Regional Savings Banks and the Financial Crisis in Spain

The sovereign debt crisis that put the Spanish socialist (PSOE) government under pressure to begin an austerity programme in May 2010  started two years earlier in a crisis of the financial system.  Whilst central government initially dismissed it as a transient banking liquidity crisis derived from the global interbank lending drought, it soon proved to be a crisis of solvency.  And it was largely cooked in the country’s not-for-profit regional financial institutions, the savings banks. In a pyrrhic victory, they almost overtook commercial banks –the dominant element of national capital— in being the lynchpin of the ‘Spanish model’, a macro-economic system based on deepening existing specializations in tourism, property development and construction as ‘competitive advantages’ adapted to the global economy.

Forty-three out of forty-five savings banks, which had roughly made up half of the Spanish banking system, disappeared. The depth of their solvency problems, the policies implemented by central governments and the deterioration of the economy did away with them. After a complex programme of mergers, savings banks were transformed into commercial banks in 2012. Many were later nationalized and sold cheap to centre banks—effectively reinforcing centripetal flows of capital and resorting to strategies of accumulation by dispossession.

Many savings banks had evolved from being not-for-profit, regional and public-administration-funding into de-territorialising and financialising institutions competing for a larger share of the market. Savings banks were mutual financial institutions set up via foundational funds and managed by boards of stakeholders –founders, local authorities, savers and employees. With their duties to foster savings, develop the economy of their locality and carry out social works, they became anchor institutions in their cities/regions of origin. But since the liberalisation of the Spanish economy, and the deepening of financial market integration during the 1990s, they underwent a prolonged weakening of their regulatory boundaries –‘freeing’ their banking activities and undoing their territorial-boundedness—which encouraged many (particularly the riskier ones with less liquidity) to participate in securitization and high leverage practices (via money-markets) characteristic of financial centres.

The framework established by the Maastricht Treaty and monetary union brought about strong purchasing power that saw major Spanish commercial banks expanding internationally. And it also brought a lowering of (the very high) interest rates and a price war at home. In Catalonia this was markedly felt when the largest of its savings banks (and largest in the EU) La Caixa switched its rates to the Euribor in 2004. La Caixa had a strong pull effect on other savings banks and, in a more competitive market, they saw profit margins squeezed and found they needed to increase their investment volume (for which deposits were now not enough) just to maintain their levels of profit.

Securitization and wholesale markets provided savings banks with a massive volume of resources. The Land Act of 1998 (which made vast amounts of land available for construction) together with changes to securitization laws; lower interest rates; higher investment needs and the traditional pattern of channelling resources to sheltered sectors of the economy by Spanish banks (such as  construction) helped build an ‘urban development tsunami’. This tsunami was built with the mass influx of EU capitals invested in Spanish mortgage-backed securities and other property assets of which savings banks were keen originators.

This liquidity surge was used in lending investments that fed the bubble. Credit to finance construction reached 60% of total credit. Lending practices worsened as savings banks bought construction companies and began selling flats and mortgages via real estate agents working on commission for them. They expanded outside their own city-regions losing their clients’ trust and information advantage characteristic of their proximity banking. Moreover, lending policies rooted in savings banks’ traditional function of providing financial inclusion became predatory when, in their competition for new clients, savings banks targeted the influx of low-income urban migrant communities, as happened in Barcelona. So-called ‘dinghy’ loans –the Catalan version of US ninja loans—became Spain’s own toxic assets.

Regional financial spaces in Spain were connected to EU and global financial markets. Without this link it is difficult to understand how the housing bubble and the crisis began and unfolded.  The financial crisis soon became a general economic crisis triggering mass unemployment and shortage of credit. But, whilst the banking system was restructured and propped up by centre government and an EU/IMF bailout in 2012 (which came with strict austerity conditionality) the weight of the crisis burden was shifted onto the population.

The distribution of the initial impact of the financial debacle was uneven. Cities were badly affected but in some regions there was a marked urban-rural continuum.  Thus, the metropolitan area of Barcelona was ground zero for evictions with 59.030 cases (trailed only by Madrid with 52.276 cases). In the north-western region of Galicia the mis-selling of preference shares to unwitting savers was widespread. Regions and local authorities account for about 50% of public spending and they are responsible for delivery of most services. But real estate taxation is the architrave of their fiscal system (together with cash transfers). Without recourse to one of their traditional sources of financing, their fiscal woes  worsened following the bust and budget cuts and many had to resort eventually to the strict conditionality of the regional liquidity mechanism set up by central government to face their debt. Many also had to pick up the tab for the spending formerly financed via social works.

An archipelago of citizen interventions scattered throughout Spain demonstrated the depth of popular discontent and made up for the neglect of public authorities in dealing with the social wreckage. Citizen-led groups emerged to advocate for the interests of the masses of people in precarious housing situations as well as for those affected by the collapse of preference shares in financial institutions such as BANKIA. These groups pushed local authorities to achieve solutions. These ‘civic platforms’ also fed into broader social movements such as the indignados, and the formation of the new political party Podemos.

So far, they have already had a political impact in the victory of citizen political platforms in the 2014 municipal elections in Madrid and Barcelona, among other urban spaces. Newcomer parties Ciudadanos (centre-right) and Podemos (left) are widely expected to end Spain’s bipartisan political system in the coming general elections on the 20th of December. But it remains to be seen what they will do to transform the financial system. So far, whilst Podemos proposes an ambitious programme of democratization of the economy (including public banking, non-recourse mortgages and managed personal bankruptcy, financial transparency and taxation), Ciudadanos barely mentions finance in its economic measures.

Dr Paula Portas-Perez is visiting research fellow at the department of politics and international relations at Cardiff University. This post is based on Paula’s article ‘Plain vanilla banking? The financialization of Spanish regional savings banks’, which is forthcoming in ‘Regional Science, Regional Studies’.

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