Spanish Financial System: Accounts, Trends, and Analysis

Posted on Feb 28, 2025 in Economy

Net Interest Income (1994-2000)

  • General reduction in interest rates.
  • Increase in banking competition (price wars: on the liabilities side since 1989 and on the assets side since 1991).
  • Financial disintermediation process.

Bigger impact of both factors on the return on assets than on liabilities. Continuous narrowing of the differential between return on assets and cost of liabilities.

Net Interest Income (2000-2007)

Interest rates decreased between 2001 and 2005. Interest rates increased between 2005 and 2007. Determining factors from monetary policy.

  • Impacting on interest income: Strong competition, expansive strategies, and an increase in the weight of mortgage loans (with relatively low profitability) lead to a smaller increase in the return on financial assets.
  • Impacting on interest expenses: Growing needs of funds financed with resources coming from the trans-border interbank market and from securities, both more expensive than ORS deposits.

Constraints from banking business strategies (till 2008). NII fell and maintained at a low level (1% of ATA).

Net Interest Income (2007-2019)

Reduction of interest rates (main refinancing rate of the ECB) till 0.00% since 2016:03. Determining factors from monetary policy. Unequal monetary transmission to interest income and interest expenses between 2008 and 2009.

  • Increase in the cost of onerous liabilities and fall in interest income in 2010 and 2011.
  • Increase in the ECB recourse and purchase of public debt.
  • Fall in profitability in 2013. In 2014, the reduction in ATA contributed to an improvement in the ratio. Since 2013 the smaller ATA contributes to this improvement.

Constraints from banking business strategies. Volatile NII maintained at a low level (approx. 0.95% of ATA since 2016).

Gross Income

Growing relevance of fee income. The importance of commissions depends on the financial markets evolution. Fall in gross income smaller than that registered in NII.

2020 Analysis (I)

  • The net interest income hardly varies (in euros) compared to the previous year; the decrease in the ratio is due to the growth of assets. Both interest income and expenses did decrease in absolute value (euros).
  • Return on equity and non-interest income fall sharply. The crisis generated by the Covid affected more strongly the part of the banking business linked to nontraditional financial services.
  • Gross income reaches its historical low in 2020.

Adjusted Net Income

Cost containment policies as a measure to compensate for the margin squeeze.

  • Promotion of alternative distribution channels to reduce costs (telephone and internet banking).
  • Between 2008 and 2012, surge in asset impairment losses especially in 2012; however, these losses are unequally distributed among companies.
  • Fall in operating expenses.
  • Non-performing loans increase.
  • Significant increase in financial assets impairment losses.

ANI raised till 2007 and subsequently fell till entering into losses in 2012 (-1.71% of ATA), improving till 0.50 since 2014 to fall till 0.29 in 2017 (due to Banco Popular), to recover since 2018 (0.66%).

Profit Before Tax

  • Till 2007, profits of the banking system grew at a breathtaking path, especially since 2005.
  • Since 2004 till 2008, PBT is higher than staff costs.
  • Since 2008 it falls more than operating margin due to the strong deterioration of financial assets (re-possessed real estate).
  • The sharp adjustment of 2012 allows a return to profits since 2013, basically due to smaller other assets impairment losses and the improvement of the gross income.
  • In 2017, profits before taxes is negative to the effect of Banco Popular; after that, in 2018, it returns to positive values.

2020 Analysis (II)

  • Reduction of operating expenses, in particular those linked to personnel. The sharp fall in personnel expenses breaks the trend of previous years of continuous but small reductions.
  • Strong increase in financial assets impairment losses (from 4.1 to 11.7 billion euros), linked to the economic crisis, despite the fact that the non-performing loan rate has fallen.
  • Deterioration of the adjusted net income: it falls by more than half compared to 2019.
  • Significant increase in other assets impairment losses.
  • Profit before taxes is negative.

Changes in Deposit Institutions (1994-2007)

Main Macroeconomic Features

  • Macroeconomic expansion: high GDP growth, large employment creation, and low interest rates.
  • Credit expansion with a strong increase in mortgage loans.
  • Large borrowing needs (financed by indebtedness with Euro area investors).

