Specifics of the Banking System of Spain - Article Example

What is the market structure of the banking market in the Spanish economy? How do different banks compete? In a monetary and credit system of Spain there are about 150 banks with an aggregate number of branches 17 727 and the general number of workers 138 386 persons. The prominent feature of bank system of Spain is exclusively high level of concentration and centralization of manufacture and the capital. From the middle of 1980th, especially after the entering EU, this process has even more amplified. On a share of 4 leading Spanish banks there are over 60 % of bank deposits of the country. The high level of centralization of the capital is the characteristic for the Spanish savings banks. In the beginning of 1990th as a result of a series of merges and absorption two leading savings banks accumulating over 90 % of personal savings of the Spanish citizens have been created. Bank system of Spain is one of the most stable and liquid financial systems in the Europe. Its distinctive features are a significant level of foreign currency (13,9 billion euro), the branched out network of branches of private banks and the state savings banks. The dominating role is played by the banks with 100 % of the Spanish capital. The leader at cost of market actives is the financial group "Banco Santander Central Hispano" formed in the beginning of 1999 as a result of merge of two largest banks of the country. Now the strongest bank group is Banco de Bilbao Vizcaya (BBV). However recently it had strong contender Central Hispano, the group formed as a result of merges of two banks - Banco Central and Banco Hispano Americano. Despite of a plenty of local savings banks (cajas de ahorros), they make operations very slowly. In general the bank system of Spain is strongly bureaucratized and not especially cares of convenience of clients (Altman). Some banks and other financial institutions of Spain: Banco de Espana - the Central bank of Spain; Banco Sabadell - the bank specializing on granting of services to private clients, and also small and average business. Has more than 400 branches in Spain and abroad; Bilbao Bizkaia Kutxa (BBK) - the largest savings bank in Basque Provinces and the fourth on size in Spain; Banco Santander - the bank which is carrying out the financial operations in Spain and in 31 country abroad, including the USA; Kutxa - savings bank; Caixa d'Estalvis i Pensions de Barcelona - the financial group including savings bank and some of other financial institutions; Caja San Fernando - the savings bank having operations in the Western Andalusia; Caixa Catalunya – the Catalon savings bank; BBVA – the financial group; Open Bank - the open bank; Ibercaja - the Spanish savings bank. The modern structure of bank system of Spain can be presented in the following way: 1) the state credit establishments; a) the Central bank; b) the Savings and loan association, Build-bank, Industrial bank, Agricultural credit bank, Bank of local crediting, the Central cash department on crediting navigation and fishery, the External economic bank; 2) private banks; 3) savings banks; 4) credit cooperative societies. Comparing the bank system of Spain with systems of other European countries it is worth attracting attention to some features. First, its sizes remain a little bit smaller, than on the average in EU (hereinafter all comparative parameters with the countries of the European Union are resulted without taking into account the entering EU of the new countries in May 2004), if to consider the volumes of own means, loans or deposits. If to measure its sizes by number of financial tools of its components the financial system of Spain is represented to much greater as totals over 15 % from the general number of the European financial institutions. The number of bank branches falling to a person, in Spain is higher, than in other EU countries. Wide scope by bank services of the population of the country, and also significant investments into new technologies have allowed the Spanish banks to raise efficiency of the activity and to reduce the number of bank employees. The parity of number of bank employees to the population of the country in Spain makes 6,29 on 1000 persons. The population while on the average in EU this parameter makes 9,73 (Ohlson). The level of participation of foreign banks in a financial system of Spain is higher, than in other West-European countries, such as Italy, France or Germany, however on absolute parameters it is insignificant. It even was more reduced in view of not too successful parameters of activity of these banks in the Spanish market. Spain is one of the countries with the greatest number of branches and branches of the national banks abroad that testifies to strongly pronounced process of internationalization of their activity in 90-ies. From the point of view of concentration of the banking capital Spain takes of an average position among the EU countries, if to proceed from parameters of five largest banks of the country. Above Spain according to this parameter are the small EU countries, while in Germany and Italy the concentration of the banking capital below. The number of the greater, average and small regional financial institutions entering into a financial system of Spain, is great enough, that creates a sufficient