Abstract
This chapter examines the subsequent impact of the economic crisis on the Spanish financial system after 2010, as well the banking bargains that ultimately led to the financial bailout. It focuses on the following variables: deteriorating economic conditions; the implosion of the real estate market; the dependence on wholesale funding; weaknesses in the regulatory framework; and the role of the Bank of Spain.
From: “A ‘Ship in Trouble’: The Spanish Banking System in the Midst of the Global Financial System Crisis: The Limits of Regulation,” in Market-Based Banking, Varieties of Financial Capitalism and the Financial Crisis, ed. Iain Hardie and David Howarth (New York: Oxford University Press, 2013a); and Royo 2013 (Chapter 6).
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Notes
- 1.
As quoted in “Spain Bank Chief Faces Reform Battle,” Financial Times, April 16, 2012.
- 2.
The concept of “market-based banking” (MBB) is driven by market pressures on both the asset and liability sides of the banks’ balance sheets. The global financial crisis and the subsequent credit crunch had a simultaneous effect: On the one hand, it reduced banks’ ability to borrow and therefore to continue lending, thus leading to the property collapse; on the other, the property collapse contributed to reduce banks’ ability to borrow.
- 3.
Lending figures from the BoS suggest a tightening due to cost and availability of funding since mid-2009, and they have mostly have remained tight since them. The more gradual but constant tightening from late 2007 to mid-2009 was clearly more significant—which shows that despite all the talk at the time about the limited problems in Spain, beneath this there was a tightening that was hitting mortgage/construction lending hard and contributed to the bursting of the bubble.
- 4.
He also warned of the need to clean up the bad loans, in “Tres años, cuatro reformas y varios cadáveres por el camino,” El País, May 11, 2012.
- 5.
“Spain bank chief faces reform battle,” Financial Times, April 16, 2012; and “El cierre de cajas dejará sin oficina a casi cinco millones de españoles,” El País, July 16, 2012.
- 6.
“Parte de guerra: ocho entidades intervenidas o nacionalizadas en España,” El País, May 9, 2012.
- 7.
The battle was so nasty that at some point Aguirre was inadvertently recorded saying that “we have given another seat [in the board] to Izquierda Unida [United Left, the political party], and we have taken it away from the son of a bitch [referring to Gallardón].”
- 8.
“Two Tiers, One Crisis for Spanish Banks,” Financial Times, Friday, May 18, 2012.
- 9.
“España, duda permanente,” El País, Sunday, May 20, 2012.
- 10.
Nonperforming rates were running at 4% at Santander and BBVA.
- 11.
From “Tres años, cuatro reformas y varios cadáveres por el camino,” El País, May 11, 2012.
- 12.
The reaction from the markets to this reform was quite mixed. While there was a sense of relief that Spain was finally coming to grips with its banking difficulties, there was the sentiment that it failed to sway investors: Banks shares fell sharply and borrowing costs rose again over levels before seen as unsustainable (6.3% for 10-year bonds). Investors seemed to think that this reform was not the definite cleanup that the market expected. Standard & Poor downgraded 11 of the country’s largest banks on April 30, 2012, and Moody’s downgraded 16 of the banks on May 18, 2012.
- 13.
This section borrows from “El día que el Banco de España se doblegó,” El País, March 13, 2011 and “Un gobernador entre dos fuegos,” El País, May 13, 2012.
- 14.
“El día que el Banco de España se doblegó,” El País, March 13, 2011 and “Un gobernador entre dos fuegos,” El País, May 13, 2012.
- 15.
This section borrows from “El día que el Banco de España se doblegó,” El País, March 13, 2011 and “Un gobernador entre dos fuegos,” El País, May 13, 2012.
- 16.
“Un gobernador entre dos fuegos,” El País, May 13, 2012.
- 17.
The BoS defended itself with seven arguments: It lacked the appropriate instruments to address the crisis until 2009; the economic deterioration was far longer and intense than anticipated; the government had decided to reject the creation of a ‘bad bank’; international banks were unable and unwilling to participate in the merge and acquisition process that was taking place in Spain because of the crisis; they could not use the traditional tool to liquidate banks, namely forcing bondholders to take loses because of the potential contagion effect to other banks and cajas; that the corporate governance system of cajas was very deficient and politicized; and finally, the autonomous governments refused to approve the mergers during the restructuring process. See “El Banco de España se defiende de su lentitud con siete argumentos,” El País, June 11, 2012.
- 18.
“El Nuevo gobernador critica la gestión de sus predecesores en el Banco de España,” El País, July 17, 2012.
- 19.
“El día que el Banco de España se doblegó,” El País, March 13, 2011 and “Un gobernador entre dos fuegos,” El País, May 13, 2012.
- 20.
“La banca nacionalizada traspasa al banco malo activos por valor de 37.110 millones,” El País, December 26, 2012.
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Royo, S. (2020). A ‘Ship in Trouble’: The Spanish Banking System in the Midst of the Global Financial System Crisis (2010–2012). In: Why Banks Fail. Palgrave Macmillan, New York. https://doi.org/10.1057/978-1-137-53228-2_6
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