III Financial Liberalization in Spain
  • 1 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund
  • | 2 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund


Gonzalo Pastor

Gonzalo Pastor

In keeping with international trends toward financial liberalization, the Spanish financial system has moved away from tight regulation and protection. This process of financial liberalization has been reinforced by the projected integration of European financial markets and has accompanied major developments in financial markets and banking.

Deregulation of the Banking System

Spanish banking has been traditionally and until recently a closed system, heavily regulated, protected from foreign competition, conservative in terms of innovations, and controlled by the large banks, who also owned big portions of industry.1 Heavy regulation of the Spanish banking system extended beyond interest rates to branching, entry, investment coefficients, and reserve requirements. Moreover, the regulations have put different constraints on different institutions and private commercial banks and savings banks.2 As the Spanish financial system and private agents were quite unsophisticated, banks would bear their main input (deposits) paying a rather low interest rate and were required to finance public deficits by investing in low-yield government securities (Pagarés del Tesoro).

During the period 1978–85, the Spanish banking system went through one of the most severe banking crises that has taken place in industrial countries in recent times. The crisis affected 58 banks, almost half of those existing in 1977, which represented 27 percent of the total banking system liabilities and 28 percent of total employment (almost 50,000 workers).3 The root of the banking crisis was the severe industrial crisis following the oil price increases in the 1970s, the close links between banks and industrial firms, bad management and fraud, and the lack of an adequate monitoring policy by the Bank of Spain. A deposit guarantee fund (Fondo de Garantía de Depósitos) was created in response to the crisis and was consolidated in 1980.4

The banking crisis temporarily slowed the deregulation process that started in 1969 (as the central bank imposed tough solvency and regulatory requirements). After the crisis, financial deregulation reaccelerated, especially in the context of EC integration.

Interest Rates

Liberalization of interest rates started in 1969, received a big impulse in 1974–77 for maturities of more than one year, and was completed in 1987. Since then, all interest rates have been free, and banks have been required to fulfill stronger publicity and transparency obligations regarding their interest rates charged and paid in their financial operations.

Limits to Entry

As of 1990, foreign banks were allowed to have only four branches each. In 1991, they were allowed to open an additional branch, to be followed by two more in 1992. Since 1992, the Spanish authorities have authorized any foreign bank as long as the candidate satisfies the conditions set by the Second Banking Directive.5

Chronology of Financial Deregulation in Spain, 1969–90

1969: Interest rates. Liberalization. Ceilings on lending (deposit) rates for maturities of more than three (two) years are removed. (August)

1970: Legal reserve requirements. Introduction. A system of reserve requirement ratios is introduced for industrial and commercial private banks in line with a move to indirect monetary management by the Bank of Spain.

1971: Legal reserve requirements. Introduction. A system of reserve requirement ratios is introduced for savings banks.

1974: Interest rates. Liberalization. Ceilings on lending rates for maturities of more than two years are removed. (August)

Entry barriers. Liberalization. Formation of new banks is allowed within specific limits. (August)

Branching. Liberalization. Expansion of private commercial banks is permitted subject to capita! adequacy. (August)

Segmentation of institutions. Liberalization, Prior legal and operational differentiation between industrial and commercial private banks is eliminated. (August)

Investment coefficients. Liberalization. The process of reductions in banks’ investment coefficients is initiated. (August)

1975: Branching. Liberalization. Expansion of savings banks is permitted within their geographical region of operation subject to capital adequacy.

