That episode, which did not initially impact Spanish banks as they had no investments in those products, was actually the trigger for a chain of events and effects on the world economy and financial markets that would soon be felt in Spain. The first symptom seen was the deterioration in financing and liquidity conditions. The authorities responded to this with support measures, such as the programmes for the purchase of financial assets and the backing of debt issues, and the European Central Bank set in place its new and ample liquidity provision criteria. In late 2008 the Spanish economy went into recession. The decline in output and rising unemployment placed upward pressure on bank and savings-bank doubtful assets ratios and the subsequent need for loan loss provisions. This combined with the increase in financial  BIS central bankers’ speeches  1  costs owing to growing dependence on wholesale funding and to sudden difficulties on these markets. Moreover, many institutions, highly concentrated in the real estate development and construction sector, were faced with the housing market grinding to a halt. What’s more, savings banks had a singular legal regime, associated with their legal status, that entailed clear limits on their ability to raise top-quality capital and to set in place the governance rules needed to retain the confidence of third-party investors as to their future.
During 2010 the Banco de España also pursued a series of initiatives to help generate muchneeded confidence. Firstly, in July it took transparency to a new level with the publication of the results of the stress tests, both because of the high proportion of institutions analysed (representing 95% of the system, compared with the figure of 50% required in Europe) and the degree of detail of the information provided. Secondly, it reformed the provisioning system that same month, to ensure appropriate balance-sheet write-downs. And thirdly, it urged institutions to provide the market with highly accurate information on their exposures to the real estate development and construction sector and on their financial structure and liquidity position. Likewise in July 2010, Parliament approved the savings banks reform, included in Royal Decree-Law 11/2010. This paved the way for a new legal structure for savings banks, under which the pursuit of their banking activity may be through a bank, to which the bulk of assets and liabilities are transferred. This corporate model, conceived for adoption on a voluntary basis, although it has become obligatory for savings banks that receive further aid as I shall mention later, is imposing itself extensively on the sector owing to its advantages in terms of the ability to tap the markets for capital, to promote best management practices and to generate the necessary confidence on the part of customers and investors.