When Regulation Works

It's rapidly become a cliché to describe the current crisis as one of a lack of regulatory oversight. But amidst all the recriminations about how the financial sector should have had much tougher regulation, there's been precious little evidence that regulators are remotely capable of staying one step ahead of the banks they're supposed to regulate, or that hard-nosed regulation really can prevent a crisis.

So we all owe Gillian Tett for providing just such an example today: the Spanish central bank.

One key factor protecting Santander from some of the global woes is the tough approach that the Spanish central bank has taken towards regulating its banks in recent years.
Earlier this decade the central bank in essence decided it disliked the idea of banks keeping vast quantities of credit assets off their balance sheets. It also quietly demanded that banks hold higher levels of reserves than international accounting laws required.
Consequently, it furtively "gold plated" - or rewrote - European Union rules to discourage Spanish banks from creating entities such as structured investment vehicles (SIVs). And when banks such as Santander embarked on an acquisition spree in Mexico, the central bank reined them back.

Time to stop being furtive, Banco de España! You're the closest thing this crisis comes to having a hero. And I can think of quite a few people in Washington who might benefit greatly from a trip to Madrid around now.

Tett ascribes the Spaniards' position to the fact that the country had a nasty banking crisis of its own a couple of decades ago, very much within the working lifetime of today's technocrats. But there might be something else to it, too: could they have been so assiduous about regulation precisely because they were emasculated by EMU and the Euro and therefore lost their former primary role as the setter of monetary policy?

Incidentally, the governor of the Spanish central bank is Miguel Fernández Ordóñez. You knew that, right?

Update: Mark Stein made the same point yesterday.