Banking Activity Evolution

  • Strong balance sheet expansion (due to the intense growth of credit, both in nominal and real terms).
  • Reduction of the importance of ORS deposits and increase in Rest of the World deposits.
  • ORS deposits-loans gap.
  • Fixed income issuance to fill that gap.

Main Changes in Balance Structure

  • Asset concentration on ORS credit, that changed from representing 37.7% of total assets in 1994 to almost 60% in 2006 and 2007.
  • Mortgage loans to households and non-financial companies reached a great weight in the ORS credit, from 37% in 1994 to 60%, concentrating in 2007 36% of banking activity.
  • The activity with the rest of the world in terms of fixed income and shares on the assets side of the balance sheet increased its relative importance up to 6% in 2007, when it was only 1.6% in 1994.
  • In the liability side, fixed income instruments tremendously increased their weight (2.4% to 14%) to compensate for the very negative ORS deposit-credit gap.

Evolution of Deposit Institutions (2007-2020)

Bubble burst, non-performing loans growth, and shutdown of international financial markets.

Evolution of the Delinquency Rate

  • Balance sheet growth slows down from 2007, turning negative from 2012, with an AAGR of -4.5% between 2012 and 2018. This value contrasts with the slight increase observed for nominal GDP (with an AAGR of 2.6% in the same period). In 2019 the balance sheet grows 1.7%.
  • Credit decreases -2.4% annually (2007-2019), particularly mortgage loans to the ORS. This evolution is partially conditioned by loans transferred to SAREB and the clean-up process in the banking sector.
  • The most dynamic item on the assets side and, therefore, responsible for the banking activity evolution is investment in debt securities, growing at 6.7% annually (and within this category, notably those securities issued by residents, specially public debt), though it sharply falls in the last three years).
  • A notable reduction on the ORS deposit-credit gap: if in 2007 ORS deposits were 78% of credit, in 2016 the coverture recovered the threshold of 100%, reaching 110% in 2019.
  • In liabilities, the item “Securities other than shares” experience a recessive behavior, as it falls from 14% (maximum, in 2007) to 6.9% of ATA, showing the effects of the problems in the wholesale financial markets. In 2017 this item strongly grows (14.7%) reaching 7.9% of ATA (link to Banco Popular event), it grows since then, showing an easing in wholesale market access for Spanish deposit institutions.

2020: Strong Growth in the Balance Sheet

Linked to the action of public administrations to mitigate the effects of the crisis generated by the pandemic.

  • Growth on the asset side is linked to loans to non-financial companies and public administrations.
  • ORS deposits grow strongly. This growth is due to the strong increase in household savings and their preference for safe instruments to materialize it.
  • The solvency position of deposit institutions weakens, since their equity goes from 12.4% to 11.5% of total assets.
  • The ORS deposit-loan gap becomes even more positive (6.9% of total assets).

Spanish System of National Accounts

The Spanish System of National Accounts is composed by:

  • The Simplified national accounts, that synthesize the operations related to the production and expenditures decisions of economic agents.
  • The financial accounts, that reflect the positions and transactions of a financial nature.

The former are compiled by the Instituto Nacional de Estadística (INE) and the latter by the Banco de España (BdE). Currently there are quarterly time series. At present, both non-financial and financial accounts are prepared following a common methodology for the European Union: the European system of national and regional accounts in the EU (ESA/2010). The two main features of the ESA/2010 are:

  • Its application is mandatory in its entirety for all EU Member States, ensuring the use of a uniform methodology for all countries.
  • It is an accounting system harmonized with the System of national accounts developed under United Nations, the World Bank, the OECD, the IMF and the European Commission (Eurostat).

The Link Between Real and Financial Economy

The primary function of any financial system is to bring together economic agents with opposite financial imbalances and/or with different preferences, refers to the set of institutions, instruments and markets through which economic agents obtain the necessary financial resources:

  • To carry out the financing of the real activity.
  • To manage their financial portfolio aiming at making saving profitable.

