Institutional deterioration

The economic and financial crisis is revealing a series of anomalies and bad practices — if not obvious illegal activities — inside banking and financial institutions. We now know that in many countries, including Spain, the bodies responsible for ensuring the proper functioning of the financial system — from regulatory agencies and supervisors to national governments and auditors — have undertaken questionable actions.

It is, however, the management of this crisis that has come to reveal serious shortcomings and errors that are difficult to ignore, are far from the spirit of fair play, and have impeded the proper functioning of the markets. In Europe, supranational institutions have failed to legitimize their existence; governments are showing us that they are incapable of combatting the worsening economic conditions, and the supervisory agencies have directly overlooked certain remedies or mistakenly handed down the wrong ones.

Bankia’s nationalization is nothing more than a grouping of these bad examples. From the forced merger of Caja Madrid with Bancaja — carried out, in the words of Madrid’s regional premier Esperanza Aguirre, with a gun held to the institution’s head — to the naming of Rodrigo Rato’s replacement at the head of Bankia at the behest of presidents of its main competitors, and not to mention the actions of the Bank of Spain’s auditors, it is little surprise that the public has such scant confidence in the Spanish economy. Even less so when taxpayers feel that these business leaders not only shirk from assuming the consequences of their mistakes, but will also be propped up with public money in order to avoid greater evils. We should view the first step being taken by the Attorney General’s office to open an investigation into possible crimes committed by officials who ran the savings banks as a positive move.

Restoring confidence

Just as it is important to limit the damage caused to the social wellbeing of Spaniards by the crisis, it is also essential to correct the conditions that are allowing the financial institutions to deteriorate. In particular, this includes restoring confidence so that people will be able to trust that the financial institutions are independent and sufficiently and technically strong enough to survive on their own. The skepticism of the public over the scale of the accounting anomalies within the banks is hard to reconcile with the Bank of Spain’s obsession over areas that are far from its remit of supervision of the sector, such as its insistence on the need to make the labor market more flexible in terms of hirings and firings.

The deviation from their main objectives, their inability to carry through even rational decisions for the banking sector after the crisis, and the extreme situations that the Bank of Spain’s auditors have created are hard to justify. They require an urgent institutional regeneration, based not so much on economic recovery, but rather the legitimizing of the entire financial system.