Banco de España

   The Bank of Spain was established in 1856 as a private bank after the merger of two banks founded in the 1840s. In 1874 it was given exclusive rights by the government to the issue of the country's banknotes. Although the bank was not nationalized until 1962, when it ceased to have private shareholders, it had for some time been a private entity only in name, and in practice had operated under the aegis of the Ministry of Finance. Nationaliza-tion meant the loss of whatever vestiges of independence it might have had—nil in any case under the Franco regime— and its primary function was to implement the government's monetary policy and to exercise vigilance over the private banking sector. Ostensibly to impose prudent banking practices but in reality to facilitate government borrowing, the bank insisted throughout the 1960s and 1970s on the observance by the private banks of a variety of coefficients that obliged the latter to keep large deposits at the central bank. In fact the Bank of Spain's policing of the banking system failed to prevent the crisis of the late 1970s and early 1980s, when at least half of Spain's private banks became technically insolvent. The Bank of Spain's role then became one of banking doctor by arranging mergers and takeovers and administering the new Deposit Guaran-tee Fund created by the government to safeguard clients" monies and prevent a collapse of confidence. As late as 1993 the Bank of Spain had to intervene to prevent the collapse, as a result of fraudulent activities, of one of Spain's biggest banks, Banesto.

   As a result of the Maastricht Treaty on European Union, the statutes governing the Bank of Spain were revised in the 1994 Law of Autonomy. This law modified the relationship between government and Bank, and gave the latter a degree of independence from political interference. The government cannot use the Bank of Spain to finance its budget deficits, not even in the short term; it can only call on whatever deposits it has at the bank. The Bank is charged with responsibility for controlling inflation, and to this end is free to set monetary policy, including interest rates, without being subject to instructions from the Ministry of Finance. The governor is obliged to inform the Parliamentary Committee on Economic Affairs of the Bank's policy and to declare at six-monthly intervals whether, or to what extent, established targets have been met. Less formally, the governor is expected to liaise with the private banks and Cajas de Ahorros in ensuring the smooth functioning of the financial system and has taken the initiative in trying to reconcile the different outlooks of these two types of financial institutions and preparing for the introduction of the single European currency.

   Further reading

   - Chislett, W. (1996) Spain 1996: The Central Hispano Handbook, Madrid: Banco Central Hispano (chapter 2 on "The Economy and EU Convergence" contains a section on the new role of the Bank of Spain in controlling inflation).

   C. A LONGHURST