luis m linde : united kingdom and spain – assessing current issues intervention by mr luis m linde, governor of the bank of spain, at the dinner opening the 25th tertulias hispano - britanicas, madrid, 26 october 2012. * * * almost a quarter of a century back, following the visit by her majesty queen elizabeth ii to madrid in 1988, a group of spanish and british diplomats, politicians, academics and civil servants had an excellent idea. they took advantage of the gibraltar dispute not to further cool relations between spain and the united kingdom, or to squabble some more, but rather to seek to be closer friends and try and understand one another better. today marks the 25th edition of the tertulias. let me welcome all those taking part, firstly and especially our british friends, who honour us with their presence. a few days ago, perusing james boswell ’ s legendary book on the life of samuel johnson, one of european culture ’ s literary giants, i came across several paragraphs in which boswell relates dr johnson ’ s interest in spain. he was convinced that spain was a greatly unknown country in england and in europe, and he suspected it could teach much to those taking the trouble to travel there. samuel johnson made this statement around the mid - 1760s. today, spain is no doubt much better known in the united kingdom than in johnson ’ s time, as it is also the case for the united kingdom being better known in spain. but everything is relative and i believe it ’ s not difficult to spot black holes, mistaken notions and errors of understanding on both sides. while these tertulias are usually an opportunity to overcome some of these problems, they most importantly allow us to understand our respective stances on current, important or pressing issues. and we also enjoy ourselves. because, unlike other meetings, the tertulias are, from my experience, a rather entertaining event. i still have fond memories of the meetings i attended and the discussions we had in the now distant 1990s in santiago de compostela, in seville, in santander and also in oxford and in edinburgh. the tertulias were instituted at what was a key time in recent european history : the disappearance of the berlin wall, german reunification, the collapse of the soviet union and the start of the european monetary union project. next came the great economic expansion at the onset of the 21st century, the international financial crisis and the serious economic

of banking supervision and regulation, and an institution that can act as lender of last resort. to come back to our basic question of whether the liquidity transformation function of banks and the associated instability remains “ special, ” i would say that there is simply no doubt about it. wherever banking panics have occurred, their effects on economic performance have been crippling. thus, developing institutions and mechanisms that can prevent or short - circuit bank panics remains an important and “ special ” goal for economic policymakers. having said this, however, recent experiences in the united states and elsewhere have underscored the importance of going about this task in a way that does not overextend the banking “ safety net. ” in the united states, this lesson was painfully conveyed during the 1980s and early 1990s by the hundreds and hundreds of bank and thrift failures that occurred in these years. while this phenomenon was extraordinarily complex, many have argued that underpriced deposit insurance and relatively lax supervision contributed to the problem by distorting the incentives banks and thrifts faced in assessing the risks of their business decisions. in response, u. s. federal banking agencies have implemented changes that trim the banking safety net somewhat - - for example, by requiring prompt closure of troubled institutions, by applying stricter rules governing the payoffs of depositors and other creditors in bank failures, and by curtailing the practice of allowing regulatory “ goodwill. ” in addition, new bank capital regulations such as the basle risk - based capital standards, which have been implemented in the g - 10 and have served as a blueprint for capital regulation in many other countries, have helped to provide better incentives for banks in their business decisions. to summarize, i would argue that banks remain quite special in their susceptibility to runs and in the severe consequences that a large - scale banking panic would involve today. balancing the need for a banking “ safety net ” to defuse potential bank runs with the need to create the right incentives for banks in assessing and assuming risk is one of the most difficult challenges we face as central bankers. a second way in which banks have been deemed to be “ special ” is in the provision of basic banking services such as credit extension, deposit - taking, and payments processing. there is little question that these functions are critically important throughout society. consumers turn to banks for safe investments such as time and savings deposits, for transactions deposits, for processing payments, and for