Financial activity is recorded as net changes in assets and liabilities that economic agents make over a period of time and whether they alter or not their credit or debit position. Economic agents acquire a range of financial assets to place their surpluses, and, in turn, emit financial liabilities, to finance their deficit. At an aggregate level, for all the agents of the national economy, the difference between the Net Acquisition of Financial Assets (NAFA) and Net Incurrence Liabilities (NIL) is the Net Financial Transactions and coincides with the lending or borrowing of the national economy. These balances are also obtained if the aggregation takes place at the level of resident sectors. The only difference is that the national balance is vis-à-vis the rest of the world, while at the sector level it is between one sector and the other resident sectors and the rest of the world. Net current account+Net capital account=Net lending or borrowing=Net financing granted(+)or received(-)=Net financial transactions(or Net financial saving)=NAFA-NIL.

Classification of Financial Accounts (FA)

Financial accounts are used for:

  • Understanding the funding sources.
  • Detecting sector financial imbalances.
  • Defining the goals and the economic policy measures for their correction.
  • Understanding the relevance of instruments where savings materialize.
  • Analyzing the role played by different channels through which financial flows circulate: bank financial intermediaries, non-bank, and markets.
  • Defining the strategy of monetary policy and assess its potential to influence real activity and prices in the most convenient direction.

Financial Balance Sheet

  • At the sector level or total economy
  • Valued at market prices
  • At the beginning and at the end of a period
  • Asset in the balance sheet: total financial wealth
  • Liability in the balance sheet: total liabilities (debt and other instruments)

Interpreting Balance Sheet Accounts

Net financial assets (NFA) measures the net financial worth of country/sector, its net credit or debit position.

  • When it is calculated at the sector level its debit or credit balance is against the other sectors including the rest of the world. Nationally its balance is only against the rest of the world, and then it is also called the Net international investment position (NIIP).
  • It must also be taken into account when assessing the debit balance that an important part of the liabilities, such as shares and other equity in the capital of companies is unenforceable and therefore should not be part of any indebtedness measure.

Main Concepts

  • Institutional sectors. They group together economic subjects with similar behavior.
  • Financial instruments. Financial assets are entities over which ownership rights are enforced by institutional units, individually or collectively, and from which economic benefits may be derived by their owners by holding them, or using them over a period of time; they differ from other assets in the SNA (as physical assets) in that there is a counterpart liability on the part of another institutional unit (except for monetary gold and Special Drawing Rights (SDRs)).
  • Unconsolidated national economy: simple aggregation of the various operations performed by resident sectors.
  • Consolidated national economy: only the transactions with no residents that affect assets and liabilities.

Flow Accounts

Explain changes between worth accounts at the beginning and at the end of a period. Financial transactions account: this is the main account. It expresses net financing granted (+) or received (-) by the national economy (or by a sector) during the referred period. Its balance is called net financial transactions. Other flows accounts, revaluation accounts: it includes changes in the value of assets and liabilities held as a result of changes in their prices or changes in the prices of the currencies in which they are nominated. Account of other changes in the volume of financial assets: it reflexes changes in the total amount of assets or liabilities due to their appearance or disappearance (for example, due to loans write-downs or to change in their classification).

Definition of Financial Accounts

The balance of the financial transactions account is called Net financial transactions and expresses the net financing granted (+) or received (-) by a sector or the economy as a whole in the referred period. For any accounting period each financial balance sheet is linked to the previous one by the accounting identity: stock at the beginning of the accounting period + transactions during the accounting period + holding gains less holding losses accruing during the accounting period + other changes in the volume of assets = stock at the end of the accounting period. Net financial assets are the result of cumulative revaluation, other changes in volume of financial assets and net lending /net borrowing.

  • A positive balance of the financial transactions account necessarily implies an increase in the asset position and / or a decrease in liabilities.
  • A negative balance necessarily implies an increase in liabilities and / or a decrease in the asset position.
  • Credit variations, positive or negative, are recorded as assets in the account. Debit variations are in the liabilities, positive or negative.
  • Net emission: the result may be +, -, or zero.

Delimitation of Institutional Sectors and Financial Instruments

The info appears in sectoral terms and also for the consolidated and unconsolidated national economy:

  • Unconsolidated national economy: it is the simple aggregation of the different operations carried out by all resident institutional sectors with each other and with the rest of the world.
  • Consolidated national economy: operations between resident sectors disappear, leaving only asset and liability operations carried out with non-residents, that is, the rest of the world account from the point of view of resident sectors.

