SERIOUSLY THOUGH! - what are the Spanish banks to do?

Not many banks have emerged from recent events with their reputations intact. Santander might be the exception that proves the rule.

A decade ago the bank was barely known outside Spain’s business community or Latin America. Now it is emerging as one of the more savvy survivors of Europe’s banking storm.

And while that sunny vista might yet change – after all, not even bankers seem truly to know what their banks hold these days – Santander’s run looks doubly remarkable given that Spain is in the aftermath of a property boom.

So what lies behind Santander’s seeming escape? In part, the persona of Emilio Botin, its chief executive, who has a reputation for being extraordinarily shrewd. However, another more interesting issue revolves around the way that Madrid runs its banks.

One key factor protecting Santander from some of the global woes is the tough approach that the Spanish central bank has taken towards regulating its banks in recent years.

Earlier this decade the central bank in essence decided it disliked the idea of banks keeping vast quantities of credit assets off their balance sheets. It also quietly demanded that banks hold higher levels of reserves than international accounting laws required.

Consequently, it furtively “gold plated” – or rewrote – European Union rules to discourage Spanish banks from creating entities such as structured investment vehicles (SIVs). And when banks such as Santander embarked on an acquisition spree in Mexico, the central bank reined them back.

When the central bank initially took this stance, it looked pretty odd. After all, in the early years of this decade institutions such as the Federal Reserve were convinced that banks could hold less capital than before because innovation had made them less exposed to credit risk.

However, Spain had experienced a searing domestic banking crisis two decades earlier and its central bank was consequently risk averse. It was also more willing to be maverick than, say, the Germans.

None of this guarantees that Spain will escape the credit crisis unscathed. A domestic property bust is always painful.

However, Madrid’s conservative stance has helped to cushion the blow of the storm. And that highlights some interesting lessons. First, it shows some of the wisest financiers are those who have experienced shocks.

Second, Spain’s story shows it pays for small countries to challenge the dominant global consensus from time to time.

But third, the Spanish tale shows the benefit of having central banks involved in regulation. In recent years other European banks have also become uneasy about trends in the global banking world; look at statements made by Jean Claude Trichet, ECB president, last year. Yet Mr Trichet could never turn this vague alarm into tangible controls since the ECB did not oversee the banks.

However, as the storm grows worse in Europe’s banking world it is becoming clearer that this state of affairs will need to be reviewed. And one place to start any debate might be with an examination of why some banks are going bust – but some, such as Santander, notably are not.

From The Financial Times Limited 2008