By the late 1980s, the Spanish banking system had been undergoing sweeping changes for some time. Its structure was largely a throwback to the post-Civil War period of the Franco era, when Spanish private banks played a leading role in financing the development of industry. As financial backers of the Nationalist cause, they had won Franco's confidence and gratitude, and they were given a relatively free hand during the reconstruction period. With the adoption of an economic policy that emphasized self-sufficiency and barred foreign investment capital and banking competition, their role was strengthened. It has been estimated that, by 1965, the five leading private banks controlled over 50 percent of Spain's capital. Their influence extended not only to the private sector, but also to such autonomous institutions as INI and the state railroads. Subsequently, as industry grew stronger, many of the banks' equity holdings were sold to the public through stock exchanges. The banks, however, continued to play a vital role in providing new funds for industry.

Supervision of all Spanish financial institutions rested with the Ministry of Economy, Finance, and Commerce. Subordinate to this ministry, and responsible for overseeing the country's banking system, was the country's central bank, the Bank of Spain. Formed in 1847, and granted the sole right to issue currency in 1874, the bank was nationalized by the Bank Reform Law of 1962. In addition to supervising the rest of the banking system and setting reserve requirements, it carried out the government's monetary policy through open market operations, and it oversaw foreign exchange along with the Directorate General for Foreign Transactions. In 1977 the Bank of Spain had helped set up the Deposit Guarantee Fund, which protected deposits in troubled banking institutions.

Of the three main groups of banks in the Spanish banking system--private banks, savings banks, and official credit institutions--private banks were the most important. In 1962 private banks were divided into commercial banks and industrial banks. The latter had the right to invest a higher proportion of their resources in equity holdings than the former, and they specialized in industrial investments. Commercial banks, which were larger and more numerous, served the general public they were the principal source of short-term credit for the private sector, though they also competed for long-term loans. By the late 1980s, the distinction between the two kinds of banks had lost much of its meaning, for each had gradually been allowed to operate in the other's area of specialization.

Although in the second half of the 1980s Spain had about 100 private banks--a quarter of which were industrial banks--the field had long been dominated the Big Seven, seven large commercial institutions: Banco Espanol de Credito or, as it was more commonly known, Banesto Banco Central Banco de Bilbao Banco Popular Espanol Banco de Santander Banco de Vizcaya and Banco Hispano Americano. By the 1980s, these banks had direct or indirect control of approximately 80 percent of the country's banking r ÍÍÍÍÍÍÍesou esources.

The leading banks controlled huge industrial portfolios, by far the largest in Spain. The market value of these holdings was not known, but analysts estimated that Banesto possessed about US$3 billion, and Banco Central, about US$1 billion. These large Spanish banks were present in virtually every area of finance. Beyond their industrial holdings, they also possessed extensive retail networks. Because Spain did not have an adequate pension fund system, many Spaniards invested their savings in order to provide for their retirement. Consequently, there were 5 million retail investors among Spain's 39 million people, the highest proportion in Europe.

Banking can be said to be the last redoubt of Francoist economic autarchy. Banks had grown during the Franco period by borrowing cheaply from their customers and then selling their services at huge margins. During the late 1970s and the early 1980s, when a number of banks found themselves in serious difficulties, the government, for the first time, permitted their purchase by foreign banks. When it became clear that the more sophisticated foreign banks were rapidly making inroads into the traditional preserves of the large Spanish banks, however, the government closed the door to their further influx. Foreign banks were no longer to be allowed entry into Spain before the 1992 deadline set by the EC integration agreement, so that the Spanish banking system would have the maximum amount of time to modernize.

By the second half of the 1980s, Spanish banks were still not internationally competitive. The banks tended to be greatly overstaffed, and they possessed far too many branches, compared with their West European counterparts. Only in Belgium were there more branches per capita. In addition, the inadequate investments of Spanish banks were compensated for financially by the overpricing of services for bank clienteles. An EC report of the late 1980s indicated that, in order for the costs of financial services in member states to be harmonized, those of the Spanish banking system would have to be cut by 34 percent. In comparison, those of French banks would have to be reduced by 24 percent, and those of British banks, by 13 percent.

