With the merger of Caixa and Bankia, the last chapter of the 2008 banking crisis closes. Modern finance developed in Castile in the 13th century. There were usury laws and the Jews put their banks outside the walls to collect deposits and give credits. Banking is a high-risk, low-margin-over-total-asset business. The bank anticipates the money for a loan and takes years to recover the capital. If during the period the client has problems and does not return the credit, the bank loses money. Since then the banking crises have been periodic, as explained by the economic historian of the University of Alcalá Pablo Martín Aceña.
In 1998 Spain entered the euro. Our interest rates converged with those of Germans and our banks and companies accessed the global capital markets. A credit boom was activated that was concentrated in the real estate sector and a bubble formed. The boom and the bubble was global and the puncture had a strong impact on the Spanish economy.
The financial crisis caused a deep economic, social and institutional depression. The human being has developed a defensive mechanism that psychologists call cognitive dissonance. When there is a conflict between your perception and reality, we tend to deny reality and look for culprits to hold responsible. The story in Spain is that the fault of the crisis was the boxes.
The savings banks are also a century-old Spanish financial innovation. They were created as mountains of mercy to protect the most vulnerable population from poverty and financial exclusion. In 2008 Caixa had half of the deposits in the savings bank system and did not need public support. Caixa also had exposure to real estate credit, especially loans to developers to finance land, which was the main poison that caused the banking crisis. But its managers followed the recommendation of the Nobel laureate in economics Harry Markowitz to diversify their investments and not put all their eggs in one basket.
Caixa had a powerful industrial corporation in companies that paid high dividends and with those dividends they were able to absorb losses without the need to receive public aid. Since then, it has been absorbing several entities and today, with the merger with Bankia, it has become the leader in the banking sector in Spain. Caixa is already a public limited company and a bank but it maintains the essence of its social work, one of the most important in the world.
Caja Madrid and Bancaja grew as if there were no tomorrow, but without diversifying and concentrating much of their growth on the real estate boom. When the bubble burst and the developers were awarded the land, they had no capital or dividends from companies to recapitalize. The State insures the deposits and to avoid deductions from the small savers they had to nationalize the bank and assume the loss with public money. Even Syriza, the Greek equivalent of Podemos, had to nationalize banks to prevent savers from losing their money. The State created a bad bank, Sareb. They told us it would make a profit, but, like all bad banks in history, we just learned that it cost us $ 35 billion. He also had to assume losses in the entity and recapitalize it.
The success was to put a bank with enormous experience in charge of the bank who was able to get Bankia out of the hole and put it back to work. Since then the bank has given credit and contributed to the growth of GDP and employment, and has given benefits and paid dividends to return part of the public aid. The State now holds these shares in Caixa and will continue to receive dividends and contribute to the recovery of employment by granting loans.
With this merger and the recognition of losses by Sareb, the last chapter of the 2008 banking crisis closes. The past can no longer be changed and the key is to live the present realistically, looking to the future to extract lessons from the successes and mistakes of the past. In this crisis, both the banks and families and companies had significantly reduced their indebtedness. If we had added a credit and banking crisis to the disastrous effects of the pandemic, as in 2008, the unemployment rate and public debt would be significantly higher.
The new entity resulting from the merger has enormous challenges ahead derived mainly from the effects of the pandemic and digitization, which is changing the banking business and the way we interact with banks. But it was born well capitalized and with an experienced management team and in a position to adapt to the new competitive and technological environment.
Without banks and without credit there is no economic development, job creation and well-being. Therefore, all good Spaniards should rejoice at this merger and at finishing the book on the history of the 2008 banking crisis. The human brain is also programmed to forget the worst or we would all be schizophrenic.
Now what we have to do is concentrate all our energy on ending the pandemic, getting out of this crisis, saving as many companies and jobs as possible and adapting as soon as possible to the new era of global technology. This new bank will help to achieve this.
Jose Carlos Diez is Director of the Orfin Chair at the University of Alcalá and partner of LUAfund
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