A motion to set things right again

The governor of the Bank of Spain, Luis Linde, on Tuesday laid down a political marker in Congress on the responsibilities assumed by the supervisor in the financial crisis. He did so without resort to sectarianism as his analysis of the significant failings of the central bank encompassed his two immediate predecessors Jaime Caruana and Miguel Ángel Fernández Ordóñez, appointed under the two previous governments. His reading of what happened could not for obvious reasons go into too many details, but served as a judgment on the system of so-called cold mergers initially proposed to resolve the crisis of the cajas (savings banks), which only led to the delaying of any solution to the problem, as well as the issue of anti-cyclical provisions, the object of disproval by the banks. The governor’s message could be summed up as an acknowledgement of the errors of the central bank and a proposal to rectify them in restoring the supervisory role of the Bank of Spain in preventing bank crises.

There are no reasons to doubt this message. If the banking authority fully holds the reins of inspection, it has the political clout to impose procedures for controlling and overseeing the banks that it so effectively exercised at least until the start of this century. Rigorous on-the-spot inspections and cautionary proceedings worked as a dissuasive front against lending excesses and unrestrained investment. These practices were relaxed during the period of real estate and financial euphoria from 1999 to 2008 with well-known consequences: inadequate knowledge of the balance sheets of banks such as Bankia, insufficient resources to impose rigor on the technical and political administrators of badly managed cajas, and, finally, a crisis that first of all overwhelmed the Bank of Spain and which the political authorities did not know how to handle.

The new governor and his team have it within their reach to restore the prestige of the central bank. Independently of the management of the banks that have been nationalized and that are to receive funds from the European bailout over which the troika also holds sway, the task is all the more urgent because of a lack of improvement in the conditions under which the financial system is operating. The non-performing loan ratio of the banks is heading rapidly toward nine percent, a factor that could spark renewed fears about its solvency. Linde’s role is to inspire confidence in the future of the Spanish banking system. This objective entails the imperative of returning to rational control of the balance sheets of the banks on the part of the Bank of Spain to avoid new crises.

If this is what the governor is proposing — and by the way his affirmation that it is not necessary for the moment for the ECB to buy Spanish debt should be taken to mean that the Bank of Spain itself forms part of the ECB — there are few objections to be made. The sooner the procedures for overseeing and controlling the banks are restored the better. Confidence in Spain’s banks is at a low ebb, and the Bank of Spain at least needs to restore faith in itself.