Banks and Banking in Spain

Introduction

Spain is in South West of Europe. It has an area of 504,750 square kilometer. It had estimated population of 40,341,000 as of 2005.Its capital is the largest city namely Madrid. Some important cities in Spain are Valladolid, Burgos, Salamanca, Toledo and Badajoz. Great regional diversity is being displayed by the Spanish people. Chief languages spoken in Spain are Castilian, Catalan, Galician and Basque. Spain has a sizeable Muslim minority population of about 1 million. Agriculture is the chief occupation of Spaniards. Spain is the global leader in the production of Olive oil. Further, it is the largest producer of oranges, lemon and strawberries in the EU. At Rio Tinto, copper is expansively mined. Iron & Steel, textiles, automobiles, chemicals, electric motors and machinery are the chief industries in Spain. (The Columbia Encyclopedia).

Though, Spain has achieved many great economic strides in the recent years but it is still trailing behind majority of Western Europe. Since 1950, Spain’s industry sector witnessed rapid development and Spain is having massive trade imbalance as of date.

Since 1975, Spain is having a constitutional monarchy. Cortes is the Bicameral legislatures which are elected once in every four years through provincial elections. Cortes is having power to approve, cancel or reform laws and to endorse international treaties. (The Columbia Encyclopedia).

Spain Banking System

The continuous economic crisis that started in 1975 had a devastating effect on the small private banks in Spain. As the result, many of such private banks have to be rescued by the Bank of Spain. Some small banks were merged with healthier and bigger banks. Market share of Spanish banks were under threat due to Spain’s accession to EC in 1986 and this had opened the doors for foreign banks to extend their operation in Spain. As an economic reconstruction process, streamlining of regulations and liberalizations was announced which was followed by mergers and new marketing strategies to attract depositors.

Merger was carried in such a massive scale that there were more than hundred private banks in the early 1970 which were reduced to just over thirty private banks by the mid -1990’s.

The biggest merger was the merger between “Banco de Bilbao”and “Banco de viscaya” and between “Banco Hispanoamericano” and “Banco Central”. The government owned Banco Exterior was merged with the other financial institutions in the public sector which was known as Banco Argentaria. Further, Banesto, a small private bank which was in trouble was acquired by Banco de Santander. Thus, these merged banks are called now as “big four.”

Before this consolidation of small private banks, Spain had large number of branches as compared to any other nations in the EU. Further, Spanish branches employ on average fewer staff than other nations and hence, the productivity in terms of clients per employee is high as compared to other banks on global basis. Further, retail banking has been the mainstay of the Spanish banks since bank and building society deposits still account for over half of the household savings in Spain.

During the recession in the early 1990s which had significant impact on Spanish banks as they have minimized their margins and to account for more bad debts. Due to siphoning of funds by Mario Conde in 1993, Spain banking system had almost collapsed and due to this, Banesto went to near verge of bankruptcy.

The year 1995-96 witnessed some improvements in the performance of Spanish banks. Further, net interest margin which is the difference between interest paid and interest earned was absorbed by the increased competitiveness as the ratio of capital and reserves to total assets was high by European standards and then profits have recovered drastically. Now, Spanish banks have also of late increasing their stake in strategic sectors in the areas of telecommunications and electricity. (Rodgers: p. 48).

Fully integrated with international financial markets, Spain has a diversified modern financial system. The financial system of Spain includes stock, credit and financial markets and precise derivative’s market which include futures and options supported on diverse properties.

The Spanish legal framework has undergone transformation in banking and insurance services due to the creation of the EU single market. EU edicts controlling the solvency ratio and equity of credit institutions, and the Second Council instruction on banking synchronization has been perused by Spain. Spain has also embraced EU edicts on the insurance services and sureties market.

The banking industry of Spain has witnessed the improvement due to improved Spain’s economic climate. Interest rates in Spain are very low as compared to other member countries of EU. Due to cut throat competition in the banking market, interest rates in Spain have been brought down. Spanish banks are having good capital base.

It is to be observed that the richest private banks in Spain like Banco de Bilbao, Banco de Santander Central Hispano and Banesto have invested their funds in the radio, television and press. (Stanton, p. 99).