Financial Accounts of the Spanish Economy in 2019

Financial transactions account (millions of euros) 2020. Positive balance in NFT = 13,720 million or 1.2% of GDP: Net lending (since 2012). The Spanish economy continued the adjustment path of the external imbalance resulting from the general improvement of Spanish external economic sector, particularly larger exports. The year 2020 is distorted by the impact of the pandemic in the tourism sector. Most important features:

  • ORS sector deleveraging stops (as a group, as households reduces their debt level).
  • Large differences across sectors in terms of NFT.
  • Increased emissions of the Central Gov. (debt in the medium and long term).
  • Loans from Central Gov. to Social security.

Financial Transactions Account (% of GDP)

Most important features:

  • Deleveraging of the private sector (NFCs and Households and NPISH) has ended but NFT positive.
  • NFCs: NFT of 1.8 of GDP. Financing (liabilities) through loans 3.9% of GDP, fixed income 1.0% and equity 1.5.
  • Households: NFT of 7.2% GDP. Loans -0.4% GDP. The fall in loans can be explained by the effects of the pandemic on consumer loans.
  • GG is the only one with negative balance = -11.0% of GDP. Intra government financial transactions are very important (Regional governments and Social security are financed by the Central Government using loans).
  • Financial institutions: NFT of 3.3% GDP. FI without BdE spectacularly increase their balance, due to their link to the monetary policy, as it is observed in the growth of BdE balance.

Financial Balance Sheet

Shows the financial balance (total accumulated financial wealth or net financial assets) by each sector and the national economy. Net financial assets (AFN), assets minus liabilities, represents the net financial wealth or net debit or creditor position. At the national level and following the nomenclature of the balance of payments it is called net international investment position (NIIP).

The Spanish economy has a net debtor position. In 2020, NFA= NIIP= -963.155 millions, equivalent to -85.8% of GDP. It strongly grows compared to 2019 as a consequence of the GDP fall and the significant negative value of the Other flows accounts. In 2020

  • Net debtor position of GG: 1,203,857 millions, -107.3% of GDP. Central G.: -75.3% of GDP.
  • NFCs: net debtor position of 1,434,613 millions, -127.9% of GPD.
  • Households: Net creditor position of 144.0% of GDP

Spanish Financial System Changes

Through its financial accounts. The analysis of financial flows in the spanish economy must be seen in the context of the profound transformation of the financial system since 1980. Its most significant causes can be summarized as:

  • Financial liberalization.
  • The membership of the eu and emu.
  • Macroeconomic changes.
  • Technological advances.
  • Changes in taxation.

All this has led to a series of events or trends over time:

  • Financial deepening or increasing financial depth of the spanish economy.
  • Internationalization of financial flows and portfolios.
  • The role of financial intermediaries.
  • The pro-cyclicality of financial activity.
  • Evolution of financial accounts balances.
  • Changes in household net financial wealth.

The 2020 data when put in relation to gdp are distorted by the 11% drop in economic activity. For this reason, although they are shown in the graphs, the comments do not extend to this year. In general, they are commented only when the figures are analyzed without putting them in relation to gdp.

Financial Depth

= (Financial asset + Financial liabilites) / GDP x 100. The greater financial depth is a fundamental consequence of the process of economic development experienced by the Spanish economy. This change has been accompanied by transforming processes as deregulation, liberalization and modernization of the financial system, European integration and internationalization of our finances. In 2008 the ratio fell sharply and its subsequent behaviour was explained by changes in the prices of financial assets, financial stagnation and the evolution of the GDP.

Financial Activity

= (NAFA + NIL)/GDP x 100. In terms of annual financial flows the evolution of the financial activity becomes more sensitive to changes in the economic cycle, particularly in the years 2001, 2002 and especially after 2008. The value for 2019 is still very low (2017 was affected by the one-off event linked to the rescue of Banco Popular.

The Role of Financial Intermediaries

The role played by domestic financial institutions has been essential due to the high dependence presented by the private sector, mainly Small and Medium Enterprises (SMSs) and families of bank financing. From 2008, a sharp contraction in FI (without BdE) activity occurs, that remains in negative value since them (except 2017 due to the one-off event of Banco Popular). In 2020, BdE and FI without BdE stand out.

