Spanish Banking Sector, the Most Tested in the World

Two European stress tests; Oliver Wyman’s endurance tests to know the capital requirements of financial institutions; the assessment of compliance with successive decrees to increase capital; four visits of the European troika… none of these was enough.

But more tests have yet to arrive: the European Central Bank (ECB) will shortly review banks’ asset quality, then the European Banking Authority (EBA) will carry out another stress test, and finally in 2014 the new tool of the Bank of Spain will start to keep a keener eye on financial institutions.

According to Mario Draghi, the Asset Quality Review (AQR) will be a strict exercise of transparency led by the consultancy firm Oliver Wyman (the same company that determined the capital requirements of Spanish financial institutions). Loans to property developers and credits for SMEs, and exposure to structured products will be among the analysed assets.

The next step is to carry out another stress test of the 130 biggest banks of the euro zone. Such test would include almost all the Spanish banks, which are now larger in size after the restructuring process. This is not so for Germany, whose banking sector is much more fragmented.

If the results of the stress tests are published in the second half of 2014, the common supervision will be created, and the Banking Union would be closer. The second phase, known as the Single Resolution Mechanism (SRM), will be more difficult to implant.

In the middle of this process, European authorities should find some solution to the most serious problems that the banking sector is now facing:

1. Overcoming the market fragmentation, which creates huge differences between the financing costs for families and businesses.
2. Breaking the “diabolic” loop between sovereign debt and financial system.
3. Finding new ways so that the credit can reach households and companies.