The Bank of Spain is not letting its guard down. Amid the debate for banks to resume lending to developers, the supervisor calls for “increased monitoring” of the banking sector’s exposure to bricks and mortar. And it puts the loans to companies linked to property development and construction at €113 billion at the end of 2023.
It represents a weight of 8.3% of total bank financing to the private sector (households and companies) in Spain. However, the Bank of Spain remains cautious for two reasons. The first is that most of it is in the form of variable-rate operations (almost 70% of the total), so that at the end of last year these companies would already have largely absorbed the rise in interest rates associated with the ECB’s monetary tightening cycle.
And second, because refinancing risks “appear contained, at least in the short term”. Just over 90% of the bank debt of companies in this real estate sector has a residual maturity of more than one year.
Identifying the accumulation of risks
“It is advisable to strengthen the monitoring of real estate exposures in the banking sector in order to improve the ability to detect the possible accumulation of risks and better measure the impact of their potential materialisation,” the Bank of Spain stresses in its latest Financial Stability Report.
The government wants to speed up the approval process for property developers as a key measure to reduce house prices. Although the banks are cautious and guarantee that they will maintain the criteria for approving loans according to their risk models as a containment dike, according to financial sources. The ghost of the 2008 crisis is still very much on banks’ minds.
In fact, the balance of loans for development and construction has already accumulated a fall of more than 80% from 2008 levels, according to updated data from the Bank of Spain. Since the start of the Cobid crisis, the fall has been 17%, deepening the correction from the 76% plunge recorded between 2008 and 2019.
Uncertainty after the wars
The Bank of Spain identifies the geopolitical situation as the main threat to financial stability, just as Iran attacked Israel this weekend and the shadow of a wider war is spreading across the world. In particular, it points to the risk of continued pressure on commodity, gas and oil prices, which could postpone the reduction in inflation.
“The potential remains for geopolitical tensions to negatively disrupt trade in energy and other commodities – and in commodities more generally – and to trigger sharp falls in the prices of risky financial assets. To the extent that these tensions translate into higher levels of economic uncertainty, their impact on economic activity could be significant,” the regulator warns.
Original Story: Vox Populi | Author: Rubén Sampedro
Edition and translation: Prime Yield