1977: Interest rates. Liberalization. Ceilings on lending (deposit) rates for maturities of more than one year are removed. (July)

Entry barriers. Liberalization. Savings banks are allowed to perform same lending and deposit activities as private commercial banks. (September)

Investment coefficients. Liberalization. A calendar for a gradual phasing out of ail these coefficients is established. (September)

1978: Entry barriers. Liberalization. Foreign banks are allowed in Spanish banking sector within specific limits to minimize their participation in the retail market. (June)

1979: Long-term financing coefficient. Introduction. Private commercial banks are obliged to grant loans at market-determined interest rates for periods longer than three years and to hold debentures of nonfinancial enterprises for an amount equal to 1.8 percent of eligible liabilities. (April)

Investment coefficients. Tightening. The pace for the monthly reduction in investment coefficients is decelerated. (April)

1981: Interest rates. Liberalization. Ceilings on lending rates for all kind of maturities are abolished. Interest rate ceilings for deposits with maturities of more than six months and a minimum balance of Ptas 1 million are removed. (January)

Dividend distribution. Liberalization. Limits on dividend distribution by private commercial banks are eliminated. (January)

Investment coefficients. Liberalization. The monthly reduction in private commercial banks’ (savings banks’) investment coefficients is accelerated to achieve a total coefficient of 21 (25) percent of banks’ eligible by October 1981. (January)

Long-term financing coefficient. Tightening. The level of the coefficient is increased to 7 percent of private commercial banks’eligible liabilities. For the case of savings banks, a 10 percent long-term financing coefficient is established. (January)

1985: Solvency coefficient. Tightening. Bank of Spain tightens capital requirement regulations. (April)

Long-term financing coefficient. Liberalization. The coefficient is eliminated for both savings banks and private commercial banks. (April)

1986: Investment coefficients. Liberalization. The system of investment coefficients for savings banks and private commercial banks is substantially reformed. The total level of the coefficients is unified and fixed at 23 percent of banks’ eligible liabilities, with banks’ holdings of government securities and subsidized loans to social sectors set at 10 and 13 percent, respectively. (January)

1987: Interest rates. Liberalization. Ceilings on deposit rates for all kind of maturity deposits are removed. (March) Investment coefficients. Liberalization. Investment coefficients for banks’ export financing and specially regulated loans are reduced from 13 percent to 1 percent of banks’ eligible liabilities. The remainder, up to a total of 10 percent, is allocated to banks’ holdings of government securities, (April)

1990: Legal reserve requirements. Liberalization. A non-remunerated reserve requirement ratio equivalent to 5 percent of banks’ eligible liabilities is established for all financial intermediaries. (February)

As regards domestic banks, limits to entry were relaxed in 1974, but tightened again during the banking crisis of 1978–85. Only in late 1988 did the Ministry of Economy and Finance begin authorizing the creation of new domestic banks for the first time since 1978. During the banking crisis, investors who wanted to open a bank were required to buy a small or nearly bankrupt bank and operate it under a new name.

Limits to Branching

The limits on branching for domestic private commercial banks were liberalized subject to capital adequacy in 1974. For savings banks, limits on branching were liberalized in 1975 within each savings bank’s geographical region and outside it starting in 1989.

Segmentation of Institutions

Savings banks had been subject to more severe restrictions than private commercial banks. At present, however, both types of institution are authorized to perform the same operations although the ownership structure of the savings bank is different from that of private commercial banks.

Capital Adequacy

Since May 1985, Spain regulates the solvency of financial intermediaries in accordance with the Basle Agreement. However, the ratio of equity to assets of most Spanish banks is above the recommended 4 percent level: at 7.25 percent in 1989, the ratio of own resources to assets of the largest Spanish banks was one of the highest in the EC (Table 4, column 7). One potential problem of the proposed EC harmonization process of solvency requirements is the limitation that it will impose on the extent of industrial holdings in relation to bank equity.

Table 4.

EC: Income and cost Margins of Largest Banks in 1989

(percent of intermediated assets, unless otherwise indicated)

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Source: Termes (1990).

The number in parentheses next to each country name indicates the number of banks considered.

Interest received less interest paid.

Interest margin plus fees and commissions less noninterest expenses.

Intermediation margin less operating costs.

