Most of them were industry-oriented with special tax advantages, but with a fragile financial base and a lack of managerial integrity and experience. Against that background, the system was highly inefficient and proved poorly effective because it was unable to develop its role of channelling saving to the most productive uses and, without any doubt, it held back economic growth. At the same time, the Spanish regulatory and supervisory framework was weak and outmoded, based mainly on a simple leverage ratio. In turn, supervision was geared towards formal compliance with administrative regulations. The need for a change in the supervisory framework to preserve the soundness of the banking system became apparent when the oil crisis of the early 70s prompted the Spanish economy into a profound recession, leading to the deepest crisis of recent Spanish banking history. Up to 50 banks went bankrupt, involving 20% of the deposits of the banking system. It is interesting to analyse the effect of the crisis and the limitations of the regulatory and supervisory framework at that time, in the light of the framework set by the Core Principles [for effective Banking Supervision] developed by the Basel Committee on Banking Supervision. Allow me to summarise the main group of principles that would have been breached. First, the principles related to licensing criteria would not have been accurately met. Indeed, the process of licensing did not consist of a proper assessment of the fitness and propriety of Board members and senior management, including their strategic and operating plan.
Most have accumulated massive international reserves, well in excess of what would be needed for precautionary reasons. All in all, this paints a very different picture as compared to past episodes of global turbulence, when these economies used to be not only “influenced” by the ups and downs of the changing risk preferences in global financial markets, but simply “driven” – even “drowned” – by them, sometimes regardless of their economic fundamentals. In my view, this separation from the main stream of the turbulence constitutes an achievement in itself. From other stand point, it is certainly striking that in this period of global financial turbulence inflation is identified as the key economic challenge for emerging economies. Indeed, the rise of inflationary pressures on food prices derived from the commodity boom, is becoming a very worrying concern. The large change in relative prices that underlies this prolonged boom is having a stronger impact on developing economies, with very negative and substantial effects on the well being of the poorest portions of their populations. Therefore, as inflation creeps up the concern of policymakers deepens, not only in the sphere of macroeconomic stability, but beyond. In connection with this, the fact that monetary policies have remained focused on inflation stability in most emerging market economies is an additional novelty to mention in the context of the present turmoil.