Increasing Foreign Financial Activity

The financial activity of the rest of the world has gradually increased its presence in Spain since 1996, but domestic activity is still the determinant of total financial activity. 33 6. Changes in the Spanish financial system as seen in the FA The role played by Spanish financial institutions was crucial. On the one hand, because their intervention doubles financial activity, acting as receiver and sender of funds; and on the other hand, they have been the channel of the inflow of foreign capital. The increase in the financial activity of the rest of the world since 2012 is due to the fall in absolute terms of the Total, which is related to the process of banking restructuring and deleveraging in the interior. The strong growth of 2020 (from 1770.1 to 2023.8) is distributed equally between domestic activity and the rest of the world, which maintain their relative weights. This is due to the fact that a good part of this increase is produced by the fall in GDP, since the total (Assets plus Liabilities) only increased by 3% in absolute values.

Excessive Pro-Cyclicality of Financial Activity

Tendency to exaggerate or amplify economic cycles through its credit policy. The Spanish financial system is excessively sensitive to the cycle due to the credit policy. Credit grows exaggeratedly in expansive times, also accompanied by the reduction of quality standards; therefore, when circumstances change, delinquency increases and credit evolves with negative rates (credit crunch). In the expansion stage, financial activity (measured in terms of flows) grew well above GDP before collapsing with the financial crisis of 2007. As of 2015, positive but reduced values have been recorded.

Net Financial Transactions (1999-2007)

  • Large financial needs (2007:-9.1% of GDP)
  • 2008-2020: strong correction of financial needs till achieving equilibrium in 2012 and surplus since that year.
  • Severe demand adjustment and growth of export capacity.

Net Financial Transactions Breakdown

By resident fct.

  • 1995-2007 period: Increasing needs of Other resident sectors, peak in 2007.
  • 2008-2020 period: Net lending since 2012, private sector deleveraging since 2009.
  • In 2020, the NFT of the economy is still positive, but the crisis motivates an even more differentiated sector behaviour (strong financial needs for the public sector and great capacity of the private sector).
  • 2012: The values of FI and General Gov. show the financial help that FI received form the government in the banking restructuring process.

Net Financial Transaction (% of GDP)

  • Non-financial companies increased their borrowing at a dizzying pace: from -0.1 up to -9.1% of GDP in 2007. Due to capital expenditures (GKF and financial investments).
  • Households abandoned their traditional behavior as a net offeror of resources (positive Net Financial Saving, NFS) and had negative NFS since 2004, peaking in 2007 with -4.5% of GDP. Increase spending on consumption (and reduce savings) and expansion of their investment in housing.
  • General Gov. continued consolidating their accounts and, from 2004, the sector has positive net financial savings, with a reduction of public debt.

Evolution of Financial Account Net Values

The building of financial imbalances: 1998-2007

  • The public sector leaves the situation of chronic deficit of the eighties and nineties to achieve a financial balance almost at the end of period.
  • Non-financial corporations form a sector that needs funds, although their behavior is full of ups and downs, given its close link to the economic activity cycles, but enters into a frenzy from 2004 till 2007.
  • Households broke their traditional role of net savers of previous decades to become, at the end of period, in a sector that demands funds.
  • The foreign sector becomes the main sector with capacity to meet the growing financial needs of businesses and households.
  • Deposit institutions are the channel of connection to the rest of the word.

Radical Changes in the Role of Different Sectors

As net savers between 2008 and 2019

  • Total economy: fast decrease of financial needs until obtaining a net financial saving of 2.5% GDP in 2019, net lending since 2012.
  • Public sector: change in the General Gov. behavior, from financial capacity to financial needs averaging 10% between 2009-2012, dropping to -2.5 in 2018 (but worse in 2019). This deterioration in the public financial saving partly offset the positive evolution of the private financial saving.
  • Non financial corporations sector: impressive change of almost 12 pp of GDP in barely two years (2007 to 2009), positives values since 2009.
  • Household sector: it becomes again a net saver, but low values since 2017.
  • Financial institutions sector: keep their traditional financial capacity (the high value of 2012 is related to the restructuring process).

