Expectations ran high when the Bank of Spain announced its intention of issuing a full report on the Spanish banking crisis. Even if events took place some years ago, the current court proceedings and the upcoming parliamentary scrutiny fuel increased interest on this topic. But what the supervisor has finally delivered has in fact failed to match up to the anticipated inquisitiveness.
The report describes in full detail most of the key developments, even if it skips over the clumsy way the authorities managed the Bankia crisis. It also provides a thorough overview of policies implemented to redress the dismal situation, even if it avoids any account of its supervisory failures. As one might expect, the media has jumped on ancillary issues such as the losses incurred by taxpayers, in striking contrast with the formal pledges made by the government at the time. Yet whatever the bill, the alternative of dropping some banks would have caused a huge backlash, driving the economy towards a doomsday scenario.
However, the report’s main shortcoming lies in its lack of a convincing analysis of the reasons why banks proved so vulnerable. True enough, it identifies their excessive exposure to residential mortgages as a fundamental weakness. It also flags excessive reliance on external financing as an obvious Achilles heel.
But it fails to plainly set out what went wrong with the world’s financial sector. The report hardly examines in full the central mismatches and potential dangers fuelled by too much complacency about the system’s ability, as a whole, to redress any unexpected incident. Over-confidence meant that banking business was run on a thinner than warranted capital and liquidity endowment, in a reckless race to boost profitability. The assurance that each participant could totally count on their neighbour for cash if needed was based simply on a bet that interest rates wouldn’t shoot up. When they did, after the Lehman Brothers’ collapse, the outstanding last resource guarantor, namely AIG, failed to secure the extra cash to cover the increased collaterals in the contracts it entered into. It went bankrupt, and all its formal pledges became waste paper. Interbank lending imploded as no entity knew for sure what the real value of its balance sheet was, let alone that of a stranger.
In Spain, banks avoided this catastrophe, as they were less keen on sophistication. Only one major lender had marginally invested in lethal structured products. They faced the slump with plenty of resources and a buffer to counter pro-cyclical biases. As time went on, however, the continued downward trend eroded their assets. Whatsmore, the euro crisis destroyed all hopes of access to the wholesale money markets. Confidence in the Spanish economy dropped to such a low level that the banks were unable to refinance themselves. While the situation was pretty tight in Southern Europe, the final blow came with the public disclosure of a huge banking gap. The Spanish banks barely survived the tsunami. Even the bail-out provided by European partners failed to change the mood. Only Draghi’s commitment to defend the euro turned the tide.
Those are the real clues the report fails to underline. The Turner Review, published as far back as March 2009, still provides a fairer account of what went wrong, along with a sensible series of proposals. Eight years later, the Bank of Spain has published far too many pages with too little meat in them.