Blame the Bankers: The Sources of Banking Crises in Spain

In the run up to the global financial crisis, the Spanish financial system earned itself a nice reputation. A culture of invasive supervision from the regulators, coupled with a conservative policy and regulatory frameworks that required higher provisioning, meant that most Spanish banks were prepared with plump cushions to absorb the losses caused by the outset of the global financial crisis. However, this proved short lived. When the crisis intensified, it exposed the weakness in the policy and regulatory frameworks and an over-reliance on wholesale funding, specifically for mortgages and construction; the financial system was unable to escape its dramatic effects. This crisis was not an isolated incident, however. On the contrary, Spain has a long history of financial crises. This paper seeks to explain why the Spanish banking system has been historically so unstable. Furthermore, the banking system has not only been crisis prone, but it also has a troubling record of providing relatively small amounts of credit to business enterprises. This has had significant impact on economic development and the economic structure of the country. Excessive lending to construction and to real state in the decade that preceded the crisis led to a huge bubble. The bursting of that bubble is crucial to explain the recent economic and financial crisis.