The Spanish Financial System: A Comprehensive Overview
REVIEW OF FINANCIAL SYSTEM RECOVERY UNIT 1
Topic 1: The Financial System
What is Money?
Money encompasses the metal coins minted by states. It serves as a common measure to determine the price of goods and facilitates the exchange of merchandise in the market. Consequently, it underpins the division of labor.
1. Banking and Money
Money available to the public includes funds held in financial institution deposits and readily accessible cash. The financial landscape has evolved with the widespread adoption of new payment instruments like bills of exchange, checks, and credit cards.
2. Functions of Money
- Instrument of Exchange: Money is universally accepted as a medium of exchange for goods and services within an economy.
- Means of Payment: Money serves as an instrument accepted by all to settle purchases or debts.
- Means of Value: In market economies, the value of all goods and services is expressed in monetary terms. Money acts as a unit of account, with assets denominated in currencies like euros or dollars.
- Store of Value: Money represents a common way to hold wealth until needed for economic purchases. This is due to its ease of exchange for goods and services in the future.
3. The Financial System
The financial system comprises institutions, intermediaries, financial instruments, and markets. Financial institutions can be categorized into:
- Banking Institutions: Key players include the State Central Bank, private banks, savings banks, and credit cooperatives.
- Non-Banking Institutions: Prominent examples include pension funds, insurance companies, investment funds, leasing institutions, payment institutions, and mutual guarantee societies.
4. Financial Markets
Financial markets facilitate the trading of financial assets, such as securities issued to meet the financing needs of investors for investments or purchases.
Role of Financial Markets:
Financial markets serve several crucial functions:
- Connecting savers with borrowers.
- Determining the prices of financial assets through bids and offers.
- Providing liquidity to financial assets.
- Reducing the time and cost of financial intermediation.
5. Composition of the Spanish Financial System
The Spanish financial system consists of various public and private entities. Following the criteria established in the Maastricht Treaty for monetary union within the EU, the system’s direction and control fall under these institutions:
- Government: Sets economic policy and holds ultimate responsibility for the financial system.
- Ministry of Economic and Finance: Oversees the economic domain within the government.
- State Governments: Autonomous communities exercise powers within their economic territories while subject to central control.
- European System of Central Banks (ESCB): Coordinates monetary policy among central banks of EU member countries, comprising the European Central Bank and national central banks.
- European Central Bank: Formulates monetary policy for the Eurozone countries.
- Bank of Spain: Responsible for controlling monetary policy under the guidance of the European Central Bank.
- Comisión Nacional del Mercado de Valores (CNMV): Supervises and inspects the stock market.
- Dirección General de Seguros: Regulates insurance entities.
- Dirección General of Foreign Transactions: Manages and provides statistics on foreign transactions and external trade.
6. Banking Financial Entities
- Private Banks: Private companies engaged in banking, acting as intermediaries between savers and investors, and offering various financial services.
- Savings Banks: Non-profit institutions operating with a social purpose.
- Credit Unions: Cooperatives engaged in banking, primarily serving their members.
7. Financial Brokerage or Investment Institutions
- Agency Companies and Securities: Authorized to act on commodity exchanges or securities markets on behalf of third parties.
- Collective Investment Institutions: Aim to trade financial assets in both primary and secondary markets.
8. Non-Banking Financial Entities
- Leasing Companies: Provide equipment financing through financial lease contracts, often with tax benefits and a purchase option at the end of the lease term.
- Factoring Companies: Manage debt collection for clients, facilitating financing for creditors and mitigating default risks.
- Mutual Guarantee Societies: Primarily support SMEs by providing guarantees to secure loans from financial institutions.
9. Insurance Institutions
- Insurance Companies: Provide financial protection against specified risks in exchange for insurance premiums, paying indemnities in the event of covered events.
- Pension Fund Managers: Manage funds contributed by members during their working lives to supplement or replace social security pensions upon retirement.
10. The Bank of Spain
Established in 1782 as the Banco de San Carlos, the Bank of Spain has undergone several name changes throughout its history. Its key functions include:
- Member of the ESCB:
- Defining and implementing monetary policy.
- Conducting foreign exchange operations.
- Ensuring the smooth operation of payment systems.
- Issuing banknotes.
- National Central Bank Functions:
- Holding and managing reserves.
- Promoting the stability and efficiency of the financial system.
- Supervising the solvency of financial institutions.
- Issuing and managing the circulation of coins.
- Producing and publishing economic statistics.
- Providing treasury services.
- Advising the government on economic matters.
11. Monetary Policy
Monetary policy encompasses measures to control the money supply. The European Central Bank and the Bank of Spain aim for price stability by adjusting the money supply in response to inflation trends.
12. Treasury Services and Debt Policy
The Bank of Spain oversees the Financial Service of the Public Debt.
13. Payment Systems and Media
The Bank of Spain holds the exclusive right to issue euro banknotes for circulation within Spain. It determines the amount of currency in circulation, manages banknote features, and oversees coin production and circulation in collaboration with the national mint.
14. Other Powers of the Bank of Spain
The Bank of Spain publishes reports on economic conditions, produces economic statistics, and disseminates information through publications like newsletters.
15. Private Banking
Private banks primarily raise funds from savers, businesses, and individuals, offering interest payments in return. They operate as for-profit joint-stock companies and constitute a significant portion of the financial system.
16. Savings Banks
Savings banks are private entities with a public service mission. They are non-profit and operate with a social purpose. Their operations resemble those of private banks, and they have undergone a concentration process, with La Caixa and Caja Madrid emerging as major players. The Spanish Confederation of Savings Banks represents their interests.
17. Introduction to Financial Transactions
When capital becomes available, individuals and entities face choices regarding its use: consumption for immediate enjoyment or savings and investment for future benefits. Financial operations are evaluated using interest rates, calculated based on financial laws. Common financial laws include simple and compound interest. Key factors in these calculations are:
- Time
- Interest rate
- Calculation method for interest credit
Present value refers to the current worth of capital, while future value represents its value at maturity. Seed capital denotes the initial investment amount.
18. Concept of a Financial Transaction
Key characteristics of a financial transaction include:
- Non-Simultaneous Exchange: Transactions occur over different time periods.
- Equivalent Provision and Compensation: The value exchanged between parties is equivalent, considering factors like interest and time.
19. Elements of a Financial Transaction
- Origin of the financial transaction
- End of the financial transaction
- Duration of the financial transaction
- Creditor of the financial transaction
- Borrower of the financial transaction