Spain's Banks Aren't Going Bust

Global investors' attention is focused on Greece, and worries have been raised about the solvency of other European nations. In Spain, however, there's good news: As a result of our government's wide-reaching measures, our financial institutions are set to emerge as more efficient and resilient to any future crises. Herein lie lessons for the rest of Europe and for the world.

Spanish financial institutions were extremely resilient to the first phase of the crisis, thanks to prudent retail-banking business models that were funded mainly through deposits and long-term debt issuance. They had negligible exposure to U.S. housing assets and good profitability and capital buffers. They also benefited from the Bank of Spain's high-quality supervision.

Nevertheless, fast credit growth in the boom years and overexposure to the construction sector and real-estate assets eventually took their toll. These problems, coupled with turmoil in the international financial markets, led to questions about solvency and, at times, made it difficult for some institutions to access certain types of funding.

Our banks reacted by cutting operating costs, broadening their deposit bases and reinforcing the quality of their funding. Yet the crisis highlighted some additional vulnerabilities, especially for our cajas, or savings banks, which make up 50% of our financial system. Many of these small, fragmented institutions had grown too large and too fast in the previous years, and had a limited ability to access additional capital when the downturn hit.

 

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