Spain: Financial System Stability Assessment

This paper presents report on Financial Sector Assessment Program (FSAP) in Spain. The bank-dominated Spanish financial system has shown resilience against shocks and household and nonfinancial corporate sectors have continued to de-lever their balance sheets. Nonbank financial intermediation comprises a smaller share of the financial system. Systemic risk analyses cover the banking, household, nonfinancial corporates, and real-estate sectors. The main risks to financial stability are of an abrupt, significant slowdown in growth alongside a material, further tightening in financial conditions, including higher interest rates and risk premia and downward pressure on real estate valuations. Banks’ ability to cope with asset quality pressures without resorting to deleveraging is inhibited by incumbent solvency buffers that are lower than European peers on a risk-weighted basis. In the near term, deploying policies that ensure that significant banks retain a greater share of profits to further raise capital buffers and be better positioned against downside risks is desirable. Macroprudential and supervisory authorities need to be well resourced to address emerging risks and challenges and close previously identified gaps in the policy framework.