The Governor of the Bank of Spain, Pablo Hernandez de Cos, today gave a wake-up call to the Executive by demanding that the new package of aid to companies of 11,000 million euros approved last week by the Government be executed quickly and homogeneously. Hernández de Cos also considered it necessary to speed up the liquidation processes. In the letter that accompanies the 2020 Banking Supervision Report, the governor points out that the new aid can be “a useful tool” to reduce the risk of closure of those companies and businesses that are going through a situation of special difficulty, but that are still viable.
“If they materialize, these solvency problems would not only cause a destruction of the productive fabric and employment, but would also end up affecting the financial position of the banking sector, which could respond with a credit restriction that would feed back the negative effects on recovery capacity and medium-term economic growth, “he warns.
In this sense, De Cos warns that if the current business liquidity difficulty leads to solvency problems “They would not only cause a destruction of the productive fabric and employment, but would also end up affecting the financial position of the banking sector.” This would carry the added risk of institutions responding ‘with a credit restriction that would feed back the negative effects on resilience and medium-term economic growth ”. If banks are protected with a retaining wall that prevents insolvencies, De Cos pointed out that entities will be able to “continue to be part of the solution to the crisis through the granting of credit to families and companies”, while at the same time they contribute to the reactivation of the economy once the pandemic is overcome.
In contrast, the governor of the Bank of Spain yes it urged to liquidate nonviable companies with the ultimate aim of preventing them from consuming resources and that their restructuring, despite public spending, does not end up bearing the desired results. With this objective, he urged the financial institutions themselves to “continue to recognize adequately and on time” the potential deterioration in the companies most affected by the coronavirus crisiss. “Only in this way will it be possible to have a reliable diagnosis of the situation that prevents dislocations from occurring in the allocation of financial resources to productive activities and favors the adoption of the necessary measures for the recovery to be robust and sustained,” he stated.
Mergers at European level
Finally, De Cos concludes that the final impact of the pandemic on the banking sector “will depend both on its magnitude and duration and on the effectiveness of economic policies to mitigate its effects on families and companies.” It also recognizes that the urgency for banks to face the challenge of their low profitability has become more evident, a scenario that forces entities to improve their efficiency “by reducing costs and using new technologies more intensively.”
Likewise, it cited mergers or consolidation processes as “an additional useful instrument to face the challenges of the future in a better position”, but stressed the need to carry out “an individual evaluation of the merits of each merger proposal”. In addition, it adds that European transnational operations “would be particularly positive, since they would make it possible to deepen the banking union, reduce the bank-sovereign risk nexus and incorporate greater possibilities for diversification.”