•  In the area of crisis prevention and resolution, the crisis in the early eighties revealed the lack of sanctioning powers and tools for crisis management. The list of possible infringements was updated. The supervisory authority was also given new tools for crisis management – as intervention measures or the replacement of management –, and an ex-ante Deposit Guarantee Scheme was established, which is also prepared to offer help and bail-out plans. This set of measures promoted and encouraged banks to adopt appropriate risk control systems and practices oriented towards prudent performance and enhancing transparency with both clients and markets. Beyond these changes, Spanish banks also learned direct lessons from the banking crisis, and managed to cope with the challenges linked to competing in a liberalised environment. In fact, banks realised that they have to make continuous efforts to retain adequate internal risk control methods and to invest in technology and human capital. Furthermore, banks have to maintain their capacity to adapt to a changing environment and be able to take advantage of the new financial landscape. The supervisory model will face new challenges ahead, as the global banking system is continuously evolving. New products of increasing complexity and new players subject to little or no regulation are continuously appearing. The model must be flexible enough to maintain its adaptability, without losing its solid foundations. Accordingly, Spanish banking supervision has recently developed its own methodology based on the continuous monitoring of every banking institution, complemented by frequent on-site inspections.

Taking advantage of hindsight, I would like to stress two chief lessons learned from this twenty-year process of modernisation. The first is that regulator and banks have formed a “joint partnership”, prompting a fruitful “virtuous cycle” and matching goals and efforts in order to attain efficiency and soundness. Close communication and constant exchanges of views are the principles currently governing this relationship. The second lesson is that, at the end of the day, there has been no trade-off between profitability and soundness: the competitive capacity of Spanish banks has not been dented by supervisory policies. These policies have been oriented towards enhancing the solvency  BIS Review 56/2008  3  and internal governance of banks, and to increasing the confidence of the public and the markets in the banking sector. However, this transformation has not been painless. It has to be recalled that the Spanish financial system had to overcome a deep-seated crisis in the mid-seventies to early eighties. By the end of the 70s, our banking system was weak, closed, corporatist, old-fashioned and highly regulated. Such regulation affected many of their operating areas, curtailing competitiveness. Interest rates were set administratively and credit institutions were obliged to meet investment ratios to finance certain economic sectors with maximum interest rates. This environment made for weak structures with no incentive to compete and no professional teams or systems to accurately identify and manage risk. At that time a range of new banks were allowed to set up.