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Regulatory responses to financial crises: Spain, 1850-2000

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Financial crises have been examined under many perspectives, including that of regulatory failures. However, the effects of crisis on regulation are less well known. Generally, after a major crisis, the faith in the market dwindles and the partisans of strong regulation tend to have the upper hand. In a recent paper on the history of financial supervision, Goodhart has put it clearly: what historical record demonstrates, and as every central banker and practitioner comes to understand, is that regulation and supervision are primarily reactive. In Goodhart´s words, when something goes wrong in the financial system, some people lose money and then almost by definition the existing system of supervision and regulation is held to be at fault. Politicians feel the need to be seen to be taking actions to make sure that that particular disaster never happens again. Then the result is to find ways to tighten regulations and change the supervisory rules.

Like the rest of the world, Spain has suffered frequent financial crises and undergone several changes in its regulatory framework. There have been crises that have been followed by reforms of the financial structure, and also trouble financial times with no modification of the regulatory and supervisory regime. In various instances, regulatory changes have predated financial crisis, but in other banking crises have occurred without reference to changes in the regulatory regime. Regulation and supervision have been usually absent in the XIXth century, while in the XXth century policy makers have been more active and diligent. Moreover, all major financial crises have produced intense financial restructuring, although as elsewhere banking restructuring and interventions not always have been successful.

Although we know the major trends of the Spanish regulatory cycles, there still many questions to be answered. Has been the Spanish financial system adequately regulated? Do financial reforms and regulations have contributed to banking stability? Have financial reforms been introduced as a response to financial crises or predated them? What government agencies have been responsible for banking supervision? Does Spanish regulation conform to a common regulatory European pattern or, on the contrary, country-specific political and economic factors have mattered more? The study regulation and supervision for a small and peripheral country in a historical perspective is of interest for several reasons. First, the examination of a nation’s case, such as that of Spain, may contribute to a better understanding of how regulation and supervision have changed in the last two centuries. Second, although one of the primary purposes of banking regulation and supervision is to promote stability, they can also have ancillary effects on the aggregate economy by affecting bank behavior. The Spanish economic experience, moving from underdevelopment in the XIXth century to development in the XXth century, provides evidence of how the regulatory framework may affect economic performance through bank lending behavior. Finally, a look at the Spanish case may also shed light to the permanent debate between the two theoretical approaches that compete to explain the historic cycles of financial regulations: one base on a public interest motivation, and the other emphasizing the role of private interest.

This talk is part of the Financial History Seminar series.

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