Spain Moving Ahead with Financial Sector Reforms

Sector shows major improvements over course of reform program

Equity prices strengthen, risk premiums fall

Continued efforts needed to enhance banks’ ability to lend

In July 2012, Spain began a major program of financial sector reform. Financial assistance was initially provided by the European Financial Stability Facility to support restructuring and recapitalization of Spanish banks and other financial institutions. Later, responsibility for providing financial support shifted to the European Stability Mechanism.

The IMF monitored the progress of Spain’s 18-month financial sector reform program via quarterly reports. This is the fifth and final report.

The 2012 assessment of Spain’s financial system set the stage for the reform program. That assessment concluded that while there was a core of strong banks that are well managed and appeared resilient to further shocks, vulnerabilities remained and a comprehensive strategy was necessary to address them.

Speaking to IMF Survey, Ceyla Pazarbasioglu, who led the Financial Sector Assessment Program (FSAP), and Kevin Fletcher, who headed the IMF team that prepared the latest monitoring report, discussed some of the conclusions of the report, including the most pressing issues facing Spain’s financial sector and the policy actions needed to further strengthen it.

IMF Survey : Can you give the big picture of Spain’s financial sector program and the role the IMF had in it?

Pazarbasioglu: Back in October 2011, we went to Spain to conduct the FSAP. At that time, the situation was deteriorating fast. A domestic real estate boom-bust exposed substantial weaknesses in the savings bank sector, shortcomings in the policy and regulatory framework, and an over-reliance on wholesale funding. The country was witnessing a financial sector crisis unprecedented in its modern history.

The authorities had been taking steps to respond. They took the politically very difficult step of starting to reform the savings banks, raised minimum capital requirements, and required substantial provisioning for real estate-related assets. But the challenge was enormous and markets were rapidly losing confidence. In addition to the global financial crisis and the domestic real estate crisis, the country was also hit with the European sovereign debt crisis. We advised them as part of our FSAP to implement a comprehensive strategy—undertaking a thorough, independent valuation of banks; establishing a credible backstop...