Includes Banco Bilbao-Vizcaya, Banco Central, Banco Español de Crédito (Banesto), Banco Hispano Americano, Banco Santander, Banco Popular Español, and Banco Exterior de España.

Investment Coefficients

Investment coefficients were established during the 1970s to finance public sector projects and have been gradually reduced since then. These coefficients would be phased out in 1993. The investment coefficients had two components. One component set the share of bank deposits that must be kept in the form of treasury bills (Pagarés del Tesoro). The other component provided subsidized credit to the agricultural, fishing, housing, and export sectors. In February 1987, the latter component was reduced from an equivalent of 13 percent of total bank deposits to 1 percent. At the same time, the debt-holding component was reduced from 10 percent of banks’ deposits to 9 percent. As of December 31, 1990, this coefficient had already been reduced to 6.3 percent of banks’ deposits.

Reserve Requirements

Reserve requirements were introduced in 1970 for private commercial banks and in 1971 for savings banks. Banks were required to deposit a portion of their liabilities as deposits with the Bank of Spain. A share of these deposits received a rate of return below market interest rates. In March 1990, the system of reserve requirements was sharply modified. The main elements of the reform were to (1) keep the average banks’ reserve coefficient at 17 percent, but increase from 9.5 percent to 12 percent the remunerated reserve tranche; (2) transform the new remunerated tranche in medium- and long-term certificates issued by the Bank of Spain, earning an interest rate of 6 percent;6 and (3) introduce a marginal reserve coefficient of 5 percent to be further reduced by 1992–93.

The phasing out of investment coefficients and reserve requirements scheduled for 1992 and 1993 represents an important policy initiative by the Spanish authorities. This move, however, would result in significant fiscal revenue losses, which might need to be compensated by alternative revenue-raising measures (revenue from seigniorage in Spain is estimated at roughly 1 percent of GDP in 1990).7

Effects of Financial Liberalization

The outcome of the deregulation process has been a banking system that, relative to other EC countries, occupies an intermediate position with respect to size and capitalization and is very sound and profitable, but not very cost efficient. Data on the 235 biggest EC banks highlight the rather small size of major Spanish banks (Table 5). Spain ranks fifth as regards the number of Spanish banks among the largest in the EC, behind Germany, Italy, France, and the United Kingdom. However, as regards the amount of assets, it drops to sixth place behind the Netherlands.

Table 5.

Indicators of the Biggest Banks in the EC During 1987–881

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Source: Bergés, Ontiveros, and Valero (1989).

Original data published in The Banker, October 1988.

As regards solvency, the Spanish banking system seems very sound. Indeed, the capital-to-asset ratio for major Spanish banks is the fourth highest in the EC (Table 5). This is the result, in part, of the banking crisis that made the authorities very aware of solvency requirements.

As to the financial margin (net interest on assets), Spanish banks take first position in the EC (Table 5). Margins are now shrinking, however, as the competition increases with financial liberalization and the introduction of supercuentas in late 1989. The high profitability of Spanish banks is common to the entire banking system, not just to major banks. Estimates show that in 1986 overall recorded before-tax profits as a percent of total balances of Spanish banks were higher than those of France and Germany and only slightly lower than those of British banks. For Spanish savings banks, before-tax profits in 1986 were higher than in France and the United Kingdom and slightly lower than in Germany and Italy.

Spanish banks are not very efficient, however; in particular, the Spanish banking industry has higher costs per unit of output than banking industries in other EC countries and has, by far, the most dense branch network in Europe (Table 6). Also, the share of value added by the financial sector over total GDP is higher in Spain than in France, Germany, and Italy (Table 6). This can be interpreted as showing that either Spain is “overbanked” in relation to other European countries or financial services are “overpriced” because of inefficiencies or noncompetitive pricing, or both.

Table 6.

International Comparisons of Output and Cost in Banking

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Sources: Cecchini, Catinat, and Jacquemin (1988); Mañas (1989); and IMF staff estimates.

Defined as value added by the credit and insurance branches over GDP.

