The Banco de España analyses the vulnerabilities and risks that could affect the Spanish financial system
The financial position of Spanish households, non-financial corporations and banks has fared favourably, while that of general government is more vulnerable. According to our latest Financial Stability Report, geopolitical tensions and the possibility of sudden, sharp corrections in the financial markets are the main risks to financial stability.
The financial system may be affected by various risks, i.e. adverse changes – with an uncertain probability of occurrence – in economic and financial conditions or in the geopolitical or physical environment (for instance, climate change or pandemics). Should these risks materialise, they would hamper the system’s ability to fulfil its crucial financial intermediation role in the economy, with negative consequences for economic growth and employment. A stable financial system can withstand such risks and is essential for the economy to run properly. For this reason, the Banco de España is tasked, among other things, with ensuring financial stability
, and it publishes a report twice a year monitoring developments in this area. So, what does the latest Financial Stability Report (FSR) say about the Spanish financial system?
Every six months, the Financial Stability Report sets out to identify the vulnerabilities and risks that could affect the stability of the Spanish financial system
This report analyses the financial position of general government, households and non-financial corporations, banks and other financial institutions, with the primary aim of detecting vulnerabilities in the system. These vulnerabilities could heighten the impact of risks to financial stability or the likelihood of such risks materialising. Figure 1 provides an overview of these vulnerabilities, by sector, and of the potential risks.
Figure 1
STRENGTHS AND WEAKNESSES BY SECTOR AND RISKS TO FINANCIAL STABILITY
SOURCE: Banco de España. Financial Stability Report, Spring 2025
Since the last FSR was published in October 2024, the financial position of Spanish households and firms has improved and their debt-to-income ratios have remained at historically low levels. Although the debt burden – i.e. what they pay for their debt relative to their income – is close to its highest levels of the last decade, it is starting to decline, aided by falling interest rates.
By contrast, general government is in a more vulnerable financial position. The government debt-to-GDP ratio remains high and, according to the Banco de España’s projections, the debt ratio and budget deficit will only decline moderately over the coming years. Moreover, there is a risk that spending (on defence, for example, given the new demands of the changing geopolitical situation) will increase and deviate from the projections. A greater level of detail in the Spanish Government’s medium-term fiscal-structural plans would help to contain these vulnerabilities.
In the Spanish banking sector, profitability grew again in 2024 and bank solvencystrengthened somewhat. Spanish banks are well above the regulatory minimum, in terms of solvency and the liquidity coverage ratio.
DID YOU KNOW...?
Solvency and liquidity are crucial for assessing a bank’s financial stability.
- Solvency is a key factor in determining a bank’s strength, as it gives an indication of the bank’s ability to absorb losses without compromising its intermediation role and its capacity to meet its financial obligations.
- How is it measured? By considering the bank’s available capital relative to the risk it assumes, measured by the volume of assets, usually weighted by their risk level.
- Liquidity is a bank’s available assets that can readily be converted into cash, so that it can meet its short-term financial obligations (debt maturities, regulatory requirements or investment needs).
- What is the key indicator? The liquidity coverage ratio, which measures a bank’s ability to handle a sudden outflow of funds. It assesses whether the bank has enough high-quality liquid assets (i.e. assets that can be quickly converted into cash with no loss of value) to cope with a 30-day stressed period.
Banks’ sound profitability at the moment should make it easier for them to build up financial buffers for potential risk scenarios. Moreover, their lending to households and businesses increased in 2024 (after contracting in 2023), and the quality of their loans also improved, pushing down the non-performing loan ratio.
In sum, Spanish banks’ ability to deal with risks remained unchanged in 2024, and they continued to perform well in 2025 Q1.
In addition to banks, other entities – such as investment funds and insurance companies – also operate in the financial system, and account for a growing share of business both in Spain and in other economies. Some of these financial agents are highly leveraged and have tight liquidity positions, which has caused some concern internationally.
Turning to the Spanish housing market, 2024 saw strong increases in sales, new loans and prices. This house price growth, which far outpaced the consumer price index, was consistent with the favourable developments in household income and the interest rate cuts. Moreover, there has been no easing of lending standards.
To round out our vulnerability analysis, we also look at the tariff hikes announced on 2 April, which unleashed turmoil on the financial markets around the world, prompting frictions in the US government bond market, a fall in stock market prices and a depreciation of the dollar. Recent weeks have seen a softening of trade tensions, which has led to a reversal of the stock market losses (see Chart 1), and financial asset prices once again reflect an optimistic economic outlook.
Chart 1
SPANISH, EUROPEAN AND US STOCK MARKET INDICES
SOURCE: LSEG Datastream.
NOTES: 28 October 2024 is the cut-off date for the last Financial Stability Report; 2 April 2025 is 'Liberation Day', when the sweeping tariff hike was announced by the United States. Latest observation: 12 May 2025.
Geopolitical tensions continue to be the main risk to financial stability
Given this situation, the main risk to financial stability continues to be geopolitical tensions, particularly those associated with the uncertainty surrounding US policies (see Chart 2) and the possible escalation of military conflicts. If these tensions were to deteriorate, they could seriously undermine world GDP growth and erode global financial conditions.
Chart 2
INDICES OF GEOPOLITICAL RISK AND OF TRADE AND ECONOMIC POLICY UNCERTAINTY
SOURCE: Economic Policy Uncertainty.
NOTE: The geopolitical risk index is drawn from Caldara and Iacoviello. (2021). The trade policy uncertainty index is taken from Caldara, Iacoviello, Molligo, Prestipino and Raffo. (2020). The economic policy uncertainty index is drawn from Davis (2016). Latest observations: April 2025 (geopolitical risk and trade policy uncertainty) and March 2025 (economic policy uncertainty).
There is also a possibility of fresh sharp corrections on the financial markets. Despite the recent volatility, risk-bearing asset prices are still high and investors’ aversion to risk is very low, which could open the door to such sudden corrections.
The report also analyses other macroeconomic risks, including the possible divergence in monetary policy between United States and Europe and the growing threat that cyber risks pose to banks.
The Banco de España’s macroprudential policy is geared towards preserving and bolstering the Spanish banking sector’s resilience to the risks and vulnerabilities identified. If the cyclical risks to Spain’s financial system remain at their present level, the countercyclical capital buffer (CCyB) required of banks will likely be raised from the current rate of 0.5% to 1% in 2025 Q4. The announced plans for strengthening this capital requirement therefore still stand.
Risks in the geopolitical arena and on the financial markets can evolve quickly, and their current prominence sets the stage for an environment of volatility. The Banco de España will continue to keep a close watch on the risks to financial stability in Spain and stands ready to adapt its macroprudential policy if needed.
