The Spanish financial crisis: Lessons for the European banking union

Summary

The event began with an overview of the report by the Elcano Royal Institute on the Spanish banking crisis and the possible lessons for the European banking union.

The researchers offered their analysis of the Spanish crisis and its causes, focusing in particular on credit expansion, wholesale inter-banking funding and poorly managed public savings banks. They also pointed out that the ex-post policy response came too late. While it was hoping for an automatic recovery that never came, it was a misguided attempt and eventually led to an even weaker financial system.

Continuing from this point, the discussion then concentrated on the lessons that can be extracted from the Spanish financial crisis. The main question here is, to what extent the potential policy measures could be taken to a European level to prevent such an episode from repeating itself.
Although banking crises occur from time to time and are often linked to relatively similar causes, i.e. financial euphoria, credit growth or real-estate bubbles, we do not seem to learn from them.

Once the crisis hit the Eurozone, the Spanish authorities encouraged mergers between healthy and troubled institutions. This led to a weaker domestic banking system which eventually had to receive public intervention. This also shows how the misdiagnosis partially worsened the economic crisis. Moreover, the Spanish example shows that even small saving banks can lead to systemic crises, especially when their supervision is inadequate. Last but not least, although bail-in measures are now in place and should enhance banks resilience to financial distress, a common fiscal backstop is needed to top up, in case bail-in loss-absorption capacity is not enough.

The conference concluded with several questions. First of all, it was asked whether the European financial assistance was needed at all, given its relatively small amount of 42 billion euros, representing around 4% of the Spanish GDP. Secondly, given the clear hints that the Spanish economy was delivering, seen by the rise in house prices and current account deficit, why did policy makers not try to address the situation?
Regarding the first question it was said that, although the relative amount was not high, it was probably also used as a political instrument for Spanish authorities to implement fiscal consolidation. Then, concerning the question about the delayed actions of policy makers, the speakers argued that it is always easier to ‘predict’ ex-post. However, since the existence of large current account imbalances within a single currency area without a fiscal union had no comparable benchmark, it was not easy to link these imbalances with the emergence of a housing bubble at that time.

Event summary by Jaume Martí Romero, Research Intern

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Relevant Reading

The Spanish financial crisis: Lessons for the European Banking Union | Miguel Otero-Iglesias, Sebastián Royo, Federico Steinberg

More Bruegel work on banking union