Defined as employment in the credit and insurance branches over total employment.

Ratio of outstanding bank loans over GDP.

Finally, it is important to note that the share of employment in the financial industry over total employment is also higher in Spain (3.9 percent versus an average of 3.2 percent for the other EC countries) but Spain’s ranking in terms of bank profit per employee is just average (Table 5).

Other Aspects of Financial Liberalization

Financial liberalization deepened the financing mechanisms of the economy and is believed to have affected capital allocation. Financial liberalization has also altered market structures and competition in the banking industry, especially regarding concentration ratios, bank mergers, and competition of domestic banks with foreign banks.

Financial Deepening

Financial deepening is broadly understood as the process of increase in the intermediation of funds through the financial system. It is considered desirable because it is believed to increase the productivity of those funds by directing them to activities that generate higher returns. The level of development of financial markets is generally measured by the ratio of domestic financial assets to GDP. In Spain, this ratio fell sharply during the period 1977–80, before registering a recovery in the early 1980s (Chart 4). The ratio reached an equivalent of 153 percent of GDP by the end of 1990, compared with 109 percent in 1980. This increase resulted from an increased demand for money and from the active search of the public sector for more flexible, nonmonetary ways to finance its deficit. In particular, the stock of government securities went up from 10 percent of GDP in 1980 to some 43 percent in 1990— most of these securities were short-term paper intermediated by banks (Chart 4).

Chart 4.
Chart 4.

Size of Financial Markets

(In percent of GDP)

Source: Bank of Spain, Statistical Bulletin, various issues.

Capital Allocation

The impact of financial deregulation on private investment behavior can be viewed two ways: (1) did investment rates actually increase following the reforms in the financial sector and (2) did the productivity of investment improve as a consequence of the reforms.

Casual observation of Chart 5 shows the impressive recovery of private investment in relation to GDP during the second half of the 1980s. This recovery followed a period of steady decline in the investment ratio over the preceding ten years. The question to ask is whether this improvement in the private investment ratio could be attributed to liberalization of capital markets to other factors. Andres and others (1989) and Molinas and others (1990) studied in detail the factors affecting the determination of private investment in Spain. They concluded that private investment was explained to a large extent by an accelerator mechanism and the degree of capacity utilization of the stock of capital. Only to a less important extent was private investment behavior explained by the cost of capital (largely represented by the level of interest rates). In particular, their econometric work indicated that private investment responded negatively and weakly to increases in interest rates. Overall, for recent years, it appears that the dynamism of the Spanish economy following Spain’s entrance into the EC and the relaxation of capital controls was of greater significance in explaining the growth in the investment ratio than the liberalization of domestic financial markets.

Chart 5.
Chart 5.

Gross Fixed Private Investment1

(In percent of GDP)

Source: Spain, Ministry of Economics and Finance.1 Excludes private investment in residential housing. Data for 1988–90 are estimates.

It could be argued that in the prereform period interest rate ceilings involved a less-than-optimal allocation of funds, impairing the efficiency of investment funds. What evidence do we find in favor of a higher efficiency of capital after the reforms? Using a rough measure of investment efficiency, the return on capital measured by the ratio of gross operating surplus to GDP increased from an estimated average of 13 percent in 1983–86 to 14.8 percent in 1987–90. Yet, factors other than better allocation of credit are likely to have increased this return, including a rising utilization of capacity, an upgrading in the quality of the stock of capital, and a more subdued growth of labor costs.

