“Spain is different”—also when it comes to the banking business model.
For several decades, Spain’s leading banking groups have pursued an intensive internationalisation process, initially focused on Latin America and later expanded to other regions such as the United States, the United Kingdom and other European Union countries, so that a very significant share of their activity and results is linked to their cross-border business.
Unlike the geographic expansion strategies commonly used in other banking systems in our environment—based mainly on opening branches—the internationalisation of Spanish banks has been carried out through autonomous local subsidiary entities with a business strongly focused on retail banking.
These subsidiaries are characterised by being genuine local banks, managed autonomously and financially independent from the parent company and any other entity within the group. In other words, the subsidiaries compete in their local markets, both in terms of where they invest and in seeking funding. They therefore face, in each case, the specific conditions of those markets, while benefiting from the strengths of the group’s business model and being subject to the parent’s risk control and management systems.
Over these years, Spanish banks have defended the advantages that a model with the characteristics described offers for solvency and stability, as it leads to more recurring results and better risk diversification due, among other factors, to the low correlation of economic cycles between very different regions.
In a study recently published by the Banco de España, Decentralized multinational Banks and risk taking: the Spanish experience in the crisis, its author, Isabel Argimón, analyses—providing empirical evidence—the interesting effects of multinational banking models, such as the Spanish one, on the risk profile of credit institutions.
The report’s main conclusion is that a decentralised business model with a presence in several countries whose economic cycles are weakly correlated can have a positive effect on the stability of banking groups’ results.
The analysis, based on data from 1999 to 2014, also shows how, in the face of a crisis such as the one experienced from 2008 onwards, Spanish groups proved more resilient than their European peers because they were internationalised in line with the model described, and how—driven precisely by the crisis—these banks intensified their cross-border activity in search of greater stability.
Applied to the field of bank resolution, this management framework—known as Multiple Point of Entry (MPE)—means that the independence and autonomy of subsidiaries makes it possible to establish firewalls, which are necessary to prevent an undesirable transmission of risks within the group in situations of crisis or instability. In this way, in the event of resolution, it would affect only the scope of the entity concerned, without spreading to the rest of the group’s entities.
In this Banco de España study, the empirical results obtained are used as an argument to suggest that the EU regulatory framework should better recognise the benefits of this business model. Specifically, it calls for geographic diversification to be rewarded with a lower capital requirement, under the principle that capital requirements should be aligned with the risks taken by institutions.
The evidence presented on the greater recovery capacity of multinational and decentralised banks, especially during the crisis, supports the need to take such characteristics into account when assessing the capital requirements of these banking groups and when addressing the resolution treatment of groups under the MPE model.
The study also calls for a reconsideration of the approach and level of detail typically used in banks’ stress tests—known as stress tests . Since the financial crisis, these tests have become a key supervisory tool aimed at assessing whether banks would have an adequate level of capital to withstand a hypothetical stressed situation. In this regard, when designing stress scenarios, it calls for better recognition of the asynchrony that often exists between distant geographic regions.
To date, regulators have shown a certain lack of confidence in the benefits of the decentralised internationalisation model followed by Spanish banking groups, possibly due to its singularity. We trust that studies such as the one carried out by Isabel Argimón at the Banco de España will help foster a better understanding of the model and that this will ultimately be reflected positively in the recognition of our banks’ solvency.
Carmen Rizo, Public Policy adviser at the Spanish Banking Association (AEB)
