Bank of Spain sees turmoil rising funding costs, requiring liquidity sourcing review

By Jesús Aguado

MADRID (Reuters) - Uncertainty triggered by the global banking sector turmoil may generate a persistent increase in funding costs for Spanish lenders and require a thorough assessment of sources of funding and liquidity, senior Bank of Spain officials said.

Presenting the central bank's supervisory report, Bank of Spain Governor Pablo Hernandez de Cos said that the impact from high inflation on the disposable income of households and firms "may adversely affect their payment ability."

"This, in turn, may force (Spanish) banks to raise the required loan loss provisions, although the macroeconomic deterioration has not been reflected so far in terms of credit quality," de Cos said, adding that bad loan ratios declined gently throughout 2022, despite the end of loan moratoriums.

Non-performing loans stood at nearly record lows of 3.56% in January, far below the all time-high of 13.6% in December 2013.

The financial authority has not seen any extraordinary deposit outflows, its director general for supervision, Mercedes Olano told the media on Tuesday, adding that banks have just been channelling deposits into funds for some time.

Deputy Governor Margarita Delgado also said that amid a tighter financing conditions following a period of abundant, cheap liquidity, banks should assess liquidity risks and have diverse, credible and plan-based funding sources to allow them to "adapt flexibly to the changing environment."

She added that recent monetary policy measures such as reduced funding via ECB's TLTROs III loans, would mop up the unusually high volumes of high-quality liquid assets.

    "Moreover, in the euro area as a whole, the decline in liquidity could increase competition for funds and thus make market conditions for obtaining funding less favourable," said Delgado, who also sits on the ECB supervisory board.

    In its report, the Bank of Spain said it expected Spanish lenders to maintain comfortable excess liquidity positions. As of February, Spanish banks' liquidity coverage ratio stood on average at 175% among the significant lenders, well above the global average of 140%, according to the Basel Committee on Banking Supervision.

Olano said that Spanish banks' exposure to Credit Suisse stood at between 300 million euros ($325.23 million)and 400 million euros.

($1 = 0.9224 euros)

(Reporting by Jesús Aguado and Emma Pinedo, editing by Andrei Khalip, Chizu Nomiyama and Tomasz Janowski)