In Spain, the retail banking is dominated by two big banks namely”Banco Bilbao Viscaya Argentaria (BBVA) “and “Banco de Santander Central Hispano (BSCH).” In less than 10 years, the above banks turned to be the largest commercial banks owned by foreign companies in Latin America and positioned themselves as largest bank in the new single European market for financial services. It is to be observed that since 1994, the Spanish banks have acquired poignant market shares and assets in Latin America. In EU region, both BSCH and BBVA are among the four largest banks in regard to their market capitalization. (Guille 202).

Adventurism of Spanish banks in Latin America is not only path breaking but also breathtaking since very rarely banks tried to influence mass-market retail banking in so many foreign nations. (Tschoegl, 1987).

Development of Banking Law in Spain

Spain economy is being influenced by three top forces namely the church, the military and the banks. (Munoz 1969). In the Franco regime during 1940 banking laws were enacted in such a way that banks in Spain could not attain growth in domestic level except through acquisition. The new banking law that were enacted in 1962 facilitated Spain banks to venture into other financial services and to have to stake in other manufacturing and media companies. This universal replica ultimately facilitated the top banks to structure business groups around them. The new banking law of 1962 also facilitated for the growth of cooperative banks, savings banks and credit institutions with robust regional roots. Further, during 1960, Spain government also established scourge of private banks namely the official credit institutions as its policy decision to develop agricultural and industrial activities. In 1994, the development of Law of Autonomy offered the Bank of Spain more powers and autonomy to bring monetary stability to Spain. It is to be noted that Spanish banks were ushered a high degree of independence and rights and due to this, they turned to be one of the founding pillars of support for the Franco regime. (Perez 1997 60). The Royal Decree 1245 dated July 14, 1995 regulates the Spanish legislation pertaining to the incorporation of banks. As initiated by legislation issued during March 1994, executing the Secondary EC command on coordination banking, the Credit financial establishments have been authorized to function in Spain. (Guille 204).

Spain’s Financial System

Financial system of the Spain could be grouped as per details given below:

Bank of Spain (Central Bank of Spain)

The Central bank of Spain occupies the pivotal part in the administration and management of commercial banks and fixed deposit-accepting financial institutions. The Bank of Spain functions as an investment banker to the banking system and government, oversees maneuvers of other credit institutions and commercial banks, and oversees the information system that is being centralized, and standardizes controlling measures of foreign exchange and markets for foreign exchange. Through the amendment to the Law 13/1994 which was amended by Law 12/1998, which makes sure that full consolidation of the Central Bank of Spain in to Central Bank System of the Europe. As per the schedule of implementation by Monetary Union of Europe, since January 1999, the Central Bank of Europe has had sole accountability over exchange policy and monetary transactions. Before nationalization, Bank of Spain was known as BANCO DE ESPANA.Though this bank was nationalized in 1962, it is however now out of control from the clutches of Spain government and now it is functioning with autonomy and freedom. It is the nation’s central bank and is under the governance of the provisions of Ley de Autonomia del Banco de Espania. As the central bank of Spain, it is responsible for controlling the foreign currency reserves and to determine the exchange rate policy. It also supervises the role of the clearing banks in Spain and may levy sanctions on those banks which do not adhere with its policies and regulations. It also controller of issuing coins and notes and is the official bank of the autonomous regions and state. (Truscott & Garcia, p. 27)

Private and savings banks

Commercial banks in Spain include the following categories:

• Savings banks
• Spanish and foreign banks
• Rural savings banks or Credit cooperatives

Savings and private banks are significant due to their dimensions of trade and since their transactions envelop all sections of the economy. As of December 31, 2004, the register of Bank of Spain’s contains 349 credit institutions. The credit institutions comprise credit unions, savings banks, private banks, financial institutions, foreign banks branches including 2 U.S. banks which are headquartered in non-EU countries. These abovementioned banks own about 17,501 branch offices with a mean of a dozen offices per each 10,000 dwellers over than two decades. Merger between the many Spanish banks have taken place so as to consolidate their part, their standing in tune with the single market for whole of EU for banking services. Many of these Spain banks also stretch their global existence, particularly in “Latin America.”

Majority of Spanish banks offer a wide spectrum of services both to individual customers and corporate, international financing which consists of loan disbursements and collections.

The Confederation of Savings Bank in Spain is consists up of 12 regional savings bank federations and46 confederated savings banks, with about sixteen thousands branch offices. Savings banks are entrenched banks drawing a considerable quantum of personal savings in Spain. Savings bank in Spain lend mostly to private customers by way of loans and mortgages. These savings banks are also vigorous in funding major private and public works by purchasing and subscribing debt securities with fixed-income.

