The Bank of Spain warns of a considerable increase in financial risks for vulnerable families and companies due to the rise in interest rates that the European Central Bank is carrying out. "The vulnerability associated with the financial weakness of companies and households is now more generalized," says the regulator in its Autumn Financial Stability Report (IEF) published this Friday. More vulnerable and in worse conditions, he predicts.
The rise in interest rates will cause a "significant" increase in costs for the most needy families and companies, who will have greater problems making ends meet and meeting their financial debts, warns the Bank of Spain in his extensive document. Specifically, in the case of the most vulnerable households, the body led by Pablo Hernández de Cos contemplates that the impact of a 300 basis point rise in rates will cause an increase in the spending of these families of around 4%, which, Added to inflation, it will lead to an increase in this expense of 13.8%.
The increase in prices and interest rates affects all incomes, but especially the lowest and average, which have a greater number of mortgages. These households continue to dip into the savings they accumulated during the pandemic, explains the state agency.
The BdE considers a vulnerable household one in which the net financial burden represents more than 40% of disposable income. That is, they have to spend at least 4 out of every 10 euros of their income to pay off their debts. There are already more than 35% who are in this situation. And up. In other words, the rise in rates is going to cause the most needy families to have a worse financial situation, a burden that is added to the rise in energy prices and the prices of the shopping basket.
And all this despite the fact that, for the moment, "the transmission of the increase in official rates to credit prices is being moderate", highlights the Bank of Spain. In other words, the banks are not yet transferring the rate hike to deposits, a transitory scenario that will disappear over the coming months.
To solve this problem, which De Cos has already warned about on several occasions, the Bank of Spain proposes "focused and temporary" support measures. This approach occurs in full negotiation between the Government and financial institutions to activate aid to families to meet their mortgages. What the regulator is demanding is that they are not general measures, but focused on the vulnerable, and that they do not generate problems in the medium term for new clients.
The Bank of Spain's Autumn Financial Stability Report indicates that the risks in the Spanish economy “have increased in recent months”. To the persistent inflation we must add "the probability of a contraction in activity", can be read in the published document. The supervisor does not foresee a recession at this time, but it does highlight that the probability of it occurring is greater today than it was six months ago.
Another of the vulnerabilities highlighted by the BdE is the “high public debt”. In this sense, the report appreciates that the reduction of the debt that the Government is carrying out is positive news, but it points out that if there are no additional measures "these gains will tend to be exhausted". The recommendation that it makes to the public authorities is twofold: that the aforementioned fiscal support for vulnerable families and companies be "temporary and very selective" and the definition of a fiscal consolidation plan.
The Bank of Spain notes in its autumn report that the situation of banks in terms of profitability has improved significantly in recent months. In this way, credit has remained stable in the first half of 2022, although it is true that consumer credit is falling. Credit to companies did pick up thanks to the decisions of large companies, which have been substituting financing in the markets for financing from banks thanks to the fact that interest rates have not yet been transferred to entities. This substitution has already been reduced in September.
Doubtful loans, moreover, have decreased and now stand at 12.4% year-on-year. This is because banks have been shedding their impaired portfolios. There has also been a drop in loans under special surveillance, which stand at 9.5%. Despite this, the risks in bank balance sheets are still there.
On the eve of the Government approving the new tax on financial institutions, a tax on which the Bank of Spain does not want to stop until it comes into force, the supervisor appreciates that the profitability of national financial institutions has been one of the most high in the euro zone due to the net interest income which, for the most part, comes from abroad. In the third quarter, however, there is a deterioration in the allocations to provisions caused by the results of some banks in countries such as the US, Brazil or Turkey.
The Bank of Spain appreciates a "remarkable strength" in housing sales in Spain in recent months, although with "some signs of slowing down". According to notarial information, between January and August housing transactions were slightly more than 30% of those registered in the same period of 2019 and reached the highest values since 2007.
Regarding prices, the BdE appreciates that the supply of housing continues to be weak in relation to demand, which is why high increases have been registered in the second quarter, although slightly lower than in the first. In the short term, the report adds, "the slowdown in housing prices could intensify" due to economic uncertainty and the tightening of financing conditions.
