miguel fernandez ordonez : spanish financial institutions in the face of the new competitive scenario opening address by mr miguel fernandez ordonez, governor of the bank of spain, of the xvi financial sector meeting “ spanish financial institutions in the face of the new competitive scenario ”, abc - deloitte forum, madrid, 21 april 2009. * * * thank you very much for inviting me to participate in this meeting which will address a subject – spanish institutions in the face of the new competitive scenario – of the utmost importance at the current juncture. the highly exceptional difficulties besetting the global financial system and economy require decisive action from all of us who, in one way or another, have responsibilities in these matters. the public authorities of different countries, including those in spain, are taking measures which in many cases are unprecedented. but their efforts cannot and should not be restricted to this area : the managers of financial institutions must reorganise and adapt their business models to the new competitive environment, actively seeking out levers permitting this process of change. i will devote the bulk of my address to this issue, not without briefly describing the situation of the spanish banking system as a whole set against the international outlook. the external environment remains hugely complex. this is because, on one hand, acute uncertainty and instability continue to plague international financial markets, while the freeze persists in what were the key funding markets until 2007 ; and, on the other, the real economy has entered a sharp downturn manifest in a widespread synchronised recession affecting both developed and emerging countries. the global dimension of this crisis and the interaction of the difficulties assailing the financial system with those of the real economy are shaping an outlook of unprecedented complexity. accordingly, there is the risk of entering a vicious circle in which the difficulties of one sector feed back into those of another, aggravating problems and making them harder to resolve. the seriousness of the situation has compelled economic and monetary authorities in many countries to adopt some extraordinary measures, including bailing out what are often very large financial institutions. international difficulties remain in this field and the disclosure of further losses related to complex structured products cannot be ruled out. this is forestalling any end to the climate of uncertainty and lack of confidence. in recent months, central banks have adopted a wide range of measures, some of which are unconventional. particular emphasis was placed on supplying the system with the necessary liquidity for it to continue to function. in the case of the ecb,

this took the form, among other initiatives, of its decision in october 2008 to extend its commitment to satisfy all demands for liquidity at a fixed rate with full allotment, in such amounts as necessary, and at least until the beginning of 2010. these actions of central banks have been complemented by others by governments, which have set up guarantee systems for the debt issues of financial institutions so that the latter can access the wholesale funding markets, which had been closed even to institutions with the best credit ratings. this type of measure, which averted a total collapse of the financial system, enabled certain markets to show signs of a slight improvement in relation to their situation in september 2008. such is the case, for example, of the money markets, where there has been a slight correction of risk premia. the public - sector guarantees for financial institutions ’ issues boosted the volumes issued on primary fixed - income markets. however, as mentioned above, normality has not returned to the markets where institutions are looking for funding, and difficulties persist in terms of amounts, prices and maturities. some of those markets, which had played a very important role prior to the summer of 2007, simply remain closed. this applies, for example, to securitisation and mortgage covered bond markets. there is no doubt that this poses a difficult challenge for credit institutions previously used to practically unlimited liquidity. the recent forecasts by various international organisations indicate that, in fact, we are in a very serious worldwide recession, from which neither the euro area nor the spanish economy have been spared. in general, according to the available forecasts for developed countries, the problems will be acute in 2009, although it is expected that at some point during 2010, taking into account the current high uncertainty any forecasting exercise entails, an incipient recovery may become discernible. the spanish banking system, as is inevitable when faced with a global financial crisis, has not been immune. nevertheless, the impact has been no less than in other banking systems, where public authorities have had to take control of very large institutions, as i have said. this better relative performance can be explained by at least two factors. firstly, the business model of spanish credit institutions is based on traditional retail banking and is founded on long - term relationships with customers and creditors. this type of banking model has enabled credit institutions to acquire in - depth knowledge of their customers, reducing the perverse effects linked to asymmetrical information present in any