December 1, 2023

Criticism of Spain’s Central Bank Grows

Much of the recent criticism from politicians, economists and investors has been aimed directly at the central bank governor, Miguel Ángel Fernández Ordóñez, for not standing up to vested political and banking interests, particularly when they kept the central bank from forcing failing banks to close.

The main opposition Popular Party has recently led the charge against the central bank, ahead of a general election on Nov. 20 that is expected to return the party to power with a parliamentary majority, according to opinion polls.

Earlier this month, Soraya Sáenz de Santamaría, the Popular Party’s parliamentary spokeswoman, said at a press briefing that the next government should impose “a profound reform” of the Bank of Spain, applying stricter “technical criteria” in selecting its top officials. She also said the central bank should bear responsibility for the “unethical” behavior of some managers of the collapsed savings banks, known as cajas.

A few days later, Spanish prosecutors started a corruption investigation into payments, including salaries, made to directors of Caja Mediterráneo, which required a bailout of 2.8 billion euros, or about $3.85 billion.

In a e-mail response to questions, the central bank stressed that its role was to supervise the solvency and not salary arrangements at a bank. Mr. Fernández Ordóñez declined to comment.

Beyond its handling of troubled banks, the Bank of Spain has recently been facing the same accusation that has dogged the Socialist government of José Luis Rodríguez Zapatero since the start of the crisis: that, having cheered the fact that Spanish banks kept away from subprime assets in the United States, it then underestimated the damage that could result from their property lending at home.

“The Bank of Spain misunderstood both the economic and the financial crisis,” said Fernando Fernández, a professor at the IE business school in Madrid and former chief economist of Banco Santander.

“They simply didn’t seem to realize that a bursting of the real estate bubble here would have a very serious impact on the banking sector, even though that had been the case in the past,” he said.

“It would be a mistake to press for his resignation,” Mr. Fernández said, “because this would create additional damage to the image of the Spanish economy, despite the fact that I think he has not been a very good governor.”

Last year, when Spain’s troubled public finances and saving banks first drew the ire of investors, the central bank was among the few Spanish institutions to retain the strong confidence of investors and economists.

The central bank had won plaudits for limiting the banks’ reliance on risky, off-the-balance-sheet derivative transactions. It was also praised for imposing buffers against excessive lending. While the extra measures helped, they were not designed to contain the spillover from the euro-zone sovereign debt crisis, which, combined with a property bubble, left its banks exposed to potential losses of 168.8 billion euros, according to the stress tests carried out by the European Banking Authority last July.

“The credibility of the Bank of Spain, which was very high coming into the crisis, has declined significantly,” said Luis Arenzana, a Madrid-based partner of Shelter Island Capital Management, an asset management company.

“The technocrats at the Bank of Spain are top-caliber people,” he said. “But the governor has been too weak, especially when dealing with politicians.”

Mr. Fernández said the central bank should have used its mandate to intervene in cajas as soon its inspectors had unearthed major problems — rather than delay by two years in some cases and try instead to engineer mergers that gave such cajas and their politicians more time to sink into trouble.

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