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"Bank Failures in Spain": Description of Crisis

The 1978-1983 banking crisis in Spain affected over 50 banks representing over a quarter of total assets, with credit, liquidity, and operational risks manifesting in bank failures. A deposit guarantee fund resolved problems by acquiring banks' assets, and Rumasa was temporarily nationalized with a rescue plan. Regulatory responses included stricter loan loss provision definitions.

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Ateeb Ahmed
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11 views

"Bank Failures in Spain": Description of Crisis

The 1978-1983 banking crisis in Spain affected over 50 banks representing over a quarter of total assets, with credit, liquidity, and operational risks manifesting in bank failures. A deposit guarantee fund resolved problems by acquiring banks' assets, and Rumasa was temporarily nationalized with a rescue plan. Regulatory responses included stricter loan loss provision definitions.

Uploaded by

Ateeb Ahmed
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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“Bank Failures in Spain”

Description of Crisis:

The 1978-1983 banking crisis affected more than 50 banks, around half of the commercial banks
then existing and representing over a quarter of their total assets. The crisis began with the
failure of small institutions and then, as time elapsed, it affected increasingly large banking
groups. Finally, in 1983, the Rumasa crisis arose. Rumasa was a holding company that had 20
banks and a much larger number of non-financial companies among its holdings. The causes of
this crisis, which was of systemic proportions, have generally been attributed to three factors: the
economic crisis, poor bank management and a lack of adequate regulation.

How Risk Was Manifested in the Crisis:

Undoubtedly the most significant risk was credit risk. Institutions failed because their losses on
doubtful and unrecoverable assets exceeded their capital, in some cases two or three times over.
Credit risk was aggravated by the concentration of the risk of the loan portfolio in the group to
which the institution itself belonged.

Market risk was not a significant factor in the bank failures because interest rates on many
transactions continued to be regulated. This helped keep the rates on most bank liabilities at low
levels, which meant that they continued to be a significant source of income and profit for those
banks that did not fall. Share prices were hit during the period, but although there were banks
with strong industrial portfolios, they did not face any serious problem.

Liquidity risk manifested in many of the failed institutions. This was, above all, a symptom of
the difficulties. In fact, the banks had serious solvency problems, which resulted in short-term
liquidity difficulties. The growing amount of unproductive assets and the strong increase in costs
have already been mentioned. Banks were already not generating enough income to meet their
costs, but the underlying problem was one of insolvency.

Operational risk manifested in the form of fraud, committed by the managers of certain
institutions who diverted funds from the bank to their own private businesses or who made
purchases and sales which entailed losses for the bank and gains for themselves. This risk was
also present in the Banesto crisis in 1993.
How Was the Problem Resolved?

It should be noted that it was not until 1977 that a deposit guarantee fund (DGF) was created in
Spain to cushion the negative impact of failure on small depositors. This body, which in 1980
was merged with the DGF, took control of the banks (normally in exchange for the symbolic
amount of one peseta), valued their actual losses, reduced their capital to zero (against such
losses), so penalizing the incompetent shareholders and, subsequently, increased their capital
subscribing for the new shares itself. This made it possible to restructure the banks, selling off
the marketable assets and recovering anything recoverable, until a purchaser was found or the
bank was wound up. The purchaser usually acquired a sound bank, the DGF paying for the
process by purchasing the bank's assets at book value, which was well above their real value.

This holding company, which controlled twenty banks and some three hundred non-financial
corporations, was temporarily nationalized. An ad hoc rescue plan was put into action, which
included the issuance of government debt and a contribution from the major Spanish banks.
After a short period in state hands, the banks of the group were sold off separately to the major
Spanish banks.

Regulatory Responses:

Previously, the accounting rules had been amended to establish a more detailed and stricter
definition of doubtful and non-performing loans and of the specific loan loss provisions
necessary to cover the losses thereon. From 1982, these amendments were fully in force,
substantially reducing banks' discretion when classifying assets. In 1987, a general provision was
added to the former specific provisions.

Conclusion:

During the past three decades, there have been a number of bank failures in Spain. First, banking
crises starts spreading during the period 1978 to 1983. Afterwards, the first half of 1990s faces
the failure of some very small banks and then, in 1993, of Banesto at that time the fourth largest
Spanish bank by volume of deposits. The majority of this case study focuses on the 1978 – 1983
incident, referring to the Banesto crises whenever appropriate.

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