1. BANCO DE ESPAÑA THE STRUCTURE OF THE SPANISH FINANCIAL SYSTEM José Luis Malo de Molina Banco de España. Director General ICO’s International Executive Training Programme in Development Banking ICO. 31 March 2003

2. 1 Banco de España - Servicio de Estudios THE TRANSFORMATION OF THE SPANISH FINANCIAL SYSTEM l In the early 80s the Spanish financial system was rigid, underdeveloped, closed and heavily intervened. But it has since changed drastically l Two main (interlinked) driving factors: n Changes in the macroeconomic environment n Changes in financial regulation

3. 2 Banco de España - Servicio de Estudios CHANGES IN THE MACROECONOMIC ENVIRONMENT l High inflation, increasing fiscal deficit and interest rate volatility fostered financial innovation l At the same time fostered stabilisation policies: n Decisive anti-inflationary orientation of monetary policy, which gradually gained credibility n Fiscal consolidation plan, which received further impulse from the run up to EMU n Spain joined EEC in 1986 and the Peseta entered the ERM in 1989 l As a positive result of those policies, Spain successfully completed its nominal convergence process by being included among the first group of countries forming the EMU in 1999

4. 3 Banco de España - Servicio de Estudios CHANGES IN FINANCIAL REGULATION l 1980s n Prudential supervision framework completed: Banco de España (credit institutions) newly created CNMV (securities) and DGS (insurances) n Bank rates and charges and commissions in securities markets fully liberalised n Capital movements partially liberalised n Book-entry public debt market comes into operation l 1990s n Second Banking Directive transposed (freedom to establish and provide banking services) n Compulsory investment requirements on banks lifted and reserve requirement markedly reduced n Capital movements fully liberalised n Full freedom to establish and provide financial services l 2000s n Investor compensation system created n New measures on transparency and good practices

5. 4 Banco de España - Servicio de Estudios THE SPANISH FINANCIAL SYSTEM IN 2003 l As a result the Spanish financial system is today a flexible developed and internationally active system well in line with those of other continental European countries l Let us briefly review its main features

6. 5 Banco de España - Servicio de Estudios A BANK-BASED SYSTEM l Share of deposits in household financial assets in Spain: n Similar to the EMU average n Higher than in the USA SPAIN 34% 14% 7% 45% EMU 30% 23% 44% 3% DepositsSecuritiesInsuranceOther USA 15% 30% 1% 54% HOUSEHOLD FINANCIAL ASSETS

7. 6 Banco de España - Servicio de Estudios A BANK-BASED SYSTEM l Spanish corporations mainly use bank credit to cover their debt finance n Share of loans is similar to the EMU average and higher than in the USA n Share of fixed income is similar to the EMU average and lower than in the USA SPAIN 24% 51% 22% 1% 2% EMU 27% 55% 12% 3% LoansFixed income EquityTrade creditsOther USA 15% 1% 51% 27% 6% NON-FINANCIAL CORPORATIONS FINANCIAL LIABILITIES

8. 7 Banco de España - Servicio de Estudios THE BANKING SYSTEM l Healthy, internationally active and compares favourably with the EMU average 19952001 176.6193.0260.064.6 0.810.702.453.36 10.915.411.315.7 Solvency ratio (Total) 11.911.010.712.4 Solvency ratio (Tier1) 10.38.77.79.6 Provisions/ Doubtful assets 71.0201.995.6171.7 Efficiency ratio 68.861.465.656.9 Foreign claims (%GDP) 11.959.379.38.7 Spain Number of institutions per 100,000 inhabitants EMUUSA Total assets (%GDP) ROE (after tax)

9. 8 Banco de España - Servicio de Estudios THE BANKING SYSTEM l Although there are some differences among different types of institutions Commercial banksSavings banksCooperative banks 1464788 102.469.06.8 123.573.37.0 15.712.79.9 Solvency ratio 9.511.511.1 Percentage of business abroad 30.31.70.0 172.1222.0155.8 Efficiency ratio 59.062.262.0 Number of institutions ROE (after tax) Total assets (non-consol.) (%GDP) Total assets (consol.) (%GDP) Provisions/ Doubtful assets

10. 9 Banco de España - Servicio de Estudios OTHER INTERMEDIARIES l Institutional investment is lagging behind the EMU average and the USA… 0 20 40 60 80 100 120 140 160 180 200 SPAINEMUUSA 0 20 40 60 80 100 120 140 160 180 200 INSURANCE COMPANIES MUTUAL FUNDS PENSION FUNDS % GDP

11. 10 Banco de España - Servicio de Estudios OTHER INTERMEDIARIES l … but has grown significantly over the 90s 0 10 20 30 40 50 60 199019911992199319941995199619971998199920002001 0 10 20 30 40 50 60 INSURANCE COMPANIES MUTUAL FUNDS PENSION FUNDS % GDP TOTAL ASSETS

12. 11 Banco de España - Servicio de Estudios FINANCIAL MARKETS l The organisation of financial markets has evolved from a segmented structure to a consolidated one: n Interconnection of stock exchanges n MEFF-AIAF-SENAF platform n Merger of SCLV and CADE SCLV CADE STOCK MARKET MANAGEMENT COMPANIES Open outcry trading SPANISH STOCK MARKET INTERCONNEC TING SYSTEM MEFF-AIAF-SENAF holding mercados financieros, SA BOLSAS Y MERCADOS ESPAÑOLES sociedad holding mercados y sistemas financieros, SA AIAFSENAF MEFF HOLDING MEFF FIXED INCOME MEFF EQUITIES Governing bodies Trading centres MADRIDBARCELONA BILBAOVALENCIA MEFF CLEARING HOUSE IBERCLEAR Clearing and settlement of securities

13. 12 Banco de España - Servicio de Estudios FINANCIAL MARKETS l The relative size of the stock exchange and public debt market is similar to the EMU average but smaller than in the USA l The relative size of the private debt market is smaller than in both the EMU and the USA

14. 13 Banco de España - Servicio de Estudios FINANCIAL MARKETS l Public debt market is by far the most active and liquid exchange in Spain

15. 14 Banco de España - Servicio de Estudios FINANCIAL MARKETS l Spanish financial markets show a high degree of internationalisation 0 10 20 30 40 50 60 0 10 20 30 40 50 60 STOCK EXCHANGE DERIVATIVES MARKETS. EQUITIES SHARE OF TURNOVER BY NON-RESIDENTS % % 0 10 20 30 40 50 60 0 10 20 30 40 50 60 STOCK EXCHANGE EQUITIES PUBLIC DEBT PRIVATE DEBT OUSTANDING AMOUNTS HELD BY NON- RESIDENTS % %

16. 15 Banco de España - Servicio de Estudios FINAL REMARKS l The Spanish financial system is currently a developed, internationalised and healthy system l It is still mainly a bank-based system although both other intermediaries and markets are gaining momentum l Banks’ health and market consolidation place the Spanish financial system in a good position to face the challenges of financial globalisation