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Information furnished by others, upon which all or portions of this report are based,has not been verified. No representation or warranty is given as to the accuracy ofsuch information. Specifically, information that has been provided by or on behalf ofthe Bank of Spain has not been validated, verified or confirmed, nor has OliverWyman sought to validate, verify or confirm such information.
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This report shall be governed by Spanish law and, without limitation to the foregoing,the extent to which Oliver Wyman shall be subject to liability if any in respect of thisreport shall be governed exclusively by Spanish law, and by the express terms andconditions of the Agreement. Context and objectives Introduction Description of the exercise Scope, purpose and limitations of the exercise Structure of the document Spain Financial Services current situation Characterisation of the portfolios and key latent risks Recognised losses Macroeconomic scenarios Methodology Credit loss forecasting Non-performing loans Foreclosed assets Loss absorption capacity Results of the stress testing exercise Forecasted expected losses Steering Committeescenarios 12Figure Credit quality indicators of historical Spanish macroeconomic indicators — vs.
Steering Committee scenarios 13Figure Steering Committee scenario vs. The objective of this work is to assessthe robustness of the Spanish banking system and its ability to withstand a severelyadverse stress scenario of deteriorating macroeconomic and market conditions.
Top-down approaches consider the different historical performance and asset mix foreach institution at aggregate levels, applying conservative but similar estimates ofloss behaviour across banks when more detailed bank-specific loss drivers are notavailable. In this way the top-down estimates provide insight into the overall capitalneed of the system but are less well suited for bank-by-bank decisions on viabilityand the amount of possible capital needs.
The scope of the work included the domestic lending book and excluded otherassets, such as foreign assets, fixed income and equity portfolios or sovereignlending. We subjected each of these assetclasses to various stress scenarios formulated by the Steering Committee. Thesevere stress scenario was more marked than similar exercises in most otherjurisdictions: the downturn persists for 3 years compared to 2 in other exercises and most critical variables were stressed at more than two times the historicalstandard deviation compared to a more typical range of in other exercises.
Forexample, cumulative GDP contraction in the severe stress scenario was 6. Bank of Spain Stress Testing Exercise Executive Summary baseline scenario with a more benign macro-economic contraction for reference purposes.
Because projected losses and loss absorption capacity are quite unevenlydistributed across banks, the difference between losses and resources will naturallynot be equal to capital needs. In the absence of a more detailed bottom-up exercise, with its due diligence andmore detailed bank-portfolio level analysis, it is not possible at this stage to providebank-level results.
Indeed because such information and data are not yet fullyavailable, the top-down estimates were conducted with a view to makingconservative assumptions on important parameters along the way.
The subsequentbottom-up process is intended to provide certainty at the individual bank level. Bank of Spain stress testing exercise1. Context and objectives1. IntroductionOn 10th May the Spanish Government agreed to commission two private andindependent valuations of the Spanish financial system. A Steering Committee was formed in order to coordinate and supervise ongoingprogress and make key decisions throughout the exercise.
Oliver Wyman was commissioned on the 21st of May to provide an independentassessment of the resilience of the main banking groups, based on macro-economicstress scenarios formulated by the Steering Committee. Description of the exerciseThe purpose of this exercise has been to undertake a top down stress testinganalysis to assess the resilience of the Spanish financial system under adversemacroeconomic conditions over 3 years This consisted of forecastingportfolio losses under various macro-economic scenarios and comparing them withthe loss absorption capacity for the banks under examination.
The differencebetween the two roughly corresponds to the additional system capital needs. Wedescribe below the three main components of the stress testing analysis. Includes large and medium sized banks and excludes small private banks, other non-foreign banks aside from the 14 listed, and the cooperative sectorOliver Wyman 1MAD-DZZ The diagram below illustrates the three main components of the top-down stresstesting analysis.
Figure 1: Loss forecasting and capital absorption framework overview 1 Expected loss forecast 3 Capital impact Capital buffer Pre-provision profit 2 Generic provisions Loss absorption capacity Provisions on foreclosed assets Substandard provision Specific provision provisions Non-performing loans Foreclosed assets Projected earnings Excess of capital buffer Performing loans New book Loss absorption capacity6 Overall in this exercise, de-leverage has a negative impact on resilience of the system, by contracting the economy and therefore significantly rising expected losses.
However, we refer here to the fact that balance sheet reduction implies lower RWA requirements and therefore lower capital. Scope, purpose and limitations of the exerciseThe exercise was conducted between the 21st of May and the 21st of June , andfocused on stressing the domestic private credit portfolio, applying bank-levelinformation provided by the BdE within that period.
It also provides a perspective on the losses already incurred and recognised by the banks. The stress testing methodology applied consists of Oliver Wyman proprietary statistical models and estimations. Bank of Spain stress testing exercise2. Spain Financial Services current situation2. This portfolio has similar challenges to the Large Corporate portfolio, however losses are mitigated through high collateralisation of the portfolio i. This segment has traditionally seen low defaults since the government is the main borrower.
However, the risk of this segment has been increasing 9. The short-term nature of this type of credits reinforces the mitigation impact of tightening of credit policies.
Latent risk due to forecasted price deterioration of both housing and land, together with expected haircuts on sale over appraisal values driven mainly by market illiquidity even more so for land and RE under development , imply significant further losses for these portfolios. Recognised lossesGiven the deterioration in the asset book, Spanish balance sheets have alreadysuffered a significant level of distress. The chart below shows the overall cumulatedrecognised losses.
Informe completo de Oliver Wyman sobre capitalización de la banca española