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Document Type

Case Study

Abstract

The global oil shock in 1973-74 occurred at a time when Spain was embarking on a liberalization of its financial system that resulted in many new entrants, particularly small- and medium-sized institutions. The banking crisis that followed from 1977-85 affected 52 of the country’s 110 banks, most of them of small- and medium-sized, that comprised over 20% of bank deposits. Spain established the Deposit Guarantee Fund in November 1977 to provide limited deposit insurance, and, in March 1978, established a Banking Corporation to take control of and reorganize troubled banks. However, because the Banking Corporation lacked the legal authority to recapitalize institutions, Spain reconstituted the Deposit Guarantee Fund in 1980 with broad new powers. One key power was the ability to acquire and dispose of non-performing assets from insolvent institutions. During the course of the crisis, the Fund intervened in 29 banks. It acquired a total of 373 billion pesetas ($2.2 billion) in nonperforming assets, real estate, and shareholdings. It disposed of more than 50% of bad assets within five years, but by 2000 still had a small amount of assets. By 1986, it had accumulated losses of 90 billion pesetas.

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