•  The first characteristic, which has set us apart from other supervisors, has been our strong role in accounting rule-making for the banking sector in Spain. This has meant that the accounting rules for the banking sector take into account supervisory sensitivities, whilst being also consistent with IFRS. One example of this is the socalled “dynamic provision”, which we introduced in 2000. This allowed Spanish banks to build up a significant provisioning buffer in a transparent manner, to be used in bad times, when problem loans increase. In 2005, the Bank of Spain reformed the dynamic provision when adopting International Financial Reporting Standards. Despite the reform, banks kept the strong provisioning level set by the former rules, and today they face the current situation with a sound buffer of loan loss provisions (1.3% of total assets at the end of 2007, and this despite bad loans being at historically low levels). •  The second characteristic that has proved useful is the Bank of Spain’s prudent approach to bank regulation. One example has been our stance on off-balance sheet investment vehicles. We have not prohibited the development of investment vehicles, but we told banks that if they set up Special Investment Vehicles, these should be consolidated with the group, and therefore be subject to capital requirements and provisions. Under these conditions, no such vehicles were set up. As a consequence, the Spanish banking system has not been so seriously hit by the de-leveraging process as other systems that have a freer attitude towards these vehicles.
Furthermore, securitisation in Spain has mainly been used as a financing tool, to raise resources on the wholesale financing markets in order to meet the demand for loans from households and businesses. Since the element of credit risk transfer was limited, Spanish banks have had little incentive to issue overly complex financial instruments. Furthermore, we have always required capital to be held against liquidity enhancements to securitizations, which we consider may have significant credit risk. Let me take this opportunity to make a brief observation on the securitisation sector, which some have described as being in “dire straits”. I am sure that this sector will ultimately recover. But to do so, it must distinguish between traditional products that are sound,  2  BIS Review 70/2008  transparent, standard and easy-to-value, and “multi-layer” securitisations and complex structured products which are difficult to understand and assess. The good news is that the market is starting to differentiate between products. An example of this is the recent placement of several Spanish banks’ issues of simple covered bonds. In short, our recent experience shows that to be successful supervisors we need to combine an open attitude to financial innovation whilst keeping at the same time some good old fashioned supervisory suspicion towards it, especially when it entails overwhelming complexity or elements of regulatory arbitrage. The Spanish banking system has faced the recent turmoil from a well-capitalized, profitable and efficient position. However, there is no room for complacency.