FINANCIAL SYSTEM Coordination between SAVERS BORROWERS Incentive to

FINANCIAL SYSTEM • Coordination between SAVERS BORROWERS • Incentive to save • Connect savings and investment (election)

Financial markets ASSETS Borrowers Savers LIABILITIES ASSETS Financial intermediaries

• If financial intermediaries predominate: (+) more resources for small firms (-) firms are more dependent on bank credit • If financial markets predominate: (+) reduces the financial cost (↓ i) (-) higher risk

SPANISH FINANCIAL SYSTEM • Increase in financial activity : – Economic development – Openness – Modernization of financial system • Banks and Savings Banks, the most important (they can create money) • Increasing importance of Investment Funds, Pension Funds, Insurance and Stock Exchange • “Intermediation of disintermediation”

BANKING SYSTEM Private banks Private S. A. Benefits to dividends Savings Banks Controlled by the State “Without profit spirit” “Social work” To increase your own resources Amplify capital Reduce “social work” Amplify the business Can’t buy Savings Banks Can buy Banks

• Bank-industry relationship

Regulation and competition (+) To avoid bank crisis, confidence (-) A lot of regulation reduces competition • Franco regime promoted a lot of regulation: – – – Commercial Banks, Industrial Banks, Savings Banks Opening of branches, minimum distances Foreign banks prohibited Control of the interest rates “Coeficientes de inversión obligatoria” (Obligatory investment coefficients) • Progressive and unequal deregulation in democracy, technological progress, intermediation of disintermediation

Efficiency and profitability • Spanish banks react to the increase of competition: – Increase of size: mergers and acquisitions – International expansion – Intermediation of disintermediation – Financial conglomerates (insurances) • Consequences: + concentration, + efficiency, + competition, + adaptation capacity

FINANCIAL MARKETS • Monetary markets (short-run, lower risk, lower profitability) – Inter-bank market – Short-run public debt market • Capital markets (long-run, higher risk, higher profitability) – Public fixed rent market – Private fixed rent market – Variable rent market (stock exchange)