Financial distress and banking regulation: what is different about Spain?

Par Julio Ramos-Tallada
We examine whether the restrictive prudential reregulation has reached its goal in terms of the banking sector’s soundness in Spain. The analysis shows the ability of the central bank to foresee the risks of the lending boom. Two main instruments, used during “good times” (2000-2007), distinguish the Spanish regulatory framework from most of its peers. (1) The capital adequacy ratios and the consolidation accounting rules related to off-balance sheet securitization have been stricter than in other countries. Unlike in U.S.A., using securitization for arbitrary purposes and reckless credit origination has been largely deterred. (2) Besides specific loan loss allowances, banks were required to make dynamic provisions on the basis of the business cycle average. By raising the reserves cushion against loans losses during the phase of high liquidity and fast credit growth, dynamic provisioning has acted as a countercyclical “insurance policy”. These measures can explain the absence of major bank bailouts, up to June 2010.
JEL codes: E65, G21, G28
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