Bank Concentration

Through 1987, bank concentration, went down slowly. The tendency toward decreasing concentration until the beginning of the 1980s was explained by a very high rate of growth of small and medium-sized banks, which more than offset the increase in concentration due to mergers in the period. Concentration went up in the beginning of the 1980s, however, as a result of the bank crisis, which resulted in the biggest Spanish banks absorbing several smaller banks. Thereafter, concentration declined again as a result of a renewed growth of medium-sized and foreign institutions. In 1988, however, the merger of the Banco de Bilbao and Banco Vizcaya, previously third and sixth in the ranking of major Spanish banks, reversed the long-term trend toward lower concentration (Table 7). The increase in bank concentration following the Bilbao-Vizcaya merger has occurred despite the rapid growth of three middle-sized banks: Bankinter and Guipuzcoano, which separated from the Santander and Banesto groups, respectively, and Banco Urquijo-Union, which changed hands from the Hispano group to the smaller March group.

Table 7.

Indicate of Absolute Concentration of commercial Banks

(In percent of bank deposits) 1

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Sources: Mañas (1989); and IMF staff estimates.

Refers to line “acreedores” in banks’ balance sheets as presented in Balances y Estadisticas de la Banca Privada, Consejo Superior Bancario.

Computations made without taking into account the 1988 merger of Banco Bilbao (BB) and Banco Vizcaya (BV).

Computations made using consolidated data for Banco Bilbao-Vizcaya (BBV).

If bank groups are taken as the units-of-market-concentration analysis, we find that from 1980 to 1988 the five major groups kept the same total market share. After the Banco Bilbao-Vizcaya merger, the share of the five major private commercial bank groups in the loan market went up from 58 percent to 66 percent (Table 7). These groups, however, are loosely defined, since it is difficult to use an objective criterion that consolidates the different types of link between the parent bank and the affiliated banks.8

The operational convergence of private commercial banks and savings banks implies that savings banks are getting much closer to full competition with commercial banks for the same pool of resources. Therefore, for the purpose of analyzing market concentration, it seems more appropriate to jointly consider private and savings banks. Data show that, with or without taking into account the merger of the Bilbao-Vizcaya, the process toward lower concentration from 1980 to 1988 proceeded faster when private commercial banks and saving banks were considered jointly (Table 8). This is due to the faster rate of expansion of savings banks in comparison with major private banks. The increase in the market share of savings banks has been quite impressive: deposits in saving banks went from 24 percent of total aggregate deposits in 1979 to 39.7 percent in 1982, to 47 percent in 1988, and to 55 percent in 1990.

Table 8.

Indices of Absolute Concentration of Banking systems1

(In percent of bank deposits)

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Source: Mañas (1989).

Includes private commercial banks and savings banks.

Computations made without taking into account the 1988 merger of Banco Bilbao and Banco Vizcaya.

Computations made using consolidated data for Banco Bilbao-Vizcaya (BBV).

Bank Mergers

Another major effect of the deregulation process is the strategic repositioning of financial institutions. As noted above, private commercial banks, big private commercial banks in particular, have been losing market share in terms of both deposits and loans because of the dynamic growth of savings banks. The erosion of the position of the big banks, including those affected by the 1978 crisis, Hispano and Banesto, has been met with different responses, merger attempts being the most prominent. In particular, in 1988, there was the merger between Banco Bilbao and Banco Vizcaya.9 Then, in May 1991, Banco Central and Banco Hispano Americano, two of Spain’s large private commercial banks, agreed to merge, creating one of the country’s biggest private commercial banks and with a potentially heavy French and German presence on the new board.10 Another important merger, announced also in May 1991, was the fusing of all the Spanish state owned banks into what is called now the Corporation Bancaria de Espana (CBE). The largest of its elements is the 62 percent state-owned Banco Exterior, which, in recent years, has been one of Spain’s six largest banking groups with assets. Caja Postal (postal savings bank). Then come four specialized institutions under the umbrella of the Instituto de Credito Oficial (ICO). These institutions played the role of development banks operating in the housing, agricultural, and industrial sectors. Before the merger, Banco Exterior and Caja Postal were already subject to reserve requirements and have been actively competing with other Spanish banks in the market for bank deposits. By contrast, the other four public banks operating under the umbrella of the ICO have not been subject to reserve requirements and until very recently have been receiving transfers from the central administration to finance their operations.