The Royal Decree 1245 dated July 14, 1995 regulates the Spanish legislation pertaining to the incorporation of banks. At the suggestion of the Bank of Spain, the Ministry of Economy gives its authorization to carry out banking activities. Foreign banks already permitted to function in a different EU member nation do not require permission from the Central Bank of Spain to establish a representative office or branch in Spain. For both Spanish and foreign companies, the circumstances of access to the Spanish financial system are the same. (U.S Embassy Trinad)

Banco Zaragozano

Banco Zaragozano is the eleventh largest private banking group that operates all over the Spain. It was established in 1910. It has around 361 branches all over Spain. In the year 2002, Zaragozano had posted a net profit before tax of € 67 million. It has a high rank of loan portfolio with approximately half of its lending in mortgages and has a very low quantum of non-performing assets to total loans as contrasted with the average standard for any Spanish banks. Zaragozano was acquired by Barclays Bank S.A in Spain in July 16 2003 which is a subsidiary of Barclays Plc. (Form 6-K 2003).

Barclays Bank S.A

Spain’s tenth largest private sector bank is the Barclays Spain bank as of December 2002. It is strongly distinguished for its strand brand image and track of innovation. It established in the year 1974 its first representative office in Spain. It has now more than 165 branches of its bank all over the Spain. Barclays Spain bank is rather distinguished from its innovative products like Unit Linked Products, money market account, a remunerated mortgage and guaranteed funds associated to the “IBEX 35 INDEX.” In the year 2002, Barclays Plc posted a net profit before tax of € 59 million.

Barclays Bank SA has also a strong presence in Spain mainly through Barclaycard International and chiefly by channelizing through its investment banking arm namely Barclays Capital. Barclays Capital was successfully raised capital of € 7.2 billion and was adjudged as the first in debt financing in Spain for the second consecutive year.

Thus, the acquisition of Banco Zaragozano by Barclays Bank SA symbolizes the Barclays strategic precedence which is to make inroads into both commercial and retail banking presence in chosen European markets. The interlinking of banking operations of Banco Zaragozano and Barclays Spain SA will get together two identical business , fostering a strong countrywide distribution mechanism ,enabling the present customer of Barclays Spain base and net work of branches. Immediately after the merger, Barclays Spain S.A has become the sixth largest bank in Spain on assets basis and facilitates Barclay’s victory in the Spanish marketplace. (Form 6-K 2003).

Banco Catalana

This bank is located in Baleares and Cataluna and about 95% of its share capital is held by the Banco Bilbao Vizcaya. (BBV). It was founded by Catalan nationalist leader Jordi Pujol in 1958.

Banco Bilbao Vizcaya Argentaria (BBVA)

This bank is actively engaged in all key aspects of banking and was established in 1989 due to merger between the Banco Vizcaya and Banco de Bilbao. It was established in 1856 as an issuing and commercial bank mainly serving the banking requirements of business communities and traders in the Vizcaya which is the northern industrial and port city name after which it was christened. It had become active banker for the steel making Basque Country. Both Vizcaya and Bilbao turned to be full-fledged commercial and industrial banks during the 1960s as Spain turned to be manufacturing economy by then. (Torrero 1991). The bank also made further acquisition of bankrupt banking institutions in the early 1980s. (Guille 209).

Banco Central Hispano (BCH)

This bank has more than 4000 branches almost in all parts of Spain. This bank was established in 1991 due to merger between the Banco Hispanoamericano and Banco Central. (Truscott & Garcia: 27) Due to its weaker capitalization, it mostly relied on joint ventures. However, this bank has been merged with the Santander. (Guille 209).

Banco Santander

The annals of Spanish banking witnessed most intriguing aspect when top three banks that dominated the pivotal roles in the expansion on the international level during 1990s.They are BCH, BBV and Santander. (Guillen and Tschoegl 2000).

Banco Santander was established in 1857 as a commercial bank specializing in the Spanish –American trade expansion through the northern port city of Santander. Despite of existence of post war regulatory limitations, Santander witnessed amazing growth between 1940’s and 1950s through consolidation, acquisition and had consolidated a network of bank branches on national level as late as 1970s. During 1980s, Santander competitors were in trouble due to issues relating to their acquisition. Santander used this opportunity to offer competitive products by breaking the cartel that existed between major banks in Spain. Between 1993 and 1999, Santander transformed the Spain’s retail banking by marketing mutual funds, high-yielding savings accounts and low interest bearing mortgages. Santander introduced first telephone banking in Spain in 1993. Banco Santander Group was able to climb top of the domestic banking in Spain due to its acquisition of Banesto’s assets which had high density of bank branches in rural Spain.

