Spanish Banking Evolution: From San Fernando to Banco de España
Before the establishment of the Banco Español de San Fernando, the financial situation was not sound. The government forced through the merger of two institutions; their shares were exchanged at par despite their differing economic situations. The resulting new bank was called Banco Español de San Fernando.
The Banco Español de San Fernando (1847-1856)
Even though the bank had a paid-in capital of 200 million reales, its problems did not disappear. Many of the new bank’s assets were impaired, and the volume of notes in circulation was so high that the gold and silver reserves theoretically backing them only accounted for 5% of the total. This led to panic among customers. To prevent the bank from filing for bankruptcy protection, a limit was placed on the amount of banknotes each customer could exchange and on the time available for these transactions (gating). As the problems persisted, the government designed a bailout for the bank, injecting public money, accepting the bank’s notes for tax payments, and forcing it to reduce its capital to 150 million reales and restrict dividend distribution.
The Banco Español de San Fernando faced similar problems to the Banco de San Carlos, stemming from their obligation to finance the Treasury. This highlighted the difficulty of balancing a private bank’s relationship with a Treasury whose financial needs must be met.
The Banco de España and Plurality of Issue (1856-1873)
The 1856 Law on Banks of Issue and Credit Companies renamed the bank as Banco de España. This law also authorized the creation of a bank of issue in each city.
Regulations for Issuing Banks
The authorization to issue banknotes was subject to obligations and limits. Concessions were granted for 25 years. The volume of banknotes issued by a bank had to be less than three times its paid-in capital, and the bank had to hold gold and silver reserves equivalent to at least one-third of its banknotes in circulation. It was required to meet transparency obligations, including the monthly publication of balance sheets in the Official Gazette, and was subject to Ministry of Finance supervision. Banks were allowed to engage in all kinds of financial operations typical of that period.
Banco de España’s Leadership and Challenges
The Banco de España inherited the assets of the Banco Español de San Fernando and opened new branches in Bilbao and Santander. During this period, the Banco de España held a leadership position.
Over this period, relations between the government and private issuing banks improved. The government influenced the Banco de España’s Board decisions, and the bank catered to the Treasury’s financial needs, retaining, in compensation, the claim to exclusivity regarding the privilege of issue.
Competition from other issuing banks was not a problem; however, the creation of the Caja General de Depósitos (1852) posed a challenge. This institution could raise deposits from the general public and became the Treasury’s main financing entity, affecting the Banco de España’s income.
Economic Crisis and Recovery
During this period, many economic imbalances emerged, such as the Treasury’s heavy indebtedness, the growing balance of payments deficit, and a cash shortage resulting from the need to export silver to cover the trade deficit. The Madrid stock exchange slumped, and a financial crisis led many banks to bankruptcy. The Banco de España was also affected; to avoid filing for bankruptcy protection, it had to resort to “gating” methods, limiting the daily conversion amount of banknotes per person and the time for these operations to be conducted.
The slow recovery from the economic crisis benefited the Banco de España. From 1869, the bank was entrusted with tax collection, providing significant liquidity which, along with gold and silver purchases, enabled it to cover banknote issuance and overcome the crisis.