The merger projects, on the one hand, can be seen as an attempt to realize necessary economies of scale (i.e., savings in bank unit costs) and scope (i.e., multiproduct banking firms) to raise efficiency in order to face the competition of an integrated market. On the other hand, the mergers can be seen as due to three other factors. First, there was the possibility for financial institutions to revalue their assets when merging and fulfill solvency requirements mandated by the Spanish legislation and the 1992 EC Directives. Second, mergers could potentially help Spanish banks counter the trend of erosion of their control of the market vis-à-vis savings banks. Third, mergers could be viewed as a defense response by larger banks to the prospect of fierce competition from potentially more efficient and sophisticated foreign institutions. Although it could be argued that another incentive for banks to merge has been the fiscal gain from the 1990 law that exempted asset revaluations due to mergers from corporate taxation, this tax exemption has been subject to discretionary government approval.

Competition from Foreign Banks

An important element in the process of financial deregulation has been the opening up of the Spanish banking system to foreign competition. This move was important in shaping the current state of the Spanish market. In particular, foreign banks in Spain were instrumental in introducing new financial services. They spurred development of the interbank market, launched merchant banking, and introduced new technology in banking services. With a network limited to four branches up to 1990 (unless part owner of a Spanish bank), foreign banks had limited capacity to attract depositors. Consequently, they moved into innovative financing products. Spanish financial institutions reacted to foreign competition, and the largest banks can now offer the same financial services. Competition for the development of financial services for small and medium-sized companies and for consumers in the wake of the opening of the single European market is expected to intensify.


During the last twenty years, there has been a gradual process of deregulation of domestic capital markets. This process of financial liberalization was given a boost when Spain formally joined the EC in 1986. Since then, the process of financial liberalization has continued at a fast pace and, in some aspects, the Spanish banking industry is now one of the most deregulated financial systems in the EC.

A prime objective of the regulatory reform has been to foster competition. Liberalization of interest rates started in 1969, received impulses during the mid-1970s, and was completed in 1987 with the removal of ceilings on deposit rates for all kind of bank deposits. During the last fifteen years attempts to distinguish “industrial” from commercial banks have been phased out. Savings banks have been authorized to move into areas that had traditionally been in the hands of private commercial banks (i.e., issuing certificates of deposit). At present, both types of institution can basically do the same operations, although the ownership structure of the savings banks is different from that of private commercial banks. Also, limits on branching have been liberalized (subject to capital adequacy) for private commercial banks since 1974 and for savings banks since 1975 within their geographical region of operation and outside it since 1989.

Access to domestic markets by foreign banks has increased steadily since 1978. Foreign banks, in turn, have helped develop the financial system in several ways. They have been instrumental in introducing new electronic banking services. They have contributed to the developing of the interbank market, where they borrow heavily. They have brought investment and merchant banking to Spain. And they have represented a constant challenge to domestic banks to give their customers better service and better returns on their deposits.

Looking to the future, convergence to a single European market in 1992 should be favorable for Spanish banking in several respects. In terms of solvency ratios, the position of Spanish banks is relatively better than that of their European counterparts. With a ratio of equity to assets of 7.25, the largest Spanish banks are among the most solvent in the EC and will not have any problem in fulfilling the EC-solvency directives. Increased competition in a more integrated European market will further reduce intermediation margins of Spanish banks. Nonetheless, some compensation for shrinking margins ought to come from the elimination of banks’ investment and reserve requirement coefficients. As regards the recent mergers of Spanish banks, it could be argued that they reflect trends similar to those in other European countries. More fundamentally, however, Spanish banks need to globalize their operations so as better to service local firms and reduce their large operating costs at the same time that financial integration in Europe reduces their margins.