Santander started its international expansion in 1980’s. It has acquired Banco de Comercio e inustria of Portugal in 1990s. In 1991, it acquired about 14% of Firs Fidelity Bancoroporaton for $ 650 billion in U.S.A. (Guille 208).

Other Credit Organizations

• As initiated by legislation issued during March 1994, executing the Secondary EC command on coordination banking, the Credit financial establishments have been authorized to function in Spain. These are credit entities are dedicated in some specific asset products and theses institutions cannot accept public deposits and other can engage on in lending, leasing, factoring and loans of mortgage.
• (Institute for Official Credit).ICO is the designated institute which functions as the Spain government’s investment bank and agency of finance. (US Embassy Trinidad).

Organizations Dealing with Investments

• Cooperative organizations for investment:

These are companies which are trading in profitable securities and dealing in assets and properties.

• Speculation funds: money market assets, marketable instruments, mortgage securities, assets & properties, retirement funds and plans.
• Business seed capital (venture) companies and funds.
• Investment organizations of other types.

Spain has initiated various measures to enhance its brokerage and investment institutions. Financial reporting to the public is made compulsory by the regulations governing investment entities. Regulations also extend its surveillance to novel characteristics of investment entities like seed capital (venture) companies and funds. Moreover, Spain has established tax holiday or concession initiatives to eradicate the additional tolls concerned in employing this mechanism for investments.

In Spain, funds for property investment do also subsist and thus carrying out the method of adjustment to and homogeny with such collective investment instruments. (US Embassy Trinidad).

Spain’s Money Market

Bank of Spain has issued of short-period instruments which is offered through Spain’s money market which are subscribed by finance companies, banks and operators of money market.

Due to the greater flexibility and increased liberalization of the financial system of Spain, the market for money has become more and more significant. In Spain, the state’s debt instrument also plays a significant role and both foreign investors and resident are the major players in this sector. Spain is considered to be an attractive market for Spaniards living in foreign countries as constructive tax schemes for investments in these financial instruments is likely to fetch more financial incentives to them. (US Embassy Trinidad).

Market for Credit in Spain

The market for credit in Spain is maneuvered through private banks, which lure many corporate and private savings and employ their finances to offer funding for the projects in private sector. These Spanish private banks also function as underwriters and investors in the nation’s securities market. They regulate their debt repaying ability both by money market and transactions by inter-banks. Spanish companies feel comfort to obtain financing from abroad due to liberalization of capital movements in the EU.

Spanish Securities Market

Stock Market of Spain is made up of 4 major stock exchanges. Stock exchanges in Spain have sustained a process of overhaul by expanding other than dealing only in stock and bond issues which have introduced new means of functioning and novel varieties of financial securities.

Top Spanish banks and notorious private companies have listed their shares on the Spanish stock market. The Spanish branches of foreign banks have also listed their promissory notes, guaranteed bills issued and certain foreign companies’ shares. In the Spanish market, some non-resident entities are authorized to issue bonds denominated in euros which is known as matador bonds.

Market regulation in Spain system is footed on a U.S.A / British replica. Its main goals are to safeguard the Spanish market and small investors. Spanish stock exchange operates on a single computerized system and it is a centralized continuous stock market. Insider trading is an offense and offenders will be penalized. Spanish stock exchange system is supervised by a National Stock Exchange Commission and it involves itself in developing its regulations.

The Spanish stock market operates in an aggressive financial instrument market which has a 3 day system for settlement. New warrant options, index and hedging instrument are accessible and trading on credit is permitted. Moreover, the government has introduced more comprehensive and stricter rules and regulations in respect of takeover bids. In Spain, some other headstart growths for the securities market which include the institution of industry for swaps, futures and options and there exist an unauthorized secondary market for dealing especially in fixed-revenue assets. These new developments have ushered the Spanish financial market safer and apparent.

The collective Securities Exchange in Spain, which includes Bilbao, Barcelona, Madrid and Valencia comprises of either the fourth or fifth top-most stock exchange in EU and either eighth or ninth in global based upon which index it is registered. (US Embassy Trinidad).

