Overview of Spanish Financial System: Banking, Money & Capital Markets, and Intermediaries, Apuntes de Economía Española

¡Descarga Overview of Spanish Financial System: Banking, Money & Capital Markets, and Intermediaries y más Apuntes en PDF de Economía Española solo en Docsity!

7. THE FINANCIAL SYSTEM

English Group (AR) - ECO References : García Delgado & Myro ( 2020 ): chapter 13

1. The financial system: aim, relevance, agents, types

2. The banking system in Spain

3. Financial markets in Spain: money and capital markets.

Outline

3. The main elements of the FS

1. The set of financial instruments (assets): they are a liability for those who issue the FI and represent an asset to those that acquire the FI.

• FI have three main features: profitability, risk & liquidity

2. The financial markets: they enable those wanting funding to ask the final savers in the economy directly
3. The financial intermediaries: economic agents that are situated between savers and those seeking funding, lending the funds to the latter that they borrow from the former.

7. 1 The Financial System

• The Financial System: Direct & Indirect finance

7. 1 The Financial System

They reduce transaction & information costs as well as increase the instrument’s liquidity They transform instruments to match maturity & volume; they reduce the risk due to a higher diversification

FINANCIAL INTERMEDIARIES : are economic agents that acquire funds issued by the lenders and transform these funds into assets which are lent to the borrowers. Main functions: Reduce the information costs of the system Match the needs between borrowers & lenders

There are several types of Financial intermediaries:

Banks (deposit-taking institutions; their liabilities are used as mean of payment, together with coins and notes)

• Banks, Saving Banks; Credit Unions non-deposit taking institution: they do not issue means of payment
• pension funds, investment funds, insurance companies; factoring & leasing societies
• Other financial intermediaries are dealers & brokers

7.1 The Financial System

Financial systems can be classified (à in a corporate finance ¹ perspective) wrt several dimensions:

1. Looking at the relevance of the “source” of funds for firms Ø Market-based or Anglo-Saxon model [UK and U.S.] § Financial markets play a relevant role in financing corporations (issue of new equity and bonds account for the 10-15% of net corporate financing), while banks provide virtually nothing Ø Bank-based or Continental Model [Germany, Spain , France, Italy, Japan] § Financial markets provide only 3-4% of net corporate financing; banks provide around 20% of net corporate finance
2. Regarding the “nature” of the banking sector Ø Large number of independent and competitive banks ( “specialized” banking model ) [U.S.] Ø Highly centralized banking sector (“ universal” banking model ) [UK, Spain , Germany, France, Japan]

7. 1 The Financial System

The financial system in the Spanish economy

7.1 The Financial System

1. The financial system: aim, relevance, agents, types

2. The banking system in Spain

1. The pre-crisis banking system

2. The crisis in the Spanish banking system

3. Financial markets in Spain: money and capital markets

Outline

q Likewise, as a result of the banking crisis begun in 1977, liberalization

has been accompanied by a reinforcement of the mechanisms that

guarantee the stability of the system (harmonized within the

EU).

ü Reinforcement of prudential regulation (obligation to fulfil a coefficient of own resources, ...). ü Improvement of supervisory systems. ü Development of deposit protection funds (deposit guarantee fund).

q As a result, a strong increase in competition was achieved in the

Spanish banking system, the result of which has been the increase

in its efficiency.

Ø In the face of the intensification of the competition, the entities respond by concentrating the activity (BBVA, BSCH), an international expansion and the mediation of disintermediation.

7. 2 The Banking System in Spain

The main players in the Spanish BS

Ø Banks: they are limited liability companies that allocate part of their

profits to the payment of dividends to their shareholders.

Ø Traditionally they were active in corporate financing; however, they gained relevance in the mortgage loans market and in the household financing in the last years before the crisis.

Ø Saving & Loans institutions (“ Cajas de ahorro ”): non-profit

institutions that use their profits by financing social (healthcare and

educational activities) & charitable.

• Historically (& originally due to legal motivations) CAs provided households financing, but in the last years they gained relevance in corporate financing.
• Before the crisis, they had become the main agent of the Spanish banking system.
• They had not experienced significant crises until 2008.

7. 2 The Banking System in Spain

The main players in the Spanish BS (cont.)

Ø Cooperativas de crédito (credit unions): they distribute benefits among their members.

• Its relevance in the Spanish financial system is marginal and limited to the rural environment. Ø ICO - Instituto de Crédito Oficial (Official Credit Institute): It is the financial agency of the State (State-owned banking institution).
• It does not gather private deposits à credit is based on specific aims (e.g. for SMEs, renewable energies, towards innovation and competitiveness).
• Potentially relevant but limited role and object of discussion in the re-assignment of public resources against the recession.

7. 2 The Banking System in Spain

# of firms Branches Workers Market share Banks 153 (51 Spanish) 15.000 110.000 45% Saving Inst. (CCAA) 46 24.000 132.000 50% Credit Unions 81 5.000 21.000 5% Data for 2009

Features of the Spanish BS before the crisis (I)

q It is a model of universal banking in which banks carry out a wide range of operations (gathering deposits, conceding credit lines, investing in financial assets,...).

• Historically, there has been a certain specialization; Banks focused on financing companies and Savings Banks in the financing of households. q High level of profitability (ROA close to 1% in 2008, the highest in the EU). q Good level of capitalization : Overall compliance with the Basel II ratios. q Moderate degree of concentration. Ø 41% of the assets were in the hands of the 5 largest entities (54% is the EU average). q High technological level and provision of services. q There is a large number of branches in relation to population , and the average branch size is small.

7. 2 The Banking System in Spain

1. The financial system: aim, relevance, agents, types

2. The banking system in Spain

1. The pre-crisis banking system 2. The crisis in the Spanish banking system

3. Financial markets in Spain: money and capital markets

Outline

The 2008 CRISIS q PERIOD [1] : The Spanish Banking system avoided the first wave of

the international financial crisis (2007- 2009), given the limited amount

of toxic assets in the balance sheets of the banksà due to:

Ø Regulation by the Bank of Spain (countercyclical provisions) Ø Specialization of the Spanish banking intermediaries in credit to families and companies Ø Better consciousness of the Spanish executives? q This does not seem a plausible explanation, given what has happened with respect to other assets (real-estate/housing sector) Error in diagnosis and paralysis: liquidity crisis

7. 2 The Banking System in Spain