Appendix Budgetary Costs of Regulatory Harmonization

An important consequence of the deregulation of the Spanish financial system is to the cost of convergence toward a more liberal regulatory framework. This cost relates to the budgetary impact of the expected reductions in both the legal reserve ratio (ratio of bank reserves to deposits) and the investment coefficient, by which Spanish banks have to allocate a percentage of their total liabilities to treasury notes (Pagarés del Tesoro).13 Seigniorage is quite important in Spain as a source of government revenue. Our estimates below show that the harmonization of reserve requirements could cost the Spanish Treasury around 1 percent of GDP.

If one views the process of money creation as simply an operation that replaces interest-bearing government debt with non-interest-bearing central bank debt, it becomes rather simple to define the budgetary gain from the process. Seigniorage can be defined to be equal to the profits of the central bank resulting from its ability to finance its purchase of interest-bearing government securities through the issuance of non-interest-bearing high-powered money. These profits can be treated as fiscal revenue transferred from the central bank to the government. Equivalently, one can consolidate the accounts of the central bank and the government and define the budgetary gain as the interest savings on their consolidated debt resulting from the central bank’s ability to borrow at zero interest. In either case, the budgetary gain (Gt) is equal to the nominal interest rate on the public debt (rt) multiplied by the stock of non-interest-bearing, high-powered money (Ht). Thus, we have


In addition, to identify the various components of the budgetary gain from the creation of money, we replace the stock of high-powered money (Ht) by the sum of its components (currency in circulation (CQt), cash in vaults (CVt), required reserves (RRt), and free reserves (FRt). This yields


where the first term on the right-hand side of equation (2) represents the fiscal revenue transferred to the government from the nonbank private sector when it holds currency; the second term represents the government’s revenue stemming from banks’ demand for high-powered money.

Before using equation (2) to measure the potential budgetary loss in Spain from the process of EC financial integration, several complicating factors need to be taken into account. The first has to do with the remuneration of bank reserves. A portion of required reserves on bank deposits has been remunerated since the 1970s. Moreover, Spanish banks are obligated to maintain investment coefficients through holdings of Pagarés del Tesoro, which yield below-market interest rates. To measure net revenues from banks’ demand for high-powered money, it is necessary to modify equation (2) by subtracting from the second term on the right-hand side the central bank’s interest payments on bank reserves and adding a term that would capture the net revenue from the imposition of investment coefficients. Also, since free reserves (FRt) have been almost null in recent years, we eliminate them from our definition of high-powered money. This yields a definition of the revenue from seigniorage in the case of banks’ holdings of high-powered money such as


where the average rate of remuneration on required reserves and the average rate of interest on investment coefficients are denoted by rrr and rpa, respectively. INt is the portion of total bank liabilities allocated in Pagarés del Tesoro due to the mandatory investment coefficients.

The second complication relates to the measurement of the rate of return on interest-bearing debt (rr). In principle, this rate should be an indicator of the opportunity cost of monetary financing. Using any kind of implicit interest rate on total public debt—including the debt held by the Bank of Spain—would yield an under-estimation of the market rate of interest. This is because the Government appropriates a large part of seigniorage revenues by borrowing from the central bank on subsidized terms. As a first approximation, in our estimations of equation (3) below we use the interest rate on treasury notes (Letras del Tesoro).

The estimates of revenue from seigniorage over the 1987–90 period are presented in Table 9, columns 10 and 11. The interest savings on the public debt due to the imposition of reserve and investment coefficients increased steadily through 1989, when it reached an equivalent of 1.6 percent of GDP. In 1990, the interest savings declined to 1.2 percent of GDP. The reasons for the growth of this variable during 1987–89 were (1) the reduction in the rate of remuneration on required reserves and investment coefficients, which increased for banks the opportunity cost of holding these assets; (2) the increase in the nonremunerated reserve tranche; this tranche went from 2.5 percent of banks total liabilities in 1987 to some 7 percent in 1989; and (3) the broadening of the eligible bank liabilities covered under the reserve coefficient. The reform of the reserve ratio and the gradual reduction in the investment coefficient were the two main reasons for the decline in the Government’s interest savings in 1990.

