Pablo Hernández de Cos: The Spanish banking industry and the economic challenges ahead

Speech by Mr Pablo Hernández de Cos, Governor of the Bank of Spain, at the 17th Banking Industry Meeting of the IESE (Escuela de Negocios de la Universidad de Navarra/Business School), Barcelona, 10 May 2022.

Central bank speech  | 
21 June 2022

Good morning.

I wish to begin by thanking the IESE for the invitation to this meeting, which gives me the opportunity to address the main challenges for, and developments in, the Spanish banking industry.

The Russian invasion of Ukraine is a new shock for the world economy, just two years after the pandemic triggered a shock to economic activity unprecedented in recent history.

The long-term consequences of the war in Ukraine are difficult to predict, but they will foreseeably be severe, not only from a geopolitical standpoint but also from an economic one. In the short and medium term, the Russian invasion and the western world's response, imposing unprecedented sanctions, have significantly stepped up the uncertainty. This has had adverse consequences for economic activity and has given rise to further inflationary pressure.

All this, in a setting in which the Spanish economy was gradually recovering from the economic effects of the health crisis. Yet this recovery was still incomplete and uneven across economic sectors, and it continued to be affected by the course of the pandemic and by the sharp increase in inflation which began in the second half of 2021.

When this new shock emerged, the Spanish banking sector's resilience remained generally high and it had returned to pre-pandemic profitability levels. But the war introduces new risks for financial stability. Although Spanish banks have very little direct financial exposure to Russia and Ukraine, the indirect effects of the war may be significant. Particularly through its impact on households and firms, especially those experiencing a slower or tardier recovery from the pandemic and whose solvency may now have worsened.

I will now outline how the Spanish banking industry stood previous to the Russian invasion, before moving on to analyse the economic and financial risks that the new tense geopolitical environment poses.