Several decades have now passed since Spanish banks made the decision—risky and not without criticism at the time—to expand their business beyond our borders, initially turning their attention to Latin America.
The efforts made over these years, expanding the number of countries in which the presence of Spanish institutions is significant, have resulted in a model of geographic diversification of banking activity that has proven to be robust, sound and profitable. The results of the stress tests –stress test– recently published by the European Banking Authority (EBA) have made it possible to confirm the resilience of the model, even in the event of an adverse scenario.
The keys to success should be sought in the set of criteria that, from the outset, Spanish institutions decided to adopt, while also meeting the safeguard requirements imposed by the Banco de España in its capacity as consolidated supervisor. The so-called subsidiary model chosen by our banks, significantly different from the branch model followed in other countries, is based on the establishment of autonomous local entities, incorporated in accordance with the legal framework of the host states, financially independent from the parent and other group entities, and with autonomy in managing their funding, liquidity and solvency. However, they are subject to rigorous criteria in the assumption and management of risks and in control procedures, imposed by the parent for all entities forming part of the consolidable group.
This seeks to meet two basic objectives: that the strength of the consolidated group rests on the solidity and solvency of each of the entities that comprise it, considered individually; and that occasional situations of difficulty in any of the subsidiaries do not pose a contagion risk to the rest of the group and do not compromise the parent’s solvency.
This latter aspect has, in turn, shaped a resolution model known as multiple point of entry (multiple point of entry, MPE), which has been favourably recognised by international regulators, given the clear advantages it would offer in the hypothetical need to resolve a banking group with a presence in multiple jurisdictions and the ability to isolate the cause of viability problems at source, preventing their spread.
No banking management model is immune to financial crises, but it is only fair to acknowledge that the international expansion model followed by Spanish institutions has demonstrated a remarkable capacity for resilience during the recent crisis. Intelligent geographic diversification, combined with a robust risk control and management system, makes it possible to “smooth the cycle” and minimise, in the profitability and solvency of banking groups, the effects of fluctuations in national and regional economies.
With the experience gained over these years, it is possible to see the results of the path chosen. Spanish banks carry out an activity focused mainly on retail commercial banking, with a high degree of diversification in the products they offer their customers, in the businesses they develop—including in insurance and investment services—and in the countries in which they have an active presence through subsidiaries that hold significant market shares in their respective areas of operation.
As reflected in the results of the EBA stress test referred to above, diversification has proven to be one of the main factors explaining the notable resilience of our country’s banking groups, but also the high recurrence of the results achieved throughout the cycle, and the stability and predictability of the return offered to their shareholders.
Presence in different markets, trading in different currencies and adapting to different phases of the economic cycle in each of the geographies in which Spanish banking groups operate contribute to ensuring that, beyond the occasional difficulties in any of them, the aggregate result is consistently positive. It is no coincidence that the ROE of Spanish institutions has, in recent years, been above the average for the European Union’s banking systems as a whole.
It is therefore somewhat disappointing that the benefits of diversification are not effectively recognised by the prudential regulation of credit institutions. Let us hope, however, that the continuation over the coming years of the model’s good results will help to change this perception and that the diversification of our institutions will ultimately be reflected as it deserves in the capital requirements for Spanish banks.
Santiago Pernías Solera, Adviser to the Spanish Banking Association