degree of a competition between them. Two large commercial banks and two large savings banks are the basic operating institutes of the Spanish financial system. According to the parameter of the consolidated actives the distance between the specified banks and other banks is great enough, besides it also constantly grows, as on a share of the first it is necessary the leading part during internationalization of the Spanish financial system. However distinctions are not so significant. According to the European parameters of profitableness the Spanish banks are at high level enough. For the last years the operative income expressed in percentage of all kinds of actives a little bit reduced, was above an average on a zone of euro and as a whole of the EU countries. The efficiency of banks measured by a parity of operational charges and operational incomes, also above average indices of EU. The same concerns such parameters, as liquidity, capitalization (Dobson). High capitalization of the Spanish banks is one of the major factors defining durability of the Spanish bank system, but not the only thing. "Banco de Espania" (the central state bank) has entered the new, so-called "statistical" maintenance supplementing already existing specific and general maintenance. Performance of "statistical" maintenance is directed on a covering of expected losses in dynamics already from the moment of granting the loan. It should reduce, first, procyclic character of others maintenance and, secondly, be reflected in accounts of incomes and losses, that reflects correlation between incomes and charges during validity of the loan is better. ‘Statistical’ maintenance should allow banks to react to deterioration of an economic situation more effectively. At last, other characteristic feature of the Spanish financial system the fact that banks operate with very significant share of actives of investment funds within the limits of structure of gross national product (one of the highest in the EU). To my mind, the changes in the tax laws and a rigid competition between banks explain that fact that the investment funds from the beginning of 90-ies have started to grow quickly, but continued to cope banks or bank branches. Pension funds also in most cases cope the banks though on the sizes they are very small in comparison with funds of other European countries. This fact is explained by the features of tax system of Spain and a degree of liquidity of funds. As a result that development of the markets of the capital, in particular the institutional funds, was carried out by banks has been caused by that real process on elimination of intermediaries as it has occurred in the majority of the European countries, in Spain was not (Richardson). The positive development of the bank system of Spain is explained by the fact that from the 60-ies in this sphere there was a number of very important changes: First, the financial liberalization after a decade of financial reprisals. Secondly, bank crisis which in a greater degree has been caused by unsatisfactory bank management, instead of financial liberalization though last also has not helped business. Thirdly, increase of distinctions in activity of commercial and savings banks. At last, fast internationalization of process of bank activity with participation in the capital of foreign banks and their purchase, in particular in Latin America and more and closer integration with the European bank system. The Spanish bank system was rigidly adjusted by the state administration up to the end of 60-ies. All the interest rates, both on actives and on passives of bank balances were established administratively. Target credits under the percent below market in such sectors, as an agriculture, shipbuilding and housing construction stood out. The number of branches of economy, in which each concrete bank could operate, also was adjusted by the quota system distributed between authorized banks. Foreign banks for activity in Spain were not accepted. In addition to it there was the rigid regulation dividing functions of commercial and savings banks. The first concentrated the activity on financing of corporate sector and it was authorized to them to operate in the foreign currency markets, but it was not allowed to carry out other financial services, for example, hypothecary operations. Savings banks, on the contrary, focused the operations on granting of housing loans (first of all by means of the mortgage), but they were not allowed to operate with corporate sector. In addition, savings banks originally had especially regional character, and they were not authorized to expand the sphere of the activity for limits of their region. Evolution of the Banco de Descuento through the MDS con.guration with an indication of the dates of the accounts(Richardson). In 60-ies the significant volume of decisions, together with business orientation has not been concentrated in hands of heads of the Spanish banks and the competence of administrative regulation was kept. It, alongside with other factors, has led to occurrence structures with high rates of return of the involved banks, but also with high price by for investors (Richardson). The economic country leaders understood that for the increase of a competition and efficiency of a financial system of Spain it is necessary to carry out its liberalization. The