Introduction
This book examines the “fragility” and historical crises proneness of the Spanish banking system, with a particular focus on the most recent banking crisis that followed the global financial crisis of 2008. It borrows and builds on the arguments developed by Calomiris and Haber (2014) who have argued that banking systems arise from a process of political bargaining: Every country’s banking system is the result of what they call a Game of Bank Bargains—a game in which actors with differentiated interests come together to form coalitions that will determine how banking systems are created and how they will operate: “Banks’ strengths and shortcomings are the predictable consequence of political bargains and those bargains are structured by a society’s fundamental political institutions” (p. x).1 Each country is different: It has different rules of the game, specific players with distinctive interests, governments who get different shares of the benefits, and coalitions that forge specific “bank banking bargains.” According to them, banking systems are the result of political struggles (“bank bargains”) between government, voters, and interest groups. The Game of Bank Bargains determines the rules that define how banks are regulated, how they are chartered, and how they interact with the state. These outcomes, in turn, determine banking system’s performance along two dimensions: propensity for banking crisis and the degree of private access to credit (p. 477). These authors focus on the structure of the banking system and the rules for allocating credit as the key explanation for banking instability, and in order to explain why banking systems vary in structure, they identify two key variables, regime type and the presence or absence of a populist coalition.
Calomiris and Haber (2014, p. 454) define abundant credit as a ratio of private bank credit to GDP of about 83% over the 1990–2010 period, and a stable banking system as one that has been crises-free since 1970. According to that definition, only six out of 117 countries meet that threshold: Australia, Canada, Hong Kong, Malta, New Zealand, and Singapore. This book aims to explain outcomes in this “Game of Bank Bargains” in a particular country, Spain, which has suffered two major banking crises since the 1970s.2 It seeks to answer one fundamental question: Why has Spain not been able to construct a banking system that avoids banking crises? In answering this question, the main focus will be on political factors, and in particular in the interplay between politics and banking, which has been crucial to account for the performance of the Spanish banking system.
The book examines the historical circumstances that have shaped the formation of political institutions and coalitions that control banking outcomes in Spain. Those circumstances are crucial to determine the extent to which Spain has suffered banking crises and suffered scarce credit , and they depend on the historical context, which changes as a result of external influences (for instance, banking crises have arisen from political struggles). Yet, these circumstances are mediated by political institutions (for instance, they may be able to insulate banking systems from populist policies). Following Calomiris and Haber (2014, pp. 488–89), it looks at political preconditions on banking-system outcomes, but accepts that banking systems also shape politics as well: Banking systems are not just an outcome of politics, they also shape the coalitions that bargain and affect the bargaining power of the parties that participate in the bargain. Finally, political circumstances influence innovations, which shape the development of new financial services and instruments. The main argument of the book is that political circumstances influence bank banking bargains, and that they, in turn, define the types of banks that emerged in the country. It seeks to explain banking goals and how they are shaped by political bargains, not the extend of regulation, but rather on the goals that give rise to regulation (p. 14).
In regard to the most recent Spanish banking crises of 2008, the main hypothesis is that this financial crisis was first and foremost the outcome of a political bargain. A central argument of this book is that politics matter, and that political factors are central to understanding why Spain has suffered repeated banking crises. It starts from the premise that banks are not just institutions run and controlled by technocrats who make mistakes, and also that banking crises are not merely the results of such mistakes, or incompetence, bad luck, or moral shortcomings. On the contrary, this book shows how politics (understood as the political institutions that structure the incentives of economic and social actors) influence bankers’ decisions, their operations, and the regulatory framework in which they operate. Indeed, political institutions and politics structure the incentives of actors involved in banks, from bankers to shareholders, depositors, debtors, to regulators. In other words, banking crises are the consequence of banks’ characteristics and the political circumstances in which they operate (see Calomiris and Haber 2014).
As we will see below, financial crises are devastating. Despite this, and this is the puzzle that this book seeks to address, in countries like Spain these crises have been persistent throughout history and governments have been unable, or unwilling, to make sure that banks either limit their risk exposure and/or have sufficient capitalization. When governments deal with banking decisions, they often face conflicts of interest, and different groups will have distinctive preferences and leverage (based on their wealth and power) to influence those decisions. The way(s) in which governments resolve or mediate those conflicts, and the resulting coalitions that emerge from the bargaining process, will largely determine the strength (or fragility) of the resulting banking structure.
Governments are indeed essential because they regulate banks, they enforce contracts, they use banks as source of finance, and in the case of bailouts, they allocate losses among creditors. But other groups (e.g., bankers, shareholders, depositors, debtors, taxpayers) also have ‘skins in the game’ and have a stake in the performance of banks. The interplay of these actors (what Calomiris and Haber call the “Game of Bank Bargaining”) will lead to coalitions that will determine bank entry rules, the degree of competition in the sector, credit flows, credit conditions, banks’ activities, and the allocation of loses. Different bank structure configurations have different beneficiaries and losers among those stakeholders, and the outcome of the political struggle among them will determine the role that they will play in the financial system. This book seeks to explain how this struggle/bargaining process (what they call the “banking games”) has played out in Spain in order to explain how banking rules have emerged in the country, and how the players have operated under those rules (Calomiris and Haber 2014, pp. 12–15).
To do so, the book traces the coevolution of banking and politics in Spain over time, with a particular focus on the two decades that preceded the 2008 crisis; and it seeks to test Calomiris and Haber’s hypotheses (2014, p. 453): Democracies are more conductive to a broad distribution of bank credit than autocracies; democracies with liberal institutions are more conductive to broad distribution of credit and the absence of banking crisis than those in which bankers form coalitions with populists; and government safety nets tend to destabilize banking systems, and they arise as a result of political bargains, not for economic efficiency reasons. In other words, it will test the hypothesis that stable democracies, like Spain’s, with weak ...