Cautious Discretion At The Bank of Spain
Written by Allan on November 19th, 2008The Bank of Spain has cautiously acknowledged praise of its supervisory model in the banking system, but is preferring to keep out of the limelight whilst the global financial system undergoes reform. The caution which characterizes the Spanish supervisory banking model has made it one of the big winners in the financial crisis. Authoritative institutions like the American Wall Street Journal, the British Financial Times or Mervyn King, the governor of the Bank of England, have established it as an objective for the rest of the central banks to achieve.
However, this starring role has contrasted considerably with the low public profile of the Bank of Spain and its governor, Miguel Ángel Fernández Ordóñez, in the reform process of the international financial system, which the G-20 group formally initiated last weekend – a situation that does not only apply to the Spanish governor. Of the central bankers from other the member states of the European Union, only Mario Draghi, the governor of the Bank of Italy, has participated directly in the meeting and that has been in his capacity as President of the Forum for Financial Stability, the organism which is drawing up the bulk of the reforms to the system.
Having said that, however, no other central bank from the euro-zone has received the congratulations that Spain has, whether it be for its anti-cyclical policy – which amounts to nothing more than the creation of a cushion in times of prosperity in order be able to ride out the storm in times of hardship- or whether it is because Spain forbade investment in off- balance sheet vehicles.
Spain´s absence from the headlines does not mean to say that it is not involved in the inner mechanisms of such important negotiations. In the run up to the G-20 meeting, the Bank of Spain held meetings with the Spanish government to prepare Spain’s role and its proposals in the handling of the crisis.
Apart from contacts with other supervisory bodies and market agents requesting information about Bank of Spain practices, the bank is also involved in other organisms and forums such as the Bank for International Settlements and the Basle Committee, is working in conjunction with the rest of the supervisory bodies and is ready to offer advice gleaned from their experience in previous Spanish banking crises, especially those in the late seventies/early eighties and the early nineties.
Nobody would deny that this discreet stance of working on the nuts and bolts of the system instead of grabbing the headlines is an essential function of any central bank and its governor. The experience of the Spanish supervisor in banking crises has been much more recent than that of central banks in other countries and has probably increased the dose of caution being administered inside the bank. Although the Spanish banks have come through the first wave of the financial crisis (high risk assets (sub-prime) and structured products) with flying colours, it remains to be seen how it will cope with the second onslaught, which is facing up to how the real economy reacts.
The Spanish economy is on the road to recession; unemployment is heading towards 17%, the property market is in rapid decline, the trickle of credit continues and the level of bank defaults is rising rapidly. Added to all that, loans to the property sector amount to over 300,000 m€. Without doubt, the Spanish banks and their overseer have won the first battle in the financial crisis but the real economy has issued an all-out declaration of war.