Skip to main content
main-content
Top

About this book

Bankers are administrators of other people’s money, and they are responsible both to their depositors and to other stakeholders. Human nature being what it is, however, they sometimes fall prey to overweening ambition, coming to see themselves as the rightful beneficiaries of the moneys entrusted to them. This can lead them to make poor lending decisions and engage in risky practices, eventually moving on to cosmetic accounting and the concealment of problems, speculation and even outright fraud.

Supervisors are there to prevent such behaviour, of course. They are responsible to government and the general public alike for the stability of the financial system, the proper allocation of financial resources by the banks and the protection of depositors and creditors. Their responsibility is, then, subsidiary to that of the bankers themselves.

Where supervision is lax and ineffective, however, it encourages bad management by bankers, creating a vicious circle that eventually leads to financial crises, which has most often to be cured using tax-payers’ money. Of course, it also hurts the broader economy. That is why the inseparable trio of regulation, supervision and resolution must exist.

In this collection of his writings over a period of some 50 years, Aristóbulo de Juan describes the causes, characteristics and consequences of financial crises based on his own experience as a central banker, world bank expert and consultant spanning a career of more than 55 years.

In a nutshell, the papers brought together in this book recount circumstances that have always plagued banking, and that are only too likely to recur in the future.

Table of Contents

Frontmatter

1. From Good Bankers to Bad Bankers

Abstract
1. This chapter is not intended to be a rigid manual or pass any ethical judgement on bankers’ behaviour. Rather, it is a model made up of features that repeat themselves historically around the world, both in developing countries and in developed ones.
Aristóbulo de Juan

2. The Spanish Banking Crisis of the 1970s and 1980s

Abstract
The Central and Eastern European Countries (CEECs) are very different from Spain. They have different financial systems and different bank supervision arrangements. The state of their economies and their banks is also different. Still there are many lessons, both financial and institutional, that could be learned from the successes and failures of the Spanish experience in dealing with its banking crisis between 1978 and 1984. The focus of this chapter will be on one of most important aspects for the CEECs of the Spanish case, notably the mechanisms that were put in place to rehabilitate problem banks.
Aristóbulo de Juan

3. The Microeconomic Roots of the Banking Crises

Abstract
1. According to one school of thought, all banking crises ultimately have macroeconomic roots and the only thing that matters is the real economy. The economists who hold this belief see the financial sector as no more than a sub-product of the real economy. This point of view is shared by many bankers, who seem to believe that their own bad management is never to blame. They are joined by not a few politicians, who find it easier to avoid taking corrective action or restructuring, whether of the industry as a whole or individual banks on a case-by-case basis.
Aristóbulo de Juan

4. ‘False Friends’ and Banking Reform

Abstract
1. The problems discussed here refer primarily to banking systems in transition economies, but they apply equally to other economies where banking reform has been undertaken. We shall begin by sketching out the progress made in transition economies in recent years and will then go on to warn about the dangers of ‘paper reforms’ and doing things half way. These pitfalls are what is here meant by the expression ‘false friends’.
Aristóbulo de Juan

5. The Dynamics of Undisclosed Insolvency

Abstract
1. International experience tells us that banks tend not to disclose the reality of their solvency and results when they find themselves in trouble, resorting instead to creative accounting to keep up appearances. The result is that the general public, analysts, rating agencies and often enough even external auditors and supervisors remain blissfully unaware of their true situation, sometimes for years.
Aristóbulo de Juan

6. Obstacles to Crisis Resolution. Excerpts from the Paper ‘Clearing the Decks’

Abstract
When a bank is insolvent, it should be recapitalized by the previous owners or new partners, or it should be closed unless the authorities decide that it is viable or that closure could trigger a wider crisis. Many governments adopt a general policy of never closing any banks. This may be utterly wrongheaded, but no matter, they adopt the policy anyway. In other cases, banks are neither closed nor effectively restructured, but rather because of the many obstacles in the way of resolution than any general policy.
Aristóbulo de Juan

7. The Financial Systems and the Ethics of Restructuring

Abstract
I am neither an economist nor a philosopher, nor yet a specialist in business ethics. I read Law at university, and I am a banker by profession. From this privileged position in the trenches, I have had plenty of opportunity to learn at first-hand about the workings of the economy. And about people. This experience has allowed me, among other matters, to observe the behaviour of bankers, bank employees, supervisors and auditors in the complex, interdependent world of finance.
Aristóbulo de Juan

8. Liquidity and Euphoria

Abstract
Hanging on the wall of a senior official at the Bank of England, I once saw a framed copy of the ‘Advice to Bankers’ written in 1863 by Hugh McCulloch, at the time Comptroller of the Currency and later US Treasury Secretary. This pithy letter sets out nine basic principles. Not a line of his advice is wasted, either for his contemporaries or for today’s bankers. Among other trenchant counsel, he ordains, ‘Never renew a note merely because you may not know where to place the money with equal advantage if the note is paid.’
Aristóbulo de Juan

9. The Recommended Option

Abstract
The Spanish resolution entity was set up in June of the same year and only began its work two years into the crisis, by partly financing the merger of poorly assessed entities with costly securities.
Aristóbulo de Juan

10. The Problems of the European Banking Union

Abstract
The Banking Union is a major step towards strengthening the European Union. Though a single-deposit guarantee scheme has yet to be established, the Single Supervisory Mechanism (SSM) and Single Resolution Mechanism (SRM) are already in place. However, it would be foolish to sit back now and expect the new institutions to provide immediate solutions. They will not. Not in the Eurozone and not in Spain. They will take years to find their feet, in the first place making different regulatory systems converge is a difficult and a slow process and, in the second, because they have been set up even while the aftershocks of the financial crisis rumble on.
Aristóbulo de Juan

11. Stability and Its Risks

Abstract
In his youth, we are told, Augustine of Hippo, later Saint Augustine, found himself torn between high religious ideals and hedonism. As he himself famously wrote, his prayer was ‘Lord, grant me chastity and continence, only not yet’.
Aristóbulo de Juan

12. Practical Lessons for Dealing with Problem Banks

Abstract
History has a stubborn habit of repeating itself. Having worked in problem banks in four continents for over 40 years, I have distilled the practical principles, rules of thumb and, some might say, personal manias spelled out here. All of them belong to my own private world and they do not cover the areas of technological change and the new financial competition, focusing rather on the matter of solvency. Furthermore, they are far from exhaustive. Be this as it may, they are grouped in four sections dealing sequentially with management, regulation, supervision and resolution.
Aristóbulo de Juan

13. Non-performing Loans: NPLs

Abstract
Europe needs to overcome fears of a hypothetical crisis and impose more intrusive supervision and greater provisioning on its banks.
Aristóbulo de Juan

14. Whys and Wherefores of the Spanish Crisis

Abstract
The full story of the financial crisis of 2007–2017 is long, bleak and quite possibly unfinished, and it involves a large cast of characters, chief among them the managers and executives responsible for the organizations that failed. However, others also played key roles in Spain, some of whom were decidedly unsuccessful in their actions, including:
Aristóbulo de Juan

Backmatter

Additional information

Premium Partner

    image credits