs converted is limited to the accounting loss as a percent of a bank’s capital).

Before this change, DTAs might not have had value in a situation such as bank insolvency. Consequently, these DTAs would have been gradually deducted from calculations of CET1 capital under CRD IV, Europe’s regulations implementing the transition to Basel III prudential requirements, with a phased deduction, subject to a threshold, starting in 2014 and rising to 100 percent by 2026. The December law change ensures that these DTAs will retain value in all situations and thus will no longer be deducted from CET1 capital under CRD IV/Basel III rules.8 In 2014, this change improves the system’s regulatory capital ratio by an estimated 0.6 ppt relative to what it would have been otherwise.

12. Spanish banks perform relatively strongly in terms of leverage compared to European peers. This reflects Spanish banks more “traditional” banking model based on lending and thus a higher density of RWA to total assets.


Core Tier 1 and Leverage Ratios 1/

(%, as of end-2013)

Citation: IMF Staff Country Reports 2014, 193; 10.5089/9781498330862.002.A004

Source: SNL.1/ Based on 150 European banks, of which 11 are Spanish.


13. Banking sector liquidity has improved over time. The overall liquidity situation of banks has been supported by the transfer of state-aided banks’ problem assets to SAREB in return for SAREB bonds, which can be more easily used as collateral, as well as an increase in holdings of government bonds over time. The system’s loan-to-deposit ratio has improved from 168 percent in 2007 to 123 percent in 2013. However, liquidity data in terms of Basel III metrics, including the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio NSFR, are less readily available, and it is not clear the extent to which banks have made progress in providing full coverage of 30-day liabilities with liquid assets. For a 1-year liquidity window, the ratio of liquid assets to deposits and short-term funding suggests that the two largest banks in the system are more comfortably placed than other banks in the system.


Smaller banks are less liquid, 2013

Citation: IMF Staff Country Reports 2014, 193; 10.5089/9781498330862.002.A004

Source: Bankscope.


14. Banks are making substantial gains in efficiency. The number of large and mid-sized banks operating in Spain has fallen from 50 in 2007 to 14 in 2013, in part due to significant consolidation of the savings bank sector.9 Branches of the entire banking system have been reduced from 45,000 to 33,000, while the number of banking sector employees (in thousands) has declined from 277 to 218. These developments have resulted in gains for some efficiency metrics, including loans per employee (in billions of euro) that has risen some 8 percent, and loans per branch that is up 11 percent. The cost-to-income ratio for the overall Spanish banking system compares favorably with that of banks in other advanced countries in Europe; however, there are significant differences in efficiency between different types of banks.

State ownership


Spanish banks have relatively low operating costs, 2013

(Cost-to-income ratio, %)

Citation: IMF Staff Country Reports 2014, 193; 10.5089/9781498330862.002.A004

Sources: BdE; and ECB (end 2013 or latest available).
  • The authorities have made significant progress in divesting ownership stakes acquired in banks as part of public support efforts during the program and earlier. Nevertheless, the state still carries an estimated €12.1 billion in ownership of the banking system comprised of stakes in Bankia, Catalunya Banc, and Banco Mare Nostrum—that will have to be unwound (Table 1). After Bankia turned a profit in 2013, the government sold a 7.5 percent stake in early 2014, which reduced its ownership to 60 percent of shares. Plans have recently been announced for an auction of Catalunya Banc in July; and BMN is meanwhile making progress in improving cost efficiency.

Estimate of Remaining State-Ownership of Banking System (May 2014)

(Millions of euros)

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Sources: BdE; FROB; and IMF staff estimates.

B. Looking ahead

15. The overarching challenge now is to create conditions for banks to sustainably ease credit conditions to better support the recovery.10 Any such easing will likely need to be consistent with credit falling as a ratio to GDP given Spain’s ratio (swollen by the boom) is significantly above most Euro area peers. This suggests the following agenda for the authorities and for banks.


Private sector credit is relatively high

(Credit-to-GDP ratio, %)

Citation: IMF Staff Country Reports 2014, 193; 10.5089/9781498330862.002.A004

Source: IMF, IFS.
  • Continue to monitor banks’ capital buffers closely in light of uncertainties regarding the exact outcome of the Comprehensive Assessment. Actions have already been taken to bolster capital and provisions significantly—the leverage of the largest banks is lower than European banking peers. Nevertheless, as noted in the BdE’s May 2014 Financial Stability Report, capital ratios of Spanish banks remain below-average for advanced Europe, in part due to higher RWAs.11 The ECB’s ongoing Comprehensive Assessment’s approach entails some important differences from the asset quality review and stress test undertaken under Spain’s financial sector program, which will also impact the other EU banks subject to the Comprehensive Assessment. For example, unlike the program’s approach, the Comprehensive Assessment will apply haircuts to sovereign bonds in relation to ratings and will also review samples of foreign loan portfolios of banks.12 The Comprehensive Assessment will also extrapolate 2013 earnings of banks to the following 3-year period (with limited exceptions). Banks that suffered losses in earnings, for example due to high provisions, will therefore be at a disadvantage in the exercise, while those that generated significant earnings, for example from foreign operations, will be at an advantage.