NIIP Evolution (1995-2007)

  • Strong deterioration from -20.4% in 1995 to -85.7% in 2007.
  • 2008-2020: slowdown of the deterioration path but it keeps growing till 2015 due to: indebtedness of Gen. Gov., borrowing from the Eurosystem, GDP fall (between 2008- 2013) and revaluations in the price of financial assets.
  • From 2015, the increase in GDP and the positive values in NFT allow a correction of the trend.

Net Financial Assets or NIIP

Against the rest world.

  • Change in the position of BdE due to the financial crisis (2010-2013).
  • Increasing role of the BdE since 2015 due to monetary policy.
  • The entry of liquidity into the national credit system obtained from the Eurosystem is mirrored in the change in the sign of the balance of the BdE (from + 7.8% in 2007 to -29.3% in 2012).
  • FIs without BdE reduce their position as of 2010 due to restructuring and deleveraging and become debtors of the BdE.
  • As of 2015, the situation of the BdE is linked to the implementation of the ECB monetary policy.

Changes in Households’ Financial Wealth

Main factors of changes in the composition of households financial assets

  • Increased income and wealth.
  • Changes in financial regulation: more competition.
  • Changes in the taxation of the financial instruments, bias towards collective investment instruments.
  • The introduction of the euro.
  • Privatizations and IPOs (initial public offers).
  • The intense process of financial innovation.
  • Increase in the investor’s financial knowledge.
  • The search for a better income for savings in a context of bearish interest rates: substitution effect.

The portfolio of assets presents families along the charged period variations in composition. Two phases:

  • 1990-2007: more diversified financial wealth, but also more volatile and riskier.
    • Cash and deposits decreases its relative weight (23 pp.).
    • These assets were replaced by shares, mutual funds and insurance, which increased from 23,1% of financial savings to 56.7%.
    • Stronger link to the evolution of financial markets or directly from the hand of institutional investors
  • 2008-2020: effects of the crisis on the composition of the assets:
    • Increased relative weight of bank deposits, though they declined since 2013 due to the impact of low interest rates.
    • Investing in stocks has a negative trend, though it grows since 2013, fall in 2019.
    • Decrease the weight of shares in investment funds till 2012, sustain recovery since 2013.
    • The relative importance of insurance and pension plans has remained very stable since 2002 (around 16%).

Net Financial Assets (NFA) and Net Financial Transactions

NAFA: Assets purchased – Assets sold. NIL: Liabilities incurred – Amortizaded liabilities. NFT = NAFA – NIL. Net financial assets (NFA) measures the net financial worth of country/sector, its net credit or debit position. Economic agents acquire a range of financial assets to place their surpluses, and, in turn, emit financial liabilities, to finance their deficit. At an aggregate level, for all the agents of the national economy, the difference between the Net Acquisition of Financial Assets (NAFA) and Net Incurrence Liabilities (NIL) is the Net Financial Transactions and coincides with the lending or borrowing of the national economy. These balances are also obtained if the aggregation takes place at the level of resident sectors. The only difference is that the national balance is vis-à-vis the rest of the world, while at the sector level it is between one sector and the other resident sectors and the rest of the world. Net current account + Net capital account =Net lending or borrowing = Net financing granted (+) or received (-) = Net financial transactions (or Net financial saving) = NAFA-NIL. If national capital resources are greater than the gross capital formation, the economy will have financing capacity (surplus). If instead it is negative, the economy will need funding. The Bank of Spain in its annual publication “The Financial Accounts of the Spanish Economy” presents a complete system of accounts comprising the financial balance sheet and the flow accounts in annual and quarterly series. Financial balance sheets or wealth accounts refer to positions in financial assets and liabilities held at the end of each period, valued at market prices. The difference between the asset and liability positions is called Net financial assets and accounts for the net financial wealth of a country or sector. When it is calculated at the sector level, its debit or credit balance is against the other sectors, including the rest of the world. At a national level its balance is only against the rest of the world, and then it is also called the Net international investment position (NIIP). The balance of the financial transactions account is called Net financial transactions and expresses the net financing granted (+) or received (-) by a sector or the economy as a whole in the referred period. Net financial assets are the result of cumulative revaluation, other changes in volume of financial assets and net lending /net borrowing.