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

OVIEDO, Spain

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

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

Amid such volatile conditions, he said it was difficult to predict what will happen to the country’s banking sector. On the one hand, higher interest rates would increase profitability. On the other hand, economic risks are a major threat.

“Although the starting position of the banking sector is positive, it is necessary to be extremely careful, as well as to monitor risks closely, which could evolve quickly and lead to new stress scenarios,” he said. .

Hernandez de Cos also suggested that banks’ risks extend beyond the short term. He says he is focusing on a two-year horizon during which many households and businesses could start to struggle to pay their debts.

Given the situation, he said banks needed to “increase provisions to cover potential losses”, referring to funds set aside to cover defaulted loans.

At the same time, the Spanish property market has seen some exuberance over the past year, with prices jumping 8%.

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

Although growing headwinds are to be expected for the Spanish banking sector, Hernandez de Cos said that in recent years financial entities have strengthened their solvency and profitability.

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