  • Continue to improve capital ratios, with a focus on raising nominal capital. Spanish banks have made very substantial progress in strengthening capital ratios and provisions. However, given the still-challenging economic environment, banks should continue to strengthen capital in absolute (euro) terms rather than seek to improve capital ratios by deleveraging. Further increasing nominal capital will allow banks to ease the pace at which lending is contracting, whereas faster deleveraging will lower broader economic growth and the performance of banks’ loan portfolios, ultimately reducing capital through financial impairment. Importantly, as a general matter, capital ratios for financial institutions in Europe need to be improved in accordance with regulatory developments and market demands.13


Basel III Common Equity Tier 1 Ratios for Major European Banks, 2013


Citation: IMF Staff Country Reports 2014, 193; 10.5089/9781498330862.002.A004

Source: SNL, bank filings.
  • Toward this end, encourage banks to issue equity and restrain cash dividends and bonuses. Present market conditions are favorable for equity issuance as banks’ shares are attractively priced relative to book value. However, individual banks appear to be relying mainly on issuance of hybrid capital, some of which is Tier 2. While this may make sense from the perspective of an individual bank, it makes less sense from the perspective of the economy as a whole, given the positive externalities to higher bank capital (see Box 5 of the Final Progress Report14). There might thus be merit in the BdE taking action to address this collective action problem, as it did with the guidance on constraining cash dividends to 25 percent of net income in 2013 and 2014. Indeed, there seems to be merit in extending guidelines on restraining dividends to 2015.


Market valuations of Spanish banks have improved

(Equity Price-to-Book Value Multiples Selected Banks)

Citation: IMF Staff Country Reports 2014, 193; 10.5089/9781498330862.002.A004

Source: Bloomberg.
  • Support efforts to foster corporate debt restructuring. The recent corporate debt restructuring initiatives should support the creditworthiness of corporate customers and improve banks’ asset quality (see companion notes on corporate debt restructuring). The BdE could also consider other measures to foster corporate debt restructuring, such as accelerating the pace at which NPAs are written off and more forward-looking provisioning on loans to potentially insolvent firms.


Scope for higher interest margin, 2013

Lending-Deposit Spread (basis points)

Citation: IMF Staff Country Reports 2014, 193; 10.5089/9781498330862.002.A004

Source: IMF, FSI.
  • Continue to improve profitability. In the near term, banks’ profitability will receive support from lower funding costs, as reflected in new term deposits and new ECB funding measures, as well as from capital gains on securities’ holdings. Nevertheless, banks should continue to improve profitability by reducing operational costs and improving efficiency. There is scope to increase Spanish banks’ net interest margin, for example in relation to banks in some other European countries.

  • Actions at the European level would help this process. Recent ECB actions—including a rate cut, negative deposit rates and policy support for new bank lending to companies—should help address low inflation and financial fragmentation. Successfully executing the ongoing asset quality review and stress tests should spur balance sheet repair and help reverse fragmentation. Agreement on a single resolution mechanism and bail-in rules comprise important milestones towards banking union, but a common fiscal backstop is still needed.

Annex I.

Spanish Banks: A View Through The Crisis, 2007–14 1/

article image
Source: BdE.

All line items are reported on solo basis except as noted otherwise.

Banking system foreign profits are estimated from those of the two largest banks as reported in filings.

On consolidated basis.

Annex II.

Spain: Selected Financial Soundness Indicators, 2006–13

(Percent or otherwise indicated)

article image
Sources: Bank of Spain; ECB; WEO; Bloomberg; and IMF staff estimates.

Starting 2008, solvency ratios are calculated according to CBE 3/2008 transposing EU Directives 2006/48/EC and 2006/49/EC (based on Basel II). In particular, the Tier 1 ratio takes into account the deductions from Tier 1 and the part of the new general deductions from total own funds which are attributable to Tier 1.

Refers to domestic operations.

Including real estate developers.

Sum of main and long-term refinancing operations and marginal facility.

Ratio between loans to and deposits from other resident sectors.

Senior 5 years in euro.


Prepared by Mustafa Saiyid (MCM).


The remainder of loans to households for other uses, such as auto purchase and credit cards, fell by 30 percent.


In September 2012, an independent stress test of banks’ balance sheets identified ten banks that were projected to face capital shortfalls relative to a benchmark of a 6 percent CT1 capital ratio by end-2014 under an adverse scenario. These banks were divided into three groups: Group 1 (banks that could not fill their capital needs on their own and were already controlled by the state); Group 2 (other banks that could not fill their capital shortfall on their own); and Group 3 (banks that could fill their capital shortfall through their own means).


Earnings for foreign operations of the banking system are estimated from those of the two largest banks as reported in filings. The domestic profit of the banking system is calculated as the sum of the profit or loss of each institution taken individually.


Decrees mandating stepped up specific and generic provisions for REDs were adopted in the first half of 2012, before the start of the program.


State support has also included issuance of guarantees on bank debt.


DTAs arising from timing differences are eligible for the deduction. These arise when a bank incurs an accounting loss that is not tax-deductible until some point in the future — for example, when a bank makes a generic provision, it is typically not tax-deductible until assigned to a specific loan as a specific provision; in the meantime, the bank records a loss from the generic provision in its accounts and counts the expected future tax deduction as an asset (DTA).


See Box 2.3 of the BdE’s May 2014 Financial Stability Report for further explanation of this change and its rationale.


These developments are in line with structural recommendations made by the IMF’s Financial Stability Sector Assessment (FSAP) in 2012, as well as subsequent Staff monitoring missions for the Spanish program supported by the ESM.


For further discussion, see Box 2: “Would Slower Private-sector Deleveraging be Good or Bad?” in Spain: Financial Sector Reform, Final Progress Report, February 2014.


Financial Stability Report, Banco de Espaňa, May 2014 (pp. 38).


The ECB will analyze samples of Spanish banks’ foreign portfolios in Portugal, Germany, UK, USA, Mexico, Brazil and Chile.


See for instance, closing address by Mr Fernando Restoy, Deputy Governor of the Bank of Spain, at the XXI Meeting of the Financial Sector, organized by ABC, Deloitte and Sociedad de Tasación, Madrid, 1 April 2014.

Spain: Selected Issues
Author: International Monetary Fund. European Dept.