Monday, August 15

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

In a darkened room, with the blinds half down, at the home of the former governor of the Bank of Spain Mariano Rubio, he and his successor, Luis Ángel Rojo, had a conversation in which the second asked him to assume responsibility in the case Ibercorp, for which he 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 jailed. This scene, which occurred in 1994, is recounted by the 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 almost three decades he spent at the head of the Agency’s Research Service.

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

With Rojo’s management of these and other hot potatoes that he had to live during his eight years in office, Malo de Molina starts a story that leads him to make a detailed analysis of the evolution of the Spanish economy without leaving aside a Profound comment 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 Governor Luis María Linde forced his dismissal in 2015.

Malo de Molina defends that with Rojo came a stage of growth in trust and prestige for 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 person in charge of the construction of the independence of the organism and of its “industrial design”. However, since then the author of the book warns of the difficult coexistence of the body with the political power.

After Rojo, Jaime Caruana came to office, with the PP in power and Rodrigo Rato as Minister of Economy. Malo de Molina highlights from this period the upward economic cycle and how the imbalances were generated that would finally explode in the financial crisis of 2008, such as the “runaway” urban policy of the Spanish city councils. Not only that. The economist points out that the growth pattern of those years could not be sustained, competitiveness problems became apparent and, as he argues, there was an “undervaluation” of the risks to the economy. The first notices about these imbalances arrive from the Bank of Spain, which, according to it, were received as “unjustified scaremongering”.

The years of economic growth and bonanza were running, and the contrary messages were not well received by the political power. The economist does not shy away from the responsibility of the Bank of Spain in the book and acknowledges 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 Department could have been dragged down by this,” he analyzes in the book.

“We were branded as ash, but we were not enough,” he acknowledges to this medium. Although the reports on urban 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 to 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 a greater political confrontation and that reached the Bank of Spain”, analyzes Malo de Molina, who assures that the body was exposed to the battle between the two great 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 when it was time to elect Miguel Ángel Fernández Ordoñez, the head of the Bank of Spain who had to deal with the crisis, was broken.

Despite the fact that this governor, appointed by the PSOE in 2006, knew the reports of his own body on the existing imbalances both in the economy and in the financial sector, Malo de Molina emphasizes that he preferred a “benevolent” speech and a commitment to ” de-dramatize “the high indebtedness of households. He even points to the “verbal excesses” committed by the governor himself when the savings banks began to collapse.

In the book, the author alternates in-depth analyzes 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 body had with the government, first socialist and later popular, which sometimes left the supervisor in “unnecessarily uncomfortable” situations at the international level, coming to confront him with the European Central Bank itself. The “high levels” of this confrontation already arrived with the PP in power and the book suggests that the organism was “relegated” to the financial reform, with Luis de Guindos as minister, even “invading its powers.” Malo de Molina considers the public criticism that Guindos drew on the organization “surprising”, to the point of preferring to opt for private agencies evaluating the situation of the financial system rather than the Bank of Spain itself.

His last years

And the resignation of Fernández Ordoñez ended up, who left office a month before his term expired. Luis María Linde, the fourth and last governor of the Bank of Spain, with whom Malo de Molina would coincide, took over. The economist argues that the new supervisor’s manager was known as a profile “closely related” to Guindos, with whom he had a “long-term friendship”, which “raised concern” about the consequences it could have on the independence of the organization. . Linde took office a few days before the bailout in Spain was announced.

In this last stage there is an event with which Malo de Molina shows his disagreement: the congressional commission of inquiry into the financial crisis. Completed in 2018, PP and PSOE agreed to conclusions in which they shaken 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. “At the time of the conclusions they focused on the easy way, which was the criticism of 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 main financial institutions in the country,” he recalls.

Malo de Molina finally left his post at the bank’s management in mid-2015 after being fired by Linde. For a long time, from the ranks of the PP they did not hide, according to the author of the book himself, their requests for him to be replaced. He was considered in the orbit of the PSOE and very close to Fernando Restoy, deputy governor of the Bank of Spain. He was replaced by Pablo Hernández de Cos, who would end up being elected as the supervisor’s new governor in 2018, days before the vote of censure against Mariano Rajoy triumphed.

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