The Bank of Spain warns the Spanish financial sector: delinquency is going to increase in the coming months. This was expressed this Thursday by the bank’s general director of supervision, Mercedes Olano, in the presentation of the 2021 Supervisory Report. “Delinquency is going to grow. We are facing a very great uncertainty and the uncertainty of the pandemic is still not closed, ”Olano assured.
This statement is based on two factors of imbalance for the Spanish economy. On the one hand, the ravages that are still dragging on from the coronavirus crisis. “39% of ICO credits are still in a grace period. Many will begin to mature this quarter, although there has been a reform in the Council of Ministers and the possibility of extending these maturities in some sectors for another six months has been opened”, recalled the general director. In other words, the moment in which part of this blackberry will emerge will be delayed.
Furthermore, on the other hand, the harshness and duration of the effects of the Russian military attack remains to be seen. “We still don’t see the second-round effects of the war, but it will generate higher energy prices, higher inflation, and a drop in consumption and investment. This will badly affect delinquency, although we do not know to what level”, Olano has influenced. The Bank of Spain is analyzing these possible impacts, but everything is at the expense of the duration of the war and the real impact it has on the economy.
For this reason, the supervisor led by Pablo Hernández de Cos underlines the need to maintain prudence in all senses. “Entities must maintain a high degree of prudence, with an adequate and early recognition of the associated risks, in order to preserve confidence in the sector and to facilitate the maintenance of the flow of credit to the economy”, collects the report in the presentation of the governor.
Regulations with ICOs
Regarding the default, Olano has confirmed that the bank has to comply with the current accounting regulations in relation to the ICO credits in force and on the new deferrals. The banks wanted there to be something loose in this regard and that they could not recognize as delinquent the part of the credits that the State guarantees. However, the Bank of Spain does not share this idea and recalls that they have to comply with the current rule.
He knows in depth all the sides of the coin.
This means that financial institutions have to reflect the entire credit as delinquent and provision between 20% and 25%. “It is a distortion that exists, but accounting regulations must be complied with. If the conditions are not met so that an asset is not removed from the balance sheet, totally or partially, the entities will have to live with this small mismatch. The regulations must be complied with and there is no more flexibility”, insisted the bank’s general director of supervision.
The report also states that exposures to ICOs continued to show low doubtful rates (2.7% in September 2021), “although they had significant rates of special surveillance (21.1% in September 2021) and were beginning to show signs of deterioration. Hence, the Bank of Spain maintains special vigilance, although it considers that the entities are well covered with the provisions it has. For this reason, Deputy Governor Margarita Delgado assures in the report that it is necessary to maintain the current level: “It is important that entities adequately analyze the risks and do not release provisions until the uncertainty dissipates, especially in the sectors most affected by the crisis”.