The pressure to revamp Spain's banking industry was, therefore, very great. Mergers were undertaken with the government's encouragement in order to create large Spanish financial holdings that could adequately compete with their European rivals. Although an attempted merger of the Banco de Bilbao and Banesto fell through in 1987, in early 1988 a successful union took place between the Banco de Bilbao and the Banco de Vizcaya. This merger resulted in the creation of Western Europe's thirty-second largest financial institution, the Banco Bilbao-Vizcaya. In 1988 the planned merger of the two largest private banks, Banco Central and Banesto, fell through, but analysts expected that, before 1992, the Big Six of the Spanish banking industry might, through various mergers, become the Big Three or the Big Four.

The second major group in the banking system consisted of savings banks, which predominated in rural areas that could not attract branches of the leading private banks. These banks did not come under the control of the Bank of Spain until 1971, having previously had their own official governing body, the Credit Institute for Savings Banks. Heretofore, they had generally accounted for about one-quarter of total lending in the private sector. Since the late 1970s, savings banks have raised their share of total national deposits from 34 percent to 45 percent--a feat that was accomplished despite severe restrictions. In the mid-1980s, these restrictions were gradually being relaxed. For example, barriers that limited their operations to specific areas or regions were lifted in June 1988, and by 1992 they were to be free to open up branches anywhere in the country. In terms of deposits, the Barcelona-based Caja de Pensiones para la Vejez y de Ahorros de Cataluna y Baleares, popularly known as La Caixa, was the country's largest savi eb9 ings bank. Another large savings bank was La Caja de Madrid. After the relevant restrictions were lifted, a large-scale merger process commenced among savings banks. This trend appeared likely to become a substantial factor in the country's savings banks' operations.

Legally, savings banks were nonprofit institutions, but in reality they were quite profitable in 1987, for example, they were more profitable than rival commercial banks. One reason for this was that savings banks were self-financed foundations without stockholders. The seventy-seven savings banks operating in the late 1980s lent mostly to families and to small and medium-sized businesses.

The third leg of the Spanish banking industry consisted of official credit institutions, each with a specialized sphere of influence. These credit institutions were under the control of the Directorate General for State Assets (Direccion General del Patrimonio del Estado--DGPE), and they were supervised by the Official Credit Institute (Instituto de Credito Oficial--ICO), which received funds from the state that were then lent to the credit institutions. The largest of these was the Industrial Credit Bank (Banco de Credito Industrial), which specialized in general industrial loans. The Mortgage Bank of Spain (Banco Hipotecario de Espana) provided mortgage loans for urban and rural properties. The Agricultural Credit Bank (Banco de Credito Agricola) provided credit for agriculture and related sectors. Provincial and municipal administrative bodies were served by the Local Credit Bank (Banco de Credito Local).

Also under the ICO, but only partially so, was the Overseas Trade Bank (Banco Exterior de Espana), which had been founded in 1923 to promote exports. More than half the bank's capital was in private hands. In addition to its participation in foreign trade, it competed with domestic commercial banks and ranked just below the former Big Seven in terms of its size. Like the official credit institutes, the Overseas Trade Bank was among those bodies belonging to the DGPE.

Analysts expected the increasing financial liberalization of the Spanish banking system to affect the status and the functions of the country's public banks. The freeing of funds tied up in government-required investments would eliminate the "privileged circuits" through which funds at low interest rates were normally channeled into such investments. In mid-1988 legislation was being prepared that would redefine the role of publicly owned banks by converting them into subsidiaries of the ICO and by forcing them to finance themselves at market rates. To assist them in adapting to these new circumstances, a period of gradual adjustment lasting as long as fifteen years was being considered, during which they could continue to depend on financing from the Ministry of Economy, Finance, and Commerce.

Data as of December 1988