Key Financial Instruments and the Role of Banking Intermediaries

Key Financial Instruments Defined

Financial instruments represent various forms of capital and debt used by companies to manage operations, fund growth, and secure liquidity.

Capital and Equity Instruments

• Contributions of the Partners (Capital Increase): This involves making a social capital increase of the company, allowing existing shareholders and new partners to subscribe to new shares or securities.
• Reserves: These are amounts derived from undistributed company profits. Reserves are typically used by the company for future investments, contingencies, or to strengthen the balance sheet.

Debt Instruments and Credit

• Loans: These are contracts between the company and a financial institution whereby the company receives the full requested amount and agrees to repay that principal amount, plus interest, periodically over a specified term. Loans can be short-term (e.g., 1 year) or long-term. The bank typically charges commissions and fees for the study and origination of the loan.
• Credit Lines (Claims): This is a contract that allows a company to periodically draw sums up to a granted credit limit. Regular payments are also available. Interest is paid only on the amount utilized, not on the total credit limit granted.
• Bonds (Empréstitos): If a company requires capital but does not wish to take on more partners, it may decide to issue bonds. This divides the required capital into equal parts called obligations, which are acquired by the public, thereby becoming creditors of the company. The bondholder is entitled to the repayment of the principal amount of the bonds, plus the agreed-upon interest.

Banking Financial Intermediaries

The Bank of Spain

The Bank of Spain is the central bank of our country. Since 1994, it has exercised certain functions autonomously, independent of the government. However, since January 1, 1999, most of its functions are performed by the European Central Bank (ECB).

Functions within the Eurosystem

As a member of the Eurosystem, the Bank of Spain helps carry out the common monetary policy in the Euro area, which is designed by the European Central Bank and aimed at price stability. These functions include:

• Fixing the interest rate.
• Fixing the currency exchange rate.
• Issuing money.
• Acting as the depository of foreign currencies.

Functions as the Central Bank of Spain

The Bank of Spain retains specific national responsibilities, such as:

• Being the depository and protecting Spain's gold reserves and currencies not deposited at the European Central Bank.
• Controlling financial institutions and financial markets.
• Promoting the proper functioning of financial institutions to achieve price stability.
• Acting as agent and treasurer for the issuance of public debt.
• Issuing coins in circulation.
• Advising the government on financial terms.

Credit Unions

Credit unions are financial cooperatives where members pool their savings. These savings are managed by the cooperative, which invests them to achieve profitability and grant loans and credit to the cooperative members. Credit unions perform the same essential functions as commercial banks.