In relation to the banking sector, the government and Parliament initiated the reform process a year before the markets began to show signs of concern with the explosion of the sovereign debt crisis. Far-reaching measures were taken that enabled the principal problems of the sector to be tackled before they became intractable. The main task undertaken to tackle the structural problems in our banking system has undoubtedly been the restructuring of the savings bank sector. Part of this sector had built up significant imbalances during the expansionary years. This, along with the duration and depth of the international economic crisis, made evident the need to create an instrument with considerable financial capacity and sufficient powers to carry out extensive restructuring of the savings bank sector. For this purpose, at the beginning of the summer of 2009 the Royal Decree-Law on the creation of the Fund for the Orderly Restructuring of the Banking Sector (the FROB) was approved, which would be ratified by Parliament one month later. Since then, the restructuring of the sector, partly achieved with the assistance of FROB funds, has been of an extraordinary intensity. In less than two years, the 45 savings banks previously in place have been reduced to a third of that number, and the consolidation process has affected more than 95% of the total assets of the sector. The objectives of this restructuring and integration process were very clear. First, to correct the excessive fragmentation of the sector.
Banks determine who should be given credit and closely monitor borrowers and their projects. This is a task that would be difficult for small savers to undertake. By offering customers various kinds of financial products, banks also help to diversify and redistribute risk. This function is essential in a modern market economy. At the same time, experience shows that complex financial structures are a source of increased vulnerability. Chart: Securitisation resulted in complex and vulnerable structures Ahead of the financial crisis, there was a proliferation of complex financial products, including residential mortgage-backed securities in the US. In theory, these new products were intended to improve the distribution of risk. Banks’ exposure to risk that had been shifted off their balance sheets would be limited. In reality, it turned out differently. Risk was not very well distributed, merely hidden. With so many links in the chain between borrower and saver, the responsibility for monitoring borrowers became highly fragmented. Good banking is important for a sound and stable economy. Despite thorough credit assessments and close monitoring of borrowers, banks will face unexpected losses. If banks end up with insufficient equity capital following substantial losses in bad times, they will have to tighten lending. This may amplify a downturn, as is currently the case in a number of European countries. Compared with other enterprises, many banks have limited equity capital. It is often more costly for banks to fund lending with equity capital than with deposits and borrowing from the market.