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Spain Banking
By the late 1980s, the Spanish banking system had been
undergoing sweeping changes for some time. Its structure
was
largely a throwback to the post-Civil War period of the
Franco
era, when Spanish private banks played a leading role in
financing the development of industry. As financial
backers of
the Nationalist cause, they had won Franco's confidence
and
gratitude, and they were given a relatively free hand
during the
reconstruction period. With the adoption of an economic
policy
that emphasized self-sufficiency and barred foreign
investment
capital and banking competition, their role was
strengthened. It
has been estimated that, by 1965, the five leading private
banks
controlled over 50 percent of Spain's capital. Their
influence
extended not only to the private sector, but also to such
autonomous institutions as INI and the state railroads.
Subsequently, as industry grew stronger, many of the
banks'
equity holdings were sold to the public through stock
exchanges.
The banks, however, continued to play a vital role in
providing
new funds for industry.
Supervision of all Spanish financial institutions
rested with
the Ministry of Economy, Finance, and Commerce.
Subordinate to
this ministry, and responsible for overseeing the
country's
banking system, was the country's central bank, the Bank
of
Spain. Formed in 1847, and granted the sole right to issue
currency in 1874, the bank was nationalized by the Bank
Reform
Law of 1962. In addition to supervising the rest of the
banking
system and setting reserve requirements, it carried out
the
government's monetary policy through open market
operations, and
it oversaw foreign exchange along with the Directorate
General
for Foreign Transactions. In 1977 the Bank of Spain had
helped
set up the Deposit Guarantee Fund, which protected
deposits in
troubled banking institutions.
Of the three main groups of banks in the Spanish
banking
system--private banks, savings banks, and official credit
institutions--private banks were the most important. In
1962
private banks were divided into commercial banks and
industrial
banks. The latter had the right to invest a higher
proportion of
their resources in equity holdings than the former, and
they
specialized in industrial investments. Commercial banks,
which
were larger and more numerous, served the general public;
they
were the principal source of short-term credit for the
private
sector, though they also competed for long-term loans. By
the
late 1980s, the distinction between the two kinds of banks
had
lost much of its meaning, for each had gradually been
allowed to
operate in the other's area of specialization.
Although in the second half of the 1980s Spain had
about 100
private banks--a quarter of which were industrial
banks--the
field had long been dominated the Big Seven, seven large
commercial institutions: Banco Espanol de Credito or, as
it was
more commonly known, Banesto; Banco Central; Banco de
Bilbao;
Banco Popular Espanol; Banco de Santander; Banco de
Vizcaya; and
Banco Hispano Americano. By the 1980s, these banks had
direct or
indirect control of approximately 80 percent of the
country's
banking resources.
The leading banks controlled huge industrial
portfolios, by
far the largest in Spain. The market value of these
holdings was
not known, but analysts estimated that Banesto possessed
about
US$3 billion, and Banco Central, about US$1 billion. These
large
Spanish banks were present in virtually every area of
finance.
Beyond their industrial holdings, they also possessed
extensive
retail networks. Because Spain did not have an adequate
pension
fund system, many Spaniards invested their savings in
order to
provide for their retirement. Consequently, there were 5
million
retail investors among Spain's 39 million people, the
highest
proportion in Europe.
Banking can be said to be the last redoubt of Francoist
economic autarchy. Banks had grown during the Franco
period by
borrowing cheaply from their customers and then selling
their
services at huge margins. During the late 1970s and the
early
1980s, when a number of banks found themselves in serious
difficulties, the government, for the first time,
permitted their
purchase by foreign banks. When it became clear that the
more
sophisticated foreign banks were rapidly making inroads
into the
traditional preserves of the large Spanish banks, however,
the
government closed the door to their further influx.
Foreign banks
were no longer to be allowed entry into Spain before the
1992
deadline set by the EC integration agreement, so that the
Spanish
banking system would have the maximum amount of time to
modernize.
By the second half of the 1980s, Spanish banks were
still not
internationally competitive. The banks tended to be
greatly
overstaffed, and they possessed far too many branches,
compared
with their West European counterparts. Only in Belgium
were there
more branches per capita. In addition, the inadequate
investments
of Spanish banks were compensated for financially by the
overpricing of services for bank clienteles. An EC report
of the
late 1980s indicated that, in order for the costs of
financial
services in member states to be harmonized, those of the
Spanish
banking system would have to be cut by 34 percent. In
comparison,
those of French banks would have to be reduced by 24
percent, and
those of British banks, by 13 percent.
