Central Banks, Shadow Banking, and Spanish Financial History

Central Banks and Shadow Banking

Competencies of Central Banks

• Monetary Policy (open market operations)
• Exchange Policy
• Lender of Last Resort
  • Bank of Banks
  • Bank of the State (In the US but not in Europe)
• Supervision of the Financial System

Banks create credit, money, and thus purchasing power. The ability to create credit and purchasing power, for good or ill purposes, is not unique to banks.

Shadow banking activities can create credit and money equivalents outside the normal banking sector. Central banks have not been able to counter the unsustainable shadow banking boom and have lost the capacity to control the quantity of money.

History of the Spanish Financial System

The modern history of Spanish banking begins in 1856. The Parliament approved two important acts that favored the creation of joint-stock banks: the Banks of Issue Law and the Credit Company Law.

• With these two laws, a relatively open and liberal financial framework arrived.
• Regulation was lost, supervision practically absent.

Savings Banks

Savings banks increased thrift among the popular classes. They were supposed to fulfill a social role, collecting and safeguarding “ordinary” people’s money, and not involve themselves in risky lending. (Caja de Ahorros de Vizcaya 1920)

Stock Markets

Stock markets were less important. There were four main stock markets: Madrid (1830), Bilbao (1890), Barcelona (1915), and Valencia (1981).

Slow Liberalization and Integration in Europe

• The obligation for banks to invest in industry was removed in the 1970s.
• 1977: Beginning of monetary policy. Very low-interest rates (los altos tipos de interés que tenía España hacía difícil competir con otros países. Esto era negativo para la industria) Since 1999, the European Central Bank is in charge of monetary policy.
• Liberalization of the stock market: 1988 Law:
  • Liberalization
  • Fiscal benefits to invest in funds
  • Low-interest rates
  • Creation of IBEX-35
  • CNMV (regulator of the Stock Market)
  • Privatization of former public enterprises (Telefónica, Repsol)
• Savings banks: They were public/almost public. They were not allowed to leave their provinces up to 1989. They were under the control of politicians since 1985.

Spanish savings banks gave many mortgages, leading to a housing bubble. From 2009-2011, savings banks have been reduced from 45 to 15 because of the crisis. Santander and BBVA are savings banks that have internationalized and have become giants.