Thirty years of the rise and fall of the Bank of Spain’s reputation as seen from the inside

In a darkened room, with the blinds half down, in the home of the former governor of the Bank of Spain Mariano Rubio, he and his successor, Luis Angel Rojo, held a conversation in which the second asked him to assume his responsibility in the Ibercorp case, for which he had had to resign two years earlier, to avoid further eroding the credibility of the supervisory body. Minutes after Rojo left the house, Rubio was arrested and subsequently imprisoned. This scene, which took place in 1994, is recounted by economist José Luis Malo de Molina in his recently published book ‘The crucial years of the Bank of Spain (1992-2018): A view from the inside’ (Marcial Pons, 2021), where he recounts the nearly three decades he spent at the head of the agency’s Research Service.

Malo de Molina came to the post the same year that Rojo assumed the direction of the banking supervisor in a rather turbulent period. “The problems inherited from the period of Mariano Rubio had left a crisis of confidence in the management of the Bank of Spain,” says the economist at the beginning of the story. Added to this were the macroeconomic and management efforts involved in Spain’s recent entry into the European institutions, as well as some financial scandals in the media, such as the one that led to the intervention of Banesto.

With Rojo’s management of these and other hot potatoes during his eight years in office, Malo de Molina begins a story that leads him to make a lengthy analysis of the evolution of the Spanish economy without leaving aside a profound commentary on the rise and fall of the reputation of the Bank of Spain during the years that he was able to witness the direction of the organization, until the governor Luis María Linde forced his dismissal in 2015.

Malo de Molina defends that with Rojo came a period of growth in the confidence and prestige of the Bank of Spain. “With the mandate of Ángel Rojo the bank reached its peak,” he defends in conversation with this medium. He cites him as the man responsible for building the independence of the institution and its “industrial design”. However, since then the author of the book warns of the difficult coexistence of the agency with political power. </p>

After Rojo came Jaime Caruana, with the PP in power and Rodrigo Rato as Minister of Economy. Malo de Molina highlights the bullish economic cycle of this period and how they were generating imbalances that would finally explode in the financial crisis of 2008, as the “unbridled” urban policy of the Spanish municipalities. Not only that. The economist points out that the growth pattern of those years could not be sustained, competitiveness problems became evident and, according to him, there was an “underestimation” of the risks to the economy. The Bank of Spain issued the first warnings about these imbalances, which, he says, were received as “unjustified alarmism”.

Those were the years of economic growth and bonanza and messages to the contrary were not well received by the political powers that be. The economist does not shirk in the book the responsibility of the Bank of Spain and recognizes that there were “hesitations” in the diagnosis of the situation. “There is a natural tendency to exaggerate confidence in the ability to judge the probabilities of future events and above all to underestimate the possibility of highly infrequent events. And the Research Service may have been drawn into this,” he discusses in the book.

“We were labelled as asinine, but we were not asinine enough,” he admits to this newspaper. Although the reports on urban planning excesses or certain financial imbalances had been repeated since 2003, he assumes that “we should have insisted more forcefully”.

How can an institution reach the peak of its reputation and practically reach the ground in just a decade? “In Spain the financial crisis led to an institutional crisis, the political balance of the Transition was broken and there was greater political confrontation and that reached the Bank of Spain,” analyzes Malo de Molina, who says that the agency was exposed to the battle between the two major political parties. One of the problems, according to the author, is that the consensus in the appointments that had been practiced with the two previous governors was broken when it came to choosing Miguel Ángel Fernández Ordoñez, the head of the Bank of Spain who had to deal with the crisis.

Although this governor, appointed by the PSOE in 2006, knew the reports of his own agency on the existing imbalances in both the economy and the financial sector, Malo de Molina stresses that he preferred a “benevolent” speech and a commitment to “undramatize” the high indebtedness of households. He even points out how

s “verbal excesses” committed by the governor himself when the savings banks began to collapse.

The author alternates in the book profound analyses of the evolution of the economy with the complicated work of the Bank of Spain during the years of the financial crisis. He places special emphasis on the confrontations that the institution had with the government, first socialist and then popular, which sometimes left the supervisor in “unnecessarily uncomfortable” situations at the international level, even confronting it with the European Central Bank itself. The “high levels” of this confrontation came with the PP in power and the book suggests that the agency was “relegated” in the financial reform, with Luis de Guindos as minister, even “invading its powers”. Malo de Molina considers “surprising” the public criticism that Guindos poured on the agency, to the point of preferring to opt for private agencies assessing the situation of the financial system rather than the Bank of Spain itself.

His last years

And then came the resignation of Fernández Ordoñez, who left office a month before his term was due to expire. He took over from Luis María Linde, the fourth and last governor of the Bank of Spain with whom Malo de Molina coincided. The economist argues that the new head of the supervisor was known as a profile “closely linked” with Guindos, with whom he had a “long relationship of friendship”, which “raised concerns” about the consequences it could have on the independence of the agency. Linde took office just days before the financial rescue was announced in Spain.

In this last stage there is an event with which Malo de Molina shows his disagreement: the commission of investigation of the Congress on the financial crisis. Finished in 2018, PP and PSOE agreed on conclusions in which they shook off their responsibility and blamed the Bank of Spain and supervisors. “The commission did a very broad and exhaustive job. If you are in a position to read it all, you realize that everything is there,” defends the author of the book. “When it came to the conclusions, they focused on the easy way out, which was to criticize the role of the supervisor,” he adds. “The two major parties had a double responsibility, as managers of economic policy and as managers of the country’s main financial institutions,” he recalls.

Malo de Molina finally left his position in the direction of the bank in mid-2015 after being dismissed by Linde. For some time, from the ranks of the PP did not hide, according to the author of the book, their requests for him to be replaced. He was considered in the orbit of the PSOE and very close to Fernando Restoy, subgovernador of the Bank of Spain. He was replaced by Pablo Hernández de Cos, who would end up being elected in 2018 as the new governor of the supervisor, days before the motion of censure against Mariano Rajoy triumphed.

With the arrival of Hernández de Cos concludes the story of Malo de Molina, which ends with an optimistic view of the future of the supervisor. “Fortunately, this story of the rise and fall of institutional prestige has been narrated from the hopeful perspective that opened with a progressive rehabilitation of the role of the Bank of Spain,” he says. With the current governor, he believes, there has been “a renewed ascendancy in Spanish society and progressive international recognition”.

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