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Corporate information 24 Feb 2017

A Brief History of BBVA (VIII): The banking sector in a divided Spain

The political climate before the civil war was anything but peaceful. The differences between the buoyant conditions in cities and the complex socio-economic juncture in rural areas were substantial. The policies that the Ministry of Finance adopted, when not directly pointless, were mostly ineffective. All this notwithstanding, the government that emerged from the 1936 elections did not adopt a bellicose stance against the Spanish banking sector.

Spanish banks in the buildup to the war

A few months before General Franco’s coup, the total 115 banking institutions that operated in Spain, managed a combined loan portfolio of 8.6 billion pesetas. Banco de Bilbao, Banco de Vizcaya, Banesto and Banco Hispano, the country’s biggest lenders, held half of the aforementioned figure. Private banks were kept under tight control by the Higher Banking Council and the Private Banking Commissariat.

Spain’s banking industry depended, to a large extent, on the country’s economic situation. Much more than it does today, indeed. Banks had a tremendous importance in the national economy, especially after  the adoption, in the early 1920s, of the protectionist measures that virtually invited foreign banks to divest in Spain.

The increase in liquidity that took place during the last years of the Republic and the subsequent interest rate cuts that followed, resulted in a significant drop in the cost of money. This aspect, combined with a slowdown in industrial and mercantile investments had a sizeable impact on the banks’ balance sheets. Also, in 1935 capital levels in the most prominent banking institutions started dropping significantly.  This drop is better understood taking into account that three fourths of the banks’ equity were owned by small investors holding less than twenty shares. The stability of banks rested on the shoulders of these small investors and the socioeconomic situation in Spain, for them, was far from desirable in the months that led to the war.

The banking sector at the beginning of the two Spains

While the uprising of the so-called national front in July 36 split the country in half, the volume of economic resources that remained in the Republican side was vastly superior.

Madrid, Cataluña and the Vasquez Country, the country’s more relevant financial regions, along with their respective stock exchanges, remained under Republican control. As regards banking institutions’ figures, 65% of branches and three fourths of the country’s financial workforce fell on the side of the then-current legitimate government. 75% of the savings in Spain also remained under control of the Republic.

Banco de Bilbao in Calle de Alcalá, Madrid, during the civil war

Also, due to the outbreak of the war, banking institutions started failing to comply with all the legal requirements, such as holding Annual General Meetings or closing the balance sheets. The particularity of the new situation that had begun to unravel in Spain, banks started falling behind in complying with some of their legal obligations with customers, including the obligation to inform their investors.

The governing bodies of the banking system that had been established during the Second Republic remained in Madrid after the uprising. The Higher Banking Council, the Bank of Spain, and the headquarters of the largest banks remained under the area of influence of the Government that José Giral inherited immediately from Santiago Casares Quiroga.  One of the measures that affected banks the most, was the requirement to make drastic changes to their Boards of Directors. This measure was adopted for two different reasons. On the one hand, a large number of directors defected to the rebellious side, and, on the other, the government reshuffled all these governing bodies at will, replacing some board members with people of its utmost confidence.

Although the banking fabric in the territory under Franco’s control was significantly less developed,  authorities started working to seize control over it immediately. Leveraging the defection of the aforementioned bankers, they placed these individuals in key positions within the boards of directors of the regional banks in their territories, as well as of the branches they seized, which until then had belonged to the country’s leading banks, and which at that time remained in the Republican side.

The quick loss of many of its board members and top exectuvies struck a tremendous blow to the republican banking system. While many of these senior figures defected to the national side, more than a few of those that remained in smaller banks were ousted by the Workers’ Committees that seized control. In a matter of weeks, the situation at Republican banking degraded to a virtually unmanageable level, and, by October, Negrín was forced to introduce the figure of the Steering Committees. These bodies in each bank consisted of an official appointed by the Ministry of Finance, a representative of the shareholders, another representative of depositors and a fourth representative of the National Banking Federation. The republican government’s decision, which helped mitigate the scarcity of expert managers at least during the first months of the conflict, ended up being one the first of the countless measures that the republican was forced to adopt during the course of the civil war.

100 pesetas of 1936 issued by the National Bank in Burgos

On the opposing side, the financial system consisted of institutions such as Banco Pastor, Banco Herrero, Banco Zaragozano and Banco Castellano, along with the branches seized from the banks on the enemy zone. As the conflict wore on, and thanks to the sizeable inflow of defectors, the national side had no problem setting up alternative Boards of Directors for the institutions that had remained based in Republican soil. Thus, Banco de Vizcaya and Banco de Bilbao established their headquarters in San Sebastian and Vitoria, respectively. Banco Popular, Banesto, Banco Central and Banco Hispano also chose Vitoria, although Banco Hispano ended up establishing itself in Burgos, the city from which Franco’s government operated. Virtually all regional banks, however, refrained from relocating their original headquarters.

Despite the existence of a duplicity of Boards of Directors in the main national banks, Franco’s self-proclaimed government, unsurprisingly, only recognized as valid the decisions of the made by the bodies that operated on the national side.

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