luis m linde : the regulatory responses to the crisis speech by mr luis m linde, governor of the bank of spain, at the fundacion de estudios financieros, madrid, 22 may 2014. * * * good morning and many thanks to the fundacion de estudios financieros for your kind invitation. let me start by recalling that just three years ago i contributed to another book of the fundacion, on the international financial crisis, as we then saw it. as governor of the banco de espana and erstwhile collaborator of the fundacion, it is a pleasure for me to participate in this presentation. knowing the authors ’ profile, i have no doubt the book will make us reflect on how to enhance our financial culture and also on the much - needed recovery, following the crisis of confidence in the financial sector. * * * * * * * my intention today is not to talk once more about the crisis and its causes. i would rather focus on the regulatory consequences of the crisis which, as we all know, have been farreaching and which we cannot consider as complete. that crises should have regulatory consequences has been a fairly frequent occurrence in financial history. you may recall, for instance, that the basel committee on banking supervision was created in 1974, in the wake of the mistrust triggered by the bankruptcy of the german bank hersttat ; that the financial stability forum was set up in 1999, following the bankruptcy some months earlier of the hedge fund “ long term capital management ” ; and that the successor to this forum, the financial stability board ( fsb ), came into being in 2009, after the lehman brothers debacle some months earlier. it is this latter institution, the fsb, which is pushing through a thoroughgoing amendment of the international regulatory framework, seeking to reduce the likelihood of further crises in the future. in this connection, the fsb has benefited from decisive contributions by, among others, the basel committee on banking supervision. identification of initiatives on the international regulatory agenda initially, the fsb identified a series of issues with a view to organising a coordinated agenda of regulatory initiatives at the international level. some aspects of the initial analysis, such as the design of structural measures in the banking sector ( which were, in principle, highly oriented towards setting limits on the size of banks ), were initially rejected by the fsb. however, as we now know, there have been several initiatives along these lines. cases

. • second, workers should understand that inflation cannot be offset by demanding wage increases that are not justified by productivity developments. this would just keep inflation persistently high, as the 1970s experience painfully showed. from the perspective of gdp growth, if we are to see a quick return to our potential, we need flexibility in supply and demand responses. we need to see increased dynamism, particularly in those sectors which are not as directly affected by the current slowdown. other measures are also necessary, such as liberalisation and deregulation policies, to improve competitiveness. policies aimed at improving the human capital of our workers and increasing labour mobility should also be encouraged. finally, a comment on fiscal policy. the current fiscal situation in spain is sound, having ending 2007 with a budget surplus and reduced public debt. indeed, let me recall that our public debt to gdp ratio, at 35 %, is the lowest among the big eu countries. it is important to maintain this stance in the face of the current slowdown. expansionary demand policies could prove counterproductive. we should avoid a deterioration of the budgetary situation beyond that implied by automatic stabilisers. let me turn now to the financial sector. so far, the impact of the recent turbulence on financial stability in spain has been limited. this is largely thanks to the actions of the banks themselves, who have not entered into the kinds of business that have been most directly affected. spanish banks have demonstrated that you do not need to turn to the originate - todistribute model to become an efficient and profitable banking business. plain vanilla, traditional business can be compatible with high returns on equity and efficiency. it also has the added value of implying greater stability. but i think that the bank of spain ’ s approach to supervision has also had a positive effect. let me emphasise two key characteristics in this respect. • the first characteristic, which has set us apart from other supervisors, has been our strong role in accounting rule - making for the banking sector in spain. this has meant that the accounting rules for the banking sector take into account supervisory sensitivities, whilst being also consistent with ifrs. one example of this is the socalled “ dynamic provision ”, which we introduced in 2000. this allowed spanish banks to build up a significant provisioning buffer in a transparent manner, to be used in bad times, when problem loans increase. in 2005, the bank of spain reformed the dynamic provision when adopting international financial reporting