Cos asks to regulate the 'big tech' to ensure competition

The governor of the Bank of Spain, Pablo Hernández de Cos, stated this Wednesday that “it is probable” that financial institutions will have to continue making provisions “during the next few years” due to an increase in loans under special surveillance and to the signals of deterioration in the portfolios of guaranteed loans and in default.

In his appearance at the Economic Affairs and Digital Transformation Committee of Congress to present the 2020 Annual Report of the Bank of Spain, Hernández de Cos has argued that entities “must maintain a policy of anticipating the recognition of impairments, ensuring that it is adequate and timely “.

In this sense, he explained that the doubtful assets ratio in the hotel, restaurant and leisure sectors has increased by 1.1 percentage points in the first quarter of 2021, while the volume of loans in a situation of special surveillance has continued to increase at a rate of 8.1% quarter-on-quarter.

In addition, “the signs of deterioration in the portfolios of guaranteed loans and in default are higher than those of the rest,” said the governor of the Bank of Spain.

In this way, he has ensured that “it is likely that the provisioning effort will have to be maintained over the next few years.” This would imply that financial institutions sacrifice part of their profits in order to protect their balance sheet from the increased risk derived from the economic crisis as a result of the Covid-19 pandemic.

However, he acknowledges that the prospects for economic recovery have translated into an improvement in the sector’s expectations. In fact, in the first quarter of 2021, the return on equity (excluding extraordinary impacts) of Spanish banks stood at 8%, although it is still below the estimates on the cost of capital (of 8, 9%).


Hérnadez de Cos also reviewed the situation of the banking sector in 2020, highlighting that the solvency ratio (CET1) increased, despite the economic deterioration, by 71 basis points, to stand at 13.3% at the end of 2020.

In parallel, bank credit to the private sector in Spain increased by 3.5% in 2020, while the credit drawn down in operations related to ICO guarantee lines represented 18% of total new credit and 34% of credit to non-financial corporations and individual entrepreneurs.

It also pointed out that the banks have used the financing received from the Eurosystem to grant loans to the real economy and that the entities that did not distribute dividends “were more active in granting loans.”

As for non-performing loans, he indicated that they continued to decline, although at a slower rate than in previous years. However, in the last quarter of 2020, the Bank of Spain has observed some signs of deterioration in credit quality, such as the increase in non-performing loans in some segments – such as consumer credit – a slowdown in the decline in credit refinanced or a strong increase in credit under special surveillance.

For its part, the consolidated net result of the banking system was negative in 2020, which meant that the return on assets (ROA) was -0.21%, which was a drop of 72 percentage points compared to 2019.

Hernández de Cos has indicated that a significant part of this decline is explained by extraordinary negative factors in three of the main entities. If the main extraordinary items were excluded, the ROA would have been 0.3%.

“In any case, the downward pressure on profitability was generalized by entities and was due, in particular, to the increase in provisions for impairment, of more than 50%,” said the governor of the Bank of Spain.


As for other risks for the banking sector in the coming months and years, Hernández de Cos highlighted the possibility that competition from technology companies (known as ‘bigtech’) “could become a disruptive path.”

In this sense, it has considered it necessary for the authorities to adopt a “proactive stance to question the regulatory perimeter” in order to guarantee competition between actors.

He also warned that technological competition could put additional pressure on the profitability of the banking sector, “so it is essential that entities continue to deepen their efficiency gains, reducing costs and using new technologies more intensively.”

In addition, it has warned of other challenges, such as the implementation of the latest global reforms of Basel III, the modification that the Bank of Spain is making of Circular 2/2016 to make new macroprudential instruments operational that include requirements to the criteria for granting credit. credit or the improvement of the capacity to act before possible episodes of excessive or inadequate credit growth.

On the other hand, Hernández de Cos has urged us to reflect on the institutional financial architecture in Spain and its possible evolution towards more integrated models and with a greater role for central banks, and has warned of new risks that are emerging, such as the need to that the financial sector incorporates those associated with climate change.


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