The Bank of Spain plans to penalize institutions that take on excessive risk by increasing their capital requirements. A bilateral agreement was signed with the EU to monitor the financial sector bailout, but a risk analysis and recommendations for addressing too-risky positions was still pending. The Bank of Spain has carried out a risk modeling simulation with 30 banks and concluded that the construction and real estate development sectors are carrying the most risk.
There are two important observations to make from the risk modle. On a positive note, most of the risk is concentrated to just one sector. On a negative note, construction debts are still a major risks for the banks despite the situation improving after firms created Sareb, a "bad bank" to store toxic real estate assets, and increasing provisions against real estate defaults and losses. Judging by the Bank of Spain's analysis and what has happened in other countries, the BofS has revised its guide on the Process of Self-Evaluating Capital (known by the acronym PAC in Spanish) that will go into effect this January.
This guide establishes debt limits by sector for the banks. That means that lenders that exceed these limits will be required to increase capital provisions. Penalties for not following the new criteria wil be high.
The Bank of Spain and the troika have kept the Spanish financial sector under their microscopes. The high level of control is being stepped up because of the possibility of rising capital requirements caused by fears of slow growth, what happens with new real estate laws, provisions for reclassified debt, upcoming autumn stress tests and this new risk limit.