Table 9.

Estimation of Budgetary Gain from Banks’ Reserve Requirements and Investment Coefficients

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Sources: Bank of Spain, Statistical Bulletin; and IMF staff estimates.

R0 is the average nonremunerated legal reserve requirement ratio.

R1 is the average remunerated legal reserve requirement ratio.

R2 is the average investment coefficient on holdings of Pagarés del Tesoro.

Average interest rate on Letras del Tesoro.

Average interest rate on remunerated legal reserve requirements.

Average interest rate on Pagarés del Tesoro.

End-of-period stock of banks’ liabilities subject to reserve requirements and investment coefficients.

End-of-period stock of banks’ cash in vaults.

Size of the budgetary gain in billions of pesetas. Defined as follows:

Defined as follows:

rt CVt + Banks’ Deposits [(rt R0) + (rt – rrr) Rl + (rt – rpa) R2].

Size of the budgetary gain in percent of GDP.


For detailed overviews of the Spanish financial system see Trujillo, Cuervo-Arango, and Vargas (1988), Manas (1989), and Caminal, Gual and Vives (1990).


Private commercial banks are “universal” banks engaged in all types of financial activities other than insurance transactions. They control the largest share of the market for loans and deposits. Currently, there are two main kinds of private commercial banks: (1) investment banks, characterized by wholesale business involving few customers, a limited number of branches, and a large amount of borrowed resources raised through bond issues rather than through deposits; and (2) noninvestment banks, or commercial banks per se, engaged in retail banking through numerous branches across the country.Savings banks are nonprofit institutions engaged in retail banking, whose boards are controlled by local and regional governments. Their activities center upon lending in their specific region, especially for housing and agricultural investment. They also make loans for projects that create new jobs and improve the area’s infra-structure. Savings banks’ deposits now equal more than 64 percent of those of private commercial banks, having increased at twice their rate in recent years. For a chronology of financial deregulation in Spain see Box 1.


The crisis initially affected middle-sized and small banks but, at a later stage, a big bank group (RUMASA), which represented around 5.5 percent of total liabilities, also went under.


The functions of the fund were twofold: (1) to insure deposits up to Ptas 1.5 million; and (2) to intervene in banks in case of trouble. For a detailed description of the Deposit Guarantee Fund and the 1977–85 banking crisis see Cuervo (1988).


The Second Banking Directive set the basic principle that any bank authorized by its home member state will be able to provide a wide array of banking services in any EC country. This is the so-called single banking license provision. The directive, however, permits host countries to enforce their own rules on liquidity, business conduct, and investor protection rules.


The stock of certificates is fixed: equivalent to the reserve requirements held against the average stock of banks’ eligible deposits outstanding during the last three months of 1989 and January 1990. The certificates will be amortized every six months starting March 1993 and ending September 2000.


See the appendix for a detailed analysis of the budgetary costs of regulatory harmonization.


There are basically three types of affiliated banks: (1) regional banks, that coexist with the parent bank in the same territory, but exploit the image of being more closely linked to the region; (2) investment banks, that are kept outside the main bank structure for operational reasons; and (3) secondary trade marks, which offer differently priced products for segments of the population with different price elasticities (urban vs. rural, high vs. low income, etc.).


Also in 1988, the attempt of Banco Central and Banesto to merge failed. Other mergers during 1989–90 include those between smaller savings banks in the Cataluña region and the Caixa de Barcelona.


The new Banco Central Hispano will have 1,600 more branches and 10,000 more employees than its nearest Spanish rival, Banco Bilbao-Vizcaya.


The investment coefficient has another component that forces banks to allocate a portion of their total liabilities to several types of assets such as export credits and debt of the fishing industry. In February 1987, however, this component of the investment coefficient was almost completely eliminated.

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Converging with the European Community
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