Droughts, heatwaves could dent Spanish banks' capital -ECB's De Cos

investing.com:

MADRID (Reuters) — Severe droughts and heatwaves in Spain could have a persisting impact on the domestic lenders' solvency by slowing down the economy and leading to more loan losses, the Bank of Spain Governor Pablo Hernandez de Cos said on Friday.

Spain has logged its warmest January since records began in 1961 and last year was the country's second warmest, while a recent study showed parts of the Iberian peninsula were suffering from the driest period in 1,200 years.

Scientists have linked scorching temperatures and dry and windy conditions in many parts of the world, including southern Europe, to climate change.

De Cos said that the materialization of those risks would lead to a 0.2 percentage points reduction in the core tier-1 capital ratio of Spanish banks and would persist over a three-year horizon.

«Bank capital consumption in this adverse scenario is mainly explained by higher impairment losses and lower net income generation, in line with lower economic activity», De Cos said at an event in the Balearic Islands.

De Cos said banks would probably react by reducing their loan portfolios, which would mitigate the effect on solvency, but exacerbate the economic impact.

«In any event, if droughts and heatwaves were to become recurrent, their negative impact on the solvency and profitability of the banking sector would be greater than the short-term effects identified in this analysis,» he said.

Findings were part of the results of various papers from the Bank of Spain.

De Cos, who is also a member of the European Central Bank governing council, said that heat waves and droughts can occur simultaneously in several countries, posing additional risks.

Last month, the ECB hinted it could make its monetary policy