Economic, business and regulatory environment

Europe took decisive steps towards banking union after reaching agreement on setting up a single bank resolution mechanism and fund. The ECB assumed its new banking supervisory responsibilities after carrying out a comprehensive assessment of the European banking system.

Political and geopolitical developments were a major focus of attention. Geopolitical tensions flared in the Middle East and, especially, in Ukraine.

The world economy was characterized by modest growth, with inflation remaining at a low level.

Oil prices fell by nearly 50% over the year under the impact of demand as well as supply factors (G3).

The Eurozone barely showed any increase in activity and inflation remained at very low levels throughout the year (G4).

The Spanish economy saw a recovery and performed strongly compared with other Eurozone economies (G5). Rising levels of activity were supported by a more benign financial climate, less aggressive budgetary consolidation and a stabilizing construction industry.

The ECB took further stimulus measures to counteract the low level of inflation. Policy rates of interest were set at historically low levels and the deposit facility rate was taken into negative territory. The ECB also set up longterm liquidity-boosting operations to encourage banks to increase their lending and launched programmes of private asset purchases (G6).

In the USA the Fed made a change in the direction of its monetary policy, supported by an improving labour market (G7). This resulted in the Fed's programme of US bond and MBS purchases being brought to an end.

Yields on German long-dated bonds sank to all-time lows (G8). The German long bond was boosted by falling inflation, Eurozone economic weakness, the ECB's accommodative policy stance and a more uncertain geopolitical climate.

In Spain, yields on 10-year government bonds also reached all-time lows (G9). Risk premiums on Spanish debt narrowed sharply, supported by the ECB's lax policy stance.

Progress towards European banking union helped to further reduce fragmentation in Europe's capital markets (G10).

The euro suffered heavy falls against the dollar (G11). This was caused by the diverging monetary policies pursued by the ECB and the Fed, and by strengthening economic activity in the US.

In the emerging economies, financial markets saw high levels of volatility and substantial currency depreciation (G12). This was fuelled by structural weaknesses in certain major economies and fears over the pace of the economic slowdown in China. Political and geopolitical instability in some countries was also a contributory factor.

Outlook for 2015

The global economy will foreseeably continue to feel the after-effects of the financial crisis and grow at a modest pace.

The geopolitical landscape will remain a source of concern and uncertainty fuelled by political developments will persist in Europe.

Core inflation (ex food and energy) will continue at a low level in the world's main regions and especially in the Eurozone.

Recovery is likely to be fragile and uneven across the euro area. The Spanish economy is set to remain one of the region's few success stories. In the USA the growth of the economy is expected to stay close to its potential rate.

The ECB will take further measures to counteract deflation risks. In contrast, the Fed is expected to embark on a round of very gradual interest rate increases.

In the field of banking union, efforts will be focused on the implementation of the single resolution mechanism. In 2015 the ECB will complete its first round of banking supervision.

Many emerging economies will have to steel themselves for the onset of a process of deleveraging (especially by companies) in an increasingly complex environment.

In China potential GDP growth is expected to continue its downward trend.

Regulatory environment

European Banking Union

Banking union is a critical stage in the process of moving towards fuller economic and monetary union in Europe. The establishment of a Single Supervision Mechanism (SSM) and the assumption by the ECB of its mandate as a prudential supervisor are key milestones in the process of establishing a banking union, which is to be supplemented by a Single Resolution Mechanism (SRM) and the implementation of a harmonized deposit guarantee system. The SSM is responsible for the supervision of all credit institutions in member states of the Economic and Monetary Union (EMU) and in those countries of the European Union which do not have the euro as their currency but choose voluntarily to participate in the system.

The ECB took on its new role as Europe's banking supervisor in November 2014, more than two years after the European sovereign debt crisis reached its peak and the European authorities agreed to work towards greater financial integration in the European Union. The ECB is to carry out its new functions through the SSM, part of a new regulatory and operating regime approved in April 2014.

Other European Union initiatives

In January 2014 the European Commission submitted a proposal for structural reform of the banking system. The aim of the proposal is to reduce the likelihood of retail banking being affected by contagion from the risks of banks' financial market operations. In particular, it is suggested that the proprietary trading business of banks be transferred to entities that would be separate from them both legally and financially. The proposal would include all EU banks that were of a globally systemic nature or whose proprietary trading was significant. At the present time the proposal is under negotiation in the European Parliament.

In another development, negotiations are in progress among a group of 11 EU countries (including Spain, Germany and Italy) on the introduction of a financial transaction tax. The negotiations relate to a proposal made by the Commission in February 2013 which would impose a tax on transactions in the main financial instruments linked to participating countries. The initiative is intended to harmonize a tax already operating at the national level in certain countries, raise revenue and act as a disincentive to speculative trading in financial markets.

Finally, the European authorities have indicated that they will increase the supervision of risks of non-bank financial institutions. In particular, they have highlighted the significant growth in the corporate bond market and the exposure of mutual funds to this market as a potential threat to financial stability. Regulation of the non-bank sector is, however, at an early stage and initiatives are being conducted at a global level by the Financial Stability Board. In the EU proposals have focused on the liquidity of money market mutual funds and on a reform of the securitization market. Progress has also been made in the regulation of collateral-based funding operations.