Control Measures of “Foreign Exchange” Transactions in Spain

The liberalization of the Spanish financial sector has been achieved by the espousal in latest periods of necessary EU ordinances. For instance, capital movements and exchange controls are now fully relaxed. Spain implemented many key Royal Decrees (RD) from 1991 to 1999 and they were:

• Spanish investment abroad (RD 664/1999).
• Foreign dealings through directives made by “RD 1816 during December 1991 updated in by RD 1638/1996.”

Some of the salient characteristics of Decree by Royal through “1816/1991 “are:

Clauses regarding protection

Under outstanding scenarios, the Spanish law permits the government of Spain to limit or prohibit some non-residents financial transactions. If the transactions influence Spaniards stakes or if they influence the relevance of procedures perused by international agencies of which Spanish government is one of the member. If find it necessary, these safeguards can be invoked by The Ministry which looks after economy or the Council of Ministers in the national interest of Spain.

Documenting transactions

Spain banks must document foreign exchange money transaction mainly for statistical purposes.

Declaration to the Bank of Spain

When some transactions happen between Spaniards and non-residents such as: funding and receipts for over a period of twelve months, and deferral of payments, offsets of inward remittances and outward remittances on financial and commercial dealings and funding or loans received from foreign residents , in such cases , information must be given to the Bank of Spain.

Prior notification in case of certain foreign exchange transactions

This regulation demands advance notification for the export of Spanish currencies, coins, and checks payable to bank on presentation, in either foreign currency, or local to non-E.U. nations for amounts whenever it exceeds €6000 per trip, per person. Advance information is also needed for foreign exchange remitted into Spain if it is more than €6000.

Advance permission for export of Spain currencies

Advance authorization from administration is needed for the export of Spain currencies, coins, and checks payable on presentation, in either foreign currency or local, for sum over €30,000 per trip, for each person.

Bank Transactions

Foreign companies and individual not residing in Spain can open accounts in Spain banks under the analogues stipulations and terms as applicable to residents. The only prerequisite is to execute proper documentation. However, residing outside Spain status has to be documented while opening of the account in Spain banks.

It is to be observed that for the purpose of exchange control purposes, residents are:

• Corporations with their registered offices in Spain.
• Persons who live in Spain.
• Subsidiaries or branches of companies of foreign origin or of persons living in foreign countries.

Table 1. Details of US banks in Spain.

Table 2. Spanish Correspóndenos

General Availability of Bank Financing

In Spain, for short and long-term capita needs, Banks are the primary source. It is some what easy to avail short-term financing. Spain banks are very vigilant about lending long-term and medium funds. Very big corporations with good financial track record can easily avail these kinds of loans.

Some of the short term loans advanced by banks in Spain are 1) polizas de credito, a short term loan agreement 2) efectos financieros, loans advanced against bills drawn.

Trade instruments and commercial bills are normally enchased or discounted if an overall credit line has been established upon by its client and by the bank. Banks normally advance these types of credit for maximum period of twelve months and favor that short-term paper of one month, 45 or two months is passed through the line.

Savings banks in Spain offer chiefly financial assistance for projects well within jurisdictions. Credits thus advanced are intended for the financing of agriculture and long-term housing and for those schemes that generate more fresh jobs and enhance the base structure of the province.

The Spain government supported agency namely Official Credit Institute (ICO) advances special terms on loans for smaller firms and for industrial restructuring. European Investment Bank offers credits in Spain and these loans can be availed for investment schemes intended to the growth of chosen regions and sectors.

Export Financing Availability and Insurance Coverage

For exports to Spain, many Spain based private banks and clandestine financial institutions such as forfeiting, confirming services and factoring are available for financing their exports. Various agencies of federal, local government and state in U.S.A offer various categories of schemes for exporter. Some export assistance schemes are guarantee schemes that demand the involvement of a permitted lender. Other U.S government export programs offer grants or loans to a foreign government or the exporter.

Spain based commercial banks employ insurance schemes and government guarantee to minimize the risk connected with loans to exporters.

Conclusion

Spain economy is being influenced by three top forces namely the church, the military and the banks. (Munoz 1969). In general, banks will develop in direct relation the size of their nation’s economy. Hence, a bank is required to support a nation’s economic development. Spain banks not only help the economic development but also help to nourish both agricultural and industrial sector of Spain. Thus, role of banks in economic development of Spain is to be appreciated and lauded.

References

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