Financial Assets, Markets, and Systems in Spain

Posted on Dec 2, 2024 in Economy

Characteristics of Financial Assets

Liquidity: Liquidity is measured by the ease and certainty of realizing assets without losses. Money is the most liquid asset. The degree of liquidity depends on:

• a) How readily convertible into cash the asset is.
• b) The certainty of its conversion into cash without loss.

Risk: Risk depends on the probability that the issuer complies with amortization provisions. It depends on the issuer’s creditworthiness and any guarantees backing the asset.

Performance: The ability of an asset to produce returns for the purchaser. An asset’s cost is inversely related to its liquidity and directly related to its risk.

Characteristics of Financial Markets

A financial market should be free, transparent, and “perfect.” A perfect market exhibits perfect mobility of factors. Key characteristics include:

1. Size: Larger markets, with higher trading volumes, allow for quicker stabilization of asset prices and interest rates.
2. Transparency: The easier and cheaper it is for economic agents to obtain information, the more transparent the market.
3. Freedom: Characterized by the absence of limitations on buying or selling.
4. Depth: Deeper markets have a greater number of buy and sell orders for each asset type. Freedom of access contributes to market depth.
5. Flexibility: Less flexible markets hinder the rapid reaction of agents to changes in asset prices or other market conditions.

Functions of a Financial System

A financial system has two primary functions:

1. Ensure efficient allocation of financial resources.
2. Contribute to monetary and financial stability, enabling an active monetary policy by the monetary authority.

The effectiveness of a financial system is measured by quantitative criteria (absolute and relative size) and qualitative criteria (fluidity, elasticity, freedom, price, and quantity of operations).

Financial Reforms of the 1960s

The 1962 Basic Law of Credit and Banking Management focused on four areas:

1. Reorganization of the monetary authority and credit.
2. Strengthening medium and long-term financing mechanisms.
3. Developing the emissions market.
4. Bank specialization.

Until the late 1960s, monetary policy was largely passive, interest rates were rigidly controlled, private banking grew rapidly, credit operations were limited, exchange controls restricted trade, and the stock market was underdeveloped.

Governance and Administrative Organization of the Bank of Spain

Governor

Appointed by the President, the Governor chairs the Governing Council and Executive Committee, holds legal representation, approves contracts, represents the Bank of Spain internationally, and delegates powers.

Deputy Governor

Appointed by the Government, the Deputy Governor manages internal services, replaces the Governor when necessary, and exercises delegated powers.

Governing Council

Composed of the Governor, Deputy Governor, Director General of Treasury and Finance, Vice President of the CNMV, six appointed advisors, and ex-officio members. It meets at least ten times annually and approves general guidelines, discusses policy matters, approves reports, and formulates recommendations.

Executive Committee

Composed of the Governor, Deputy Governor, and two advisors, with ex-officio attendees. It implements monetary policy, decides on administrative licenses, organizes the Bank, and manages day-to-day operations.