Spanish Bank Restructuring & Financial Market History
Spanish Restructuring
The Spanish government, under Zapatero, created a bank restructuring fund called FROB (Fondo de Reestructuración Ordenada Bancaria) to recapitalize the banks. FROB lent 14 billion euros to the banks until 2012, when the European Union rescued the Spanish banks.
Mergers of the Savings Banks
Mergers occurred to reduce excess capacity and strengthen their financial position. The most important merger involved Caja Madrid and six other smaller savings banks, forming Bankia. Bankia struggled with bad loans, forcing the government to inject 23.5 billion euros in share capital.
During the crisis, banks needed help, but the government couldn’t provide it. The EU’s rescue fund could lend directly to the banks, but Mariano Rajoy tried to avoid this, as rescuing the banks would transform the banking crisis into a sovereign debt crisis.
Solution: The Eurogroup agreed to provide 100 billion euros to recapitalize the banks. This loan was extended to the FROB.
In 2013, a new law, the Ley de Fundaciones Bancarias y Cajas de Ahorro, led to the disappearance of savings banks.
History and Regulation of the Financial Market During the 20th Century
After the Great Depression
This was a period of control. From the 1940s until 1971, advanced economies operated within the Bretton Woods system of fixed but adjustable exchange rates.
- Restrictions were natural.
- Regulation Q placed limits on interest rates on bank deposits.
- There were no financial crises during this period.
London, Offshore Centers, and Tax Havens
The City of London became a hub for the Eurodollar and Eurobond markets.
- Eurobond: The idea was to capture some of the dollars that were around Europe because of America’s Regulation Q.
This market grew when J.F. Kennedy imposed a tax to discourage Americans from investing in foreign securities. International companies that wanted to borrow dollars turned to the Eurobond market.
London became the center of this new market, reviving the financial center (The City) that had been suffering from the country’s economic troubles.
Tax havens emerged and grew. These are countries where tax rates are very low. People and companies started to recognize their profits in these countries to pay much lower taxes.
Liberalization of the Financial Market
Liberalization at a Global Level and Basel Regulation
- Free capital flows were seen as beneficial.
- A floating exchange rate system was implemented.
- In the 1970s and 1980s, advanced and emerging economies removed controls on cross-border capital flows.
The Basel Committee on Banking Supervision (Basel I) established an international framework for capital requirements to deal with globalized banking. Basel I failed because it regulated banks, not banking. The economic risk of some transactions was not regulated, so banks could avoid capital requirements through capital arbitrage.
Liberalization was supposed to be better than regulation (Bretton Woods) and improve the efficiency of the financial markets, but it ultimately contributed to the financial crisis.