process of financial liberalization has formally begun in 1969 and has ended in the beginning of 90-ies. The financial liberalization was carried out in Spain consistently enough, after its end the Spanish banks have been admitted to free definition of interest rates on their actives and passives. The reserve contributions (except for insignificant reserve requirements) have been cancelled, geographical restrictions on opening of branches in the beginning have been removed for the commercial banks and, gradually, also for the Savings Banks, and to foreign banks licenses for their activity in Spain began to stand out. The liberalization of financial system of Spain has been conceived for increase in a competition in this sector. However, while the increased competition has led to the reduction of profits of banks, it at the same time was the reason of that banks began to apply more risky policy in the actions. Reduction of the price of financial operations in connection with the termination of state regulation of banks and the increased competition have led to that at banks remains ever less than desire to strengthen the solvency by means of attraction of capitals. Threat of bank crisis, especially if to consider a complex political and economic situation in Spain that time, became more and more probable. In 1978-83 Spain experienced a heavy bank crisis which has led to closing, to merge or purchase of 52 of available in the moment banks, 25 % from the general number of bank actives. Crisis in the beginning has mentioned small banks of local value, but later has amazed also some of the important bank conglomerates. The reasons of bank crisis were a deep economic crisis in Spain and too weak system of regulation in conditions of process of financial liberalization, but first of all an inept management of the banks, the structures connected with them, and also the primitive extra crediting, carried out them. Actually, as well as in many other things cases, bank crisis has burst under influence of the bad economic conditions which have followed the period of significant economic growth (Altman). The economy sharply developed in 60-ies and 70-ies with rates of growth of gross national product at a level of 7 % a year, i.e. the highest in the Europe at that time. 1975 became year of recession when rates of growth of gross national product were reduced up to the minimal 0,5 % because of the burst oil crisis and the difficulties caused by acceptance of measures on stabilization of an economic situation during democratization in the country. Both rates of growth of the salary, and inflation, which parameter has come nearer to 10 %, were sharply accelerated, led to devaluation of peseta and deterioration of position of balance of current operations. It was necessary to toughen the monetary policy to bridle inflation, but it simultaneously conducted to growth of the price of extra means for corporate sector in conditions of delay of economic growth. The first symptoms of crisis have appeared in 1977 when the Bank of Spain has found out, that problems with the liquidity, noted in several bank institutes, hide more serious problem of their solvency. Many of the gone bankrupt banks have been founded in 60-ies. The owners of these new banks focused the basic attention to financing of the industry (long-term financing of not financial companies), giving the basic volume of financing to the sector of the real estate most subject to risks. During the beginning of industrialization in the country and later, in 1974-80, it has won from sharp falling at stock exchange and operated as reliable harbour for capitals. Moreover, banks gave large loans to not financial companies belonging the same mostly bank groups. Granting of loans to the companies connected with these banks and the physical persons who are a part of specified financial groups, reached 50 % of volumes of the loans given by banks which subsequently became bankrupts. When an economic situation in the country has worsened, repayment of the loans received by clients has stopped and cash at banks was sharply reduced. Many of problem banks have been compelled to start realization of own actions to avoid reduction of market capitalization and have appeared involved in so-called "the creative reporting", trying to hide various ways unsatisfactory results of the activity. Not returned loans and the means enclosed for support of the share capital of banks have started to be reflected in volume of the involved means and profitableness of these banks. For the decision of problems with liquidity some banks have started payment of higher percent on the involved means, exceeding adjustable limits, or began to expand sharply a network of the branches with a view of attraction of additional means. Increase of cost of these operations, and also increasing discrepancy of actives available banks to their obligations eventually have led these banks to bankruptcy. As banks were on the verge of bankruptcy, their many managers began to get involved in doubtful, from the legislative point of view, operation that has even more accelerated their ruin (Richardson). The price of bank crisis for the Spanish tax bearers was significant, - 5 % of gross national product of the country, - but nevertheless it is lower, than under similar circumstances in many other countries. In