Understanding Spain’s Financial System and Institutions
Understanding Spain’s Financial System
Spanish Financial System Overview
The Spanish financial system is in charge of conducting financial resources from savers to investors. Its key elements are:
- Financial instruments
- Financial intermediaries
- Financial markets
Financial Instruments Defined
Financial instruments are securities or book-entry securities issued by those who need resources and acquired by those with financial resources. Therefore, financial instruments are both an asset and a liability. An instrument is an asset for the party that acquires it and a liability for the party that issues it. An asset represents a right for its owner, while a liability represents an obligation.
Bonds: A Financial Instrument
A bond is a financial instrument used by businesses. When owners do not want to dilute their ownership, they may decide to issue a loan in the form of obligations. The total issue is divided into equal parts called obligations (bonds). Those who purchase these bonds are called bondholders, and they are entitled to the restoration of the agreed amount of the obligations plus interest over a certain period.
Stocks vs. Bonds: Key Differences
The key differences between stocks and bonds are:
- Shareholders are proprietors of shares; their benefits are dividends and equity titles, which are market-dependent.
- Bondholders own obligations; their benefits are debenture interest and debt titles, which are dependent on the agreed terms in the market.
Leasing Contracts Explained
A leasing contract involves a company acquiring real property it needs. The leasing company provides the asset in exchange for periodic payments (rent) and offers an option to buy the asset at the end of the contract term.
State Financing: Key Instruments and Revenue
The State finances itself primarily through:
- Tax revenue (mainly from EU funds)
- Income from assets
- Income from sales of state patrimonial goods
- State lotteries and gambling
- Issuance of debt: Treasury bills and State debt obligations.
Financial Intermediaries and Their Role
Financial intermediaries are institutions that mediate between savers and investors. Banking intermediaries include: the Bank of Spain, commercial banks, savings banks, and credit unions. Their functions are:
- To act as intermediaries between savers and investors.
- To create money (money creation can be lawful money or deposit money).
Non-bank financial intermediaries have the sole function of being financial brokers.
The Bank of Spain: Role and Functions
The Bank of Spain is the central bank of our country. Since 1994, the central bank of Spain had duties assigned that it exercised autonomously and independently from the government. As of January 1, 1999, many of these functions became powers of the European Central Bank (ECB) as part of the Eurosystem.
Current Functions of the Bank of Spain
The Bank of Spain currently performs functions in two main areas:
- As a member of the Eurosystem.
- As our country’s central bank.
Functions as a Eurosystem Member:
- Conducting the monetary policy of the Euro area, as designed by the European Central Bank.
- Ensuring price stability in the country.
- Implementing the interest rate set by the ECB.
- Applying the exchange rate policy.
- Issuing currency notes and coins (issued by the ECB).
Functions as the Central Bank of Spain:
- To be the depository and custodian of the country’s gold and currency reserves.
- To control the operation of financial entities and markets in Spain.
- To promote the proper functioning of financial entities to ensure price stability.
- To put banknotes and coins into circulation.
- To advise the government on financial and monetary terms.