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and deposits of Bradford & Bingley.
55. Since growth in customer deposits has not kept pace with domestic credit expansion, banks have increasingly tapped international capital markets. Between 1997
and end-2007, domestic deposits grew at an average rate of 12 percent, thus financing only part of the credit expansion of 17 percent. As a result, the loan-to-deposit ratio climbed well above the Euro-area average. Securitization facilitated access by credit institutions to foreign savings (Figure 6). Credit institutions have established securitization funds, which in turn have issued their own securitization bonds, mainly covered mortgage bonds (cédulas hipotecarias, CH). Given the soundness of the issuer, the quality and size of the mortgage portfolio, and the level of over-collateralization, resulting from sound regulation, these securities were attractive to foreign investors.56 Outstanding balances of Spanish 55 Moody's April 2008.
56 The new Mortgage Law (Law 41/2007) further strengthens the regulatory framework of CH; in particular:
(1) it creates a special register for all mortgage loans and credits forming the collateral; (2) it reduces the loan-to-value ratio for commercial mortgage loans from 70 to 60 percent while keeping the one for housing loans at 80 percent (both ceilings may rise respectively to 80 and 95 percent if there are appropriate and sufficient additional guarantees); (3) it increases the minimum legally required over-collateralization from 11 to 25 percent; and (4) it provides for the possibility of including specific liquid and low-risk assets in the pool of collateral underlying the CH issue (up to 5 percent). from a??18 billion (3 percent of GDP) in 2000 to a??350 billion (33 percent of GDP) in 2007.57 Spanish CHs currently represent the second biggest Jumbo segment in European covered bonds after the German pfandbriefe.58
56. In recent years, the Spanish banking industry has enjoyed significantly higher profitability than EU peers, despite lower leverage (Figure 7). While high volumes of intermediation have contributed to this result, higher trading and fee income as well as enduring cuts in operating costs have been important drivers.
57 It is important to note that the Bank of Spain has adopted stringent criteria regarding risk transfer and control of special purpose entities. Both steps have reduced drastically the incentives for off-balance sheet securitization and the resulting capital relief opportunities.
58 Jumbo issues amount to at least a billion euros.
57. To gauge the contribution of different factors, an algebraic breakdown of banks' return on equity (ROE) has been undertaken (Box 2, Figure 8). The results indicate that while savings banks' financial strength (net income over net operating income) has remained broadly unchanged, commercial banks and cooperatives have experienced some decline in this indicator in the last years, mainly reflecting provisioning expenses and write-downs. In the case of commercial banks, this development has been partially compensated by continuous improvements in cost efficiency whereas savings banks and cooperatives have witnessed some increase in the burden of their administrative expenses, consistent with the expansion of their branch networks. While increasing leverage ratios may have weighed on credit institutions' vulnerability to shocks, improving (or undiminished) risk-adjusted asset productivity, mor