Spain had an oversized banking system, excessively concentrated on lending to the residential property sector and highly dependent on international wholesale financing. In 2008, the consolidated assets of the banking system amounted to 304% of GDP, bank lending to the property sector (in the broad sense of the term) reached 99% of GDP and bank debt held by non-residents accounted for 24% of GDP. Moreover a significant number of deposit-taking institutions suffered from institutional and governance shortcomings. Over the last decade many of these vulnerabilities have been resolved; in particular, those relating to the high level of non-financial private sector debt, which is now at levels similar to those in the rest of the euro area (having fallen by almost 70 percentage points of GDP from its peak in 2010). The weight of lending to property and construction activities has decreased by 47 percentage points of GDP. This reduction in non-financial private sector debt has been reflected in a decrease in the size of the financial sector and, in particular, in bank balance sheets in Spain, since business abroad has proved to be one of the main determinants of the resilience of some institutions. Thus, over the last ten years, the total assets of business in Spain have contracted by 20% (a fall of 72 percentage points of GDP) and employment in the sector has fallen by 32%.
We do not have zero appetite for failure of individual firms, provided that they do so in an orderly way that does not impose large costs or disruption on policyholders – neither in the form of direct losses nor of disruption – does not have knock on effects elsewhere in the financial system, and there is sufficient capacity elsewhere to substitute for the loss of the failing firm. We cannot leave this all to the market. Intervention in the form of prudential regulation is necessary because of the inverted production cycle in insurance – policies pay out after, in many cases long after, they are taken out – because of the limited or non-existent ability of many policyholders to monitor or react to increases in risk taking by their insurer during the life of their policy, and because of the incentive for managers and limited liability shareholders to increase risk if their capital stake drops too low – so called gambling for resurrection. These market failures are addressed not just by capital requirements, but by the interplay between capital and the other two pillars of the regime. Goldilocks and the three pillars: how much capital is just right? ‐ speech by Anna Sweeney | Bank of England  Page 3  Pillar 3: market discipline Pillar 3 is disclosure of information about a firm’s balance sheet risks. Market discipline is not wholly absent from the insurance sector either at the inception of or during the course of policies.