MNI INTERVIEW:Spain's Covid NPL Surge More Ripple Than Tsunami

Spanish banks' nonperforming loans will rise as Covid aid is withdrawn, but fears at the beginning of the pandemic crisis of a "tsunami" of bad debt have proven unfounded, the president of the Spanish Banking Association Jose Maria Roldan told MNI.

Stress tests and internal modelling predicting a wave of unpaid loans were wrong, Roldan said, adding that the eventual rise in NPLs should be manageable and very unlikely to strain financial stability, Roldan said in an interview

"We faced a black swan event and the analysis extrapolating from past data suggested a scale of problems that we are not seeing," he said.

State-backed loans from Spain's Official Credit Institute helped share risk between the public sector and private banks, said Roldan, also pointing to coordinated international stimulus in response to the crisis. Only half of the companies which received state-backed loans asked for maturity extensions, he noted, adding that he was confident Spain would see a V-shaped recovery.

Government aid remains generous in those areas of Spain's economy still emerging from the crisis, such as hospitality and airlines, Roldan said.

Asked about steps towards completing European banking union, the slow progress of which has frustrated officials in Brussels and Frankfurt, prompting the European Central Bank's top banking regulator to call for eurozone banks to open branches in other parts of the bloc without establishing subsidiaries, Roldan said that technology would facilitate cross-border integration.

"If you have a digital bank, you can offer banking services to any European citizen regardless of which country they are in," he said, mentioning as an example JPMorgan's move to start an online bank in the U.K.

EUROPEAN DEPOSIT GUARANTEE

But suggestions that eurozone countries could integrate their existing deposit guarantee schemes in lieu of the establishment of a joint European guarantee were unsatisfactory, he said, stressing that a joint scheme was essential for banking union.

"The paradox is that the Spanish banks defend [a joint European deposit guarantee] but because of their relatively larger size they would probably never use it, since that would mean that they would enter the resolution process. Those who aren't going to benefit from it defend it, while those who don't are the ones who would benefit first from this mechanism."

It is too early to tell whether ECB climate stress tests will prompt higher capital requirements for banks in Southern Europe, where companies are seen as more exposed to future climate risks, Roldan said.

"We are in our infancy when it comes to the impact of climate change. There are too many unknown variables," he said. Risks would include not only the physical impact of weather, but the demands of the structural economic change that would come in consequence of a changing climate, he added.

Spanish banks with a high exposure to Latin America will not be overly concerned by the tapering of Federal Reserve bond purchases, he said, adding that the benefits of their international diversification strategies outweigh the costs of any short-term volatility in high-growth countries. Spain's lenders have almost zero direct exposure to the financial struggles of Chinese construction giant Evergrande, Roldan said, but added that any effect on the Chinese economy could have second-round effects for international markets.