Annual report
EVOLUTION OF THE MEMBER SAVINGS BANKS
The 2010 financial year was marked by a distinct dichotomy in the progress rates of emerging economies on one hand, with a specific weight of almost 50% of the world, and developed economies on the other. Within this last group what did stand out were the difficulties experienced in public finances of certain important countries, which had a very large impact on the evolution of the markets, on the need for sound public accounts, on the recomposition of the financial system and on the return to higher economic growth rates. In the same way, there was an accentuation of the imbalances between financial flows on a global level, so that the deficit of more advanced economies (such as the US economy) were financed with the available surpluses from emerging economies such as China. All of this affected monetary policy in recent months.
The sovereign debt crisis called into question not only the stability of the European system, but also the survival of the single currency in countries comprising the Economic and Monetary Union (EMU). Initially, it did not seem that the Greek debt crisis would continue or rapidly spread towards other EMU countries as occurred. This highlighted not only the vulnerability of prevention and control systems and the absence of tools for tackling systemic eventualities on a European level, but also the need to improve financial and economic governance mechanisms in Europe.
In this context, both the Eurozone and other international institutions embarked on a series of reforms to address the situation. Of these, it is worth mentioning the creation of the European Systemic Risk Board, the establishment of a European Stability mechanism and the provision of a European rescue fund or the European Financial Stability Facility as instruments for the recovery of EMU market confidence. European governance improvements also included revising the Stability and Growth Pact, monitoring macroeconomic imbalances in a more transparent climate and implementing penalties in the event of non-compliance.
As far as financial regulation and supervision is specifically concerned, the Basilea III agreements established new liquidity and solvency requirements as an integral part of a series of actions for modifying the European financial architecture.
In general, all EU countries were making important efforts to increase the effectiveness and efficiency of their financial systems. The objectives pursued refer to toning down the impacts of the possible future systemic financial crises, to maintaining the efficiency of the credit flow to the real economy, to preserving the capacity of households and companies for managing their financial risks and needs, and finally to preserving the functioning of payment systems, thereby guaranteeing safe capital and liquidity for savers.
These reforms should also be supplemented with restructuring measures suitable for the banking system. According to the ECB, sound balance sheets, effective risk management and transparent, robust business models are key to strengthening credit institutions' resilience to shocks and thereby laying the foundations for sustainable growth and financial stability.
The monetary policy applied by the ECB was expansive and maintained the marginal interest of immovable auctions at 1% throughout the financial year. There were no remarkable variations in the interbank market. There was a moderate increase in the Euribor rate with the 3-month rate rising from 0.67% at the beginning of the year to 1.02% at the end and the 1-year rate rising from 1.23% to 1.53% for the same period.
Monetary and price stability was therefore one of the main objectives of ECB actions in 2010. The central bank made important purchases in the bond market, offering exceptional credit and liquidity facilities, and accepting a wider range of financial assets as collateral. This practice, however, was provisional and non-permanent and was slowly suspended as markets returned to normal.
The foreign exchange market was characterised by the tensions between the most important currency exchange rates, which anticipated the possibility of entering a trade war and of the increase in protectionism in world trade. Problems did not so much stem from the volatility of the exchange rate, as to the tensions arising from China's refusal to revaluate its currency, the renminbi, together with the expansive monetary policies of more advanced economies which propelled the flow of capital towards emerging countries with the resulting appreciatory pressure for their currencies. By the end of the year, the exchange rate between the euro and the dollar stood at 1.315% after a 7.9% appreciation of the American currency against a weak euro.
EMU inflation remained at the fixed variation rate set by the ECB, with a limit of over 2%, although there was still the threat of the pressure exerted by the strong rise in the prices of raw materials in international markets, spurred by the high growth rates of emerging countries and their growing demand for such raw materials.
There were also differences between the European and North American public debt market. The latter continued to reduce its rate of return towards the middle of the year which sparked a sharp recovery under the new tax stimulus package for economic growth and the recovery of the economic cycle and this had a favourable effect on agents' expectations.
The European sovereign debt crisis transferred demand towards variable income markets at the mercy of improvement in corporate profits of certain sectors. The evolution of European variable income markets was extremely volatile and erratic due to the fact that there was no clarification of the panorama of those countries trapped by the crisis and uncertainty. Sovereign debt offered protection at the beginning of the crisis, but as the crisis unfolded, there was a loss of value and funds were directed towards securities with higher risk-profitability ratios.
Credit activity, meanwhile, rose weakly, with a year-on-year growth rate for household loans of 2.3% in the EMU. Debt in relation to family assets continued to grow moderately, despite the economic recovery observed in the last quarters of 2010.
After an important drop in private sector credit interest rates which reached their lowest of around 3% at the end of the year, a certain recovery was observed in Spain with an average of 3.57% as interbank rates rose and Spain's debt risk premium increased. In real terms, however, the cost of financing continued to fall very gently. This explained the growth of private credit investment which was particularly directed towards companies. There was a slowing down of the drop in working capital financing through trade credit.
Nor was there any substantial improvement in household financing with its very moderate growth rates. The demand for home mortgages was influenced by the state of the sector which was severely affected by the excess of supply after the housing bubble burst. Consumer credit, meanwhile, was seriously affected by the VAT increase in the middle of the year, which encouraged consumer purchases in the months beforehand and a significant reduction after the summer. Demand for public sector financing grew and presented a year-on-year variation of 16% at the end of the financial year. The default rate of the private sector rose to 5.7%.
In terms of the evolution of deposits, the liquidity requirements of financial institutions unleashed a remuneration war of the funds obtained as liabilities. The average interest rate of term deposits reached 2.75%, which represented a growth of 3.2% of their balance.
Investment funds were particularly affected by market volatility and savers withdrew balances from this type of product, with a year-on-year drop of around -14%, having recorded a complete dip in the return of these according to the type of investment fund.