The pressure to revamp Spain's banking industry was,
therefore, very great. Mergers were undertaken with the
government's encouragement in order to create large
Spanish
financial holdings that could adequately compete with
their
European rivals. Although an attempted merger of the Banco
de
Bilbao and Banesto fell through in 1987, in early 1988 a
successful union took place between the Banco de Bilbao
and the
Banco de Vizcaya. This merger resulted in the creation of
Western
Europe's thirty-second largest financial institution, the
Banco
Bilbao-Vizcaya. In 1988 the planned merger of the two
largest
private banks, Banco Central and Banesto, fell through,
but
analysts expected that, before 1992, the Big Six of the
Spanish
banking industry might, through various mergers, become
the Big
Three or the Big Four.
The second major group in the banking system consisted
of
savings banks, which predominated in rural areas that
could not
attract branches of the leading private banks. These banks
did
not come under the control of the Bank of Spain until
1971,
having previously had their own official governing body,
the
Credit Institute for Savings Banks. Heretofore, they had
generally accounted for about one-quarter of total lending
in the
private sector. Since the late 1970s, savings banks have
raised
their share of total national deposits from 34 percent to
45
percent--a feat that was accomplished despite severe
restrictions. In the mid-1980s, these restrictions were
gradually
being relaxed. For example, barriers that limited their
operations to specific areas or regions were lifted in
June 1988,
and by 1992 they were to be free to open up branches
anywhere in
the country. In terms of deposits, the Barcelona-based
Caja de
Pensiones para la Vejez y de Ahorros de Cataluna y
Baleares,
popularly known as La Caixa, was the country's largest
savings
bank. Another large savings bank was La Caja de Madrid.
After the
relevant restrictions were lifted, a large-scale merger
process
commenced among savings banks. This trend appeared likely
to
become a substantial factor in the country's savings
banks'
operations.
Legally, savings banks were nonprofit institutions, but
in
reality they were quite profitable; in 1987, for example,
they
were more profitable than rival commercial banks. One
reason for
this was that savings banks were self-financed foundations
without stockholders. The seventy-seven savings banks
operating
in the late 1980s lent mostly to families and to small and
medium-sized businesses.
The third leg of the Spanish banking industry consisted
of
official credit institutions, each with a specialized
sphere of
influence. These credit institutions were under the
control of
the Directorate General for State Assets (Direccion
General del
Patrimonio del Estado--DGPE), and they were supervised by
the
Official Credit Institute (Instituto de Credito
Oficial--ICO),
which received funds from the state that were then lent to
the
credit institutions. The largest of these was the
Industrial
Credit Bank (Banco de Credito Industrial), which
specialized in
general industrial loans. The Mortgage Bank of Spain
(Banco
Hipotecario de Espana) provided mortgage loans for urban
and
rural properties. The Agricultural Credit Bank (Banco de
Credito
Agricola) provided credit for agriculture and related
sectors.
Provincial and municipal administrative bodies were served
by the
Local Credit Bank (Banco de Credito Local).
Also under the ICO, but only partially so, was the
Overseas
Trade Bank (Banco Exterior de Espana), which had been
founded in
1923 to promote exports. More than half the bank's capital
was in
private hands. In addition to its participation in foreign
trade,
it competed with domestic commercial banks and ranked just
below
the former Big Seven in terms of its size. Like the
official
credit institutes, the Overseas Trade Bank was among those
bodies
belonging to the DGPE.
Analysts expected the increasing financial
liberalization of
the Spanish banking system to affect the status and the
functions
of the country's public banks. The freeing of funds tied
up in
government-required investments would eliminate the
"privileged
circuits" through which funds at low interest rates were
normally
channeled into such investments. In mid-1988 legislation
was
being prepared that would redefine the role of publicly
owned
banks by converting them into subsidiaries of the ICO and
by
forcing them to finance themselves at market rates. To
assist
them in adapting to these new circumstances, a period of
gradual
adjustment lasting as long as fifteen years was being
considered,
during which they could continue to depend on financing
from the
Ministry of Economy, Finance, and Commerce.
Data as of December 1988
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