the beginning of crisis in Spain there was no system of insurance of deposits. After the end of an estimation of the importance of the burst crisis, the scheme of insurance of deposits by commercial and savings banks together with Bank of Spain has been immediately entered. Created for realization of this scheme the institute has acquired also the right to realization of crisis re-structuring of banks. Being guided by the sad experience, controllers became much closer to the problems of rigid regulation and supervision of solvency of banks and within the next years many measures in this direction have been entered. The Corner stone of a new line of actions, besides strict regulation of solvency, became frequent inspections on places during which the actives of banks and their reserves were closely checked. From banks conformity to more strict rules concerning their capitalization was required. "The factor of a guarantee" (counted up on the basis of a parity of obligations to own capital) has been replaced in 1985. In factor of solvency in which for various kinds of actives various levels of capitalization (from 0,25 % up to 35 %) were required. This factor was in essence very close to what later has been fixed in Bazil agreement in 1988. In addition to it in that, as to requirements to capitals limits for concentration of credit risk (as it became clear, it was one of principal causes of last bank crisis) have been entered, and also more rigid initial requirements for new banks, intervention of inspectors at earlier stage and more strict sanctions for infringers of rules have been accepted. At last, the requirements concerning professional and personal qualities of the future bankers have been established, and the right to intervention in business of those banks has been given to controllers, solvency and which liquidity is in doubt. Change of bank structure: commercial banks against the Savings Banks. The important consequence of financial liberalization became the increase in distinctions between commercial and savings banks though it has occurred and at last stage of process of liberalization as liberalization of the Savings Banks has begun later. While it was authorized to commercial banks to open the branches on all territory of the country at rather early stage liberal process, the Savings Banks should expect reception of the similar sanction up to 1989. For savings banks higher requirements concerning compulsory deposits have been established.  In conclusion it is worth mentioning that Spain banks occupy a significant place in the World Bank system. In a financial system of Spain two strong bank groups of a world level "Santander" and "BBVA" were generated. Cumulative profit of eight basic financial institutions of Spain (group " Santander " and "BBVA", banks " Popular", "Sabadell", "Bankingter", "Banesto", savings banks " La Kaisa", " Kaha Madrid ") in 2004 has made nearby 10 billion euro from which 66 % were necessary "Santander" and "BBVA". They concern to the largest banks of the world. On volumes of capitalization these bank groups of Spain enter in first ten banks of the Europe where "Santander" takes the fourth place, and "BBVA" - the ninth. In 2004 these largest bank groups of Spain have received the record profits which exceeded profits of German "Deutshe Bank ", corresponded to a profit level of the French bank "Sosiete General", however conceded to leading banks of the USA, Great Britain, Holland, Switzerland (Brown). The income and profit of the largest world banks in 2006 (millions euro) Country The name of the bank Profit 2005 Profit 2006 2005/2006 % Income 2005 Income 2006 2005/2006 % Spain BBVA 2227 2802 25,8 12537 12466 -0,6 Santander 2610 3136 20,2 17203 18103 5,2 Germany Deutshe Bank 1365 2546 86,5 21268 21918 3,1 France Sosiete General 2492 3125 25,4 15637 16416 4,9 Switzerland UBS 4051 5223 28,9 21941 26668 21,5 Holland ING 4043 5968 47,6 64746 67814 4,7 ABN Amro 3161 4109 30 18783 19793 5,4 Great Britain NSBS 6646 8969 34,9 31115 38323 23,2 The Royal Bank of Scotland 3314 6258 88,8 28354 33461 18,0 The USA Citygroup 17853 17046 -4,5 77442 86190 11,3 The bank of America 10810 14143 30,8 37914 48894 28,9 Substantially these results are connected by that operative charges of the Spanish banks to rather cumulative actives on the average the lowest (0,026 euros) in Europe, except for the German banks (0,019 euros). However the mid-annual wages of bank employees of Spain are less (52 thousand euro), than their German colleagues (60 thousand euro). Quantity of employees on one branch in Spain (6 person) the lowest, in comparison with bank branches of France (13), Germany (43), Great Britain (45). In conditions of low interest rates large financial institutions actively use commission fee for a covering of the charges. So, in the first quarter 2005 the leading financial five of Spain ("Santander", "BBVA", " La Kaisa ", " Kaha Madrid ") on 54,2 % covered with "Banquo Popular" the operational expenditure due to incomes of commission, savings contributions, insurances and pension funds. It is worth mentioning that now about a quarter of actives of bank system of Spain is abroad, and one half is necessary to Latin America, and the second - on the European countries. In other regions the Spanish banks are presented slightly. 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