Financial Crisis and Regulation: The Case of Spain

Abstract There have been a number of heterogeneous and, in some cases, opposing views of how the reform of the present international financial architecture should be tackled. This chapter discusses and reassesses the principal challenges and proposals for the reform of international financial regulation, commenting upon some specific lessons for the Spanish case from recent empirical evidence. From an international perspective, consensus is broadest that the most appropriate way to avoid systemic risk escaping from the perimeter of regulation and generating shadow banking is coordination at the national/international level and prompt corrective action, which in the EU has led to a combination of both microprudential and macroprudential policies (contained in the Larosière Report). From a national perspective, the chapter provides empirical evidence suggesting the existence of a relationship between excessive credit expansion in the years prior to the crisis and the current problems of asset impairment. It can be observed that the greater demands of prudential supervision and the dynamic provisions of the Bank of Spain have so far been able to attenuate only part of the effects of asset impairment. Nevertheless, some further adjustment is still required, in the framework of the orderly restructuring of the banking sector, and this is highly likely to generate an intensive process of financial consolidation.