Banco Central

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Banco Central

49 Alcala
Madrid 28014
Spain
532 8810

Public Company
Incorporated: 1919
Employees: 23,711
Assets: Pts4.90 trillion (US$43.25 billion)
Stock Index: Madrid Barcelona Bilbao Valencia London Paris Frankfurt New York Toronto

Banco Central was founded in Madrid on December 6, 1919 by the Marquis of Aldama, the Count of Los Gaitanes, and Juan Nunez Anchustegui. These businessmen realized that the economic growth of the post-World War I era would require financing—and could lead to profits. Banco Central quickly became a major actor in emerging industries, especially coal, iron and steel, shipping, and papermaking. In 1921, the bank made its first major acquisition, of Banco de Albacete, and by 1922, it had established 18 branches. Banco Central was on its way to meeting its goals of promoting industrial development and establishing a presence throughout the country.

Postwar economic nationalism led to similar expansion throughout the banking industry during the 1920s, but not all the expansion could be supported by Spain’s underdeveloped industrial base. When the U.S. stock market crash in 1929 led to a worldwide depression, Spanish banks were hard hit. Banco Central’s investments in heavy industry gave it a strong position, however, and it was able to continue its policy of growth through merger and acquisition by taking over some of its ailing peers.

Government measures passed in 1931 to meet the crisis in Spanish banking consolidated Banco Central’s position. Under the new laws, the Bank of Spain was made responsible for centralized banking functions and would no longer serve the public. This opened a new share of the market for other banks, and Banco Central moved aggressively to fill it.

Following the Depression came a new crisis for Spain. The Spanish Civil War pitted Loyalists faithful to the liberal constitution of the republic (which had replaced the monarchy in 1931) against Nationalists, who stood for Spain’s traditional identification as an autocratic Catholic country. The conflict devastated nascent industrial development and set back Spaniards’ hopes for a better standard of living. When Francisco Franco came to power in 1939, he faced neglected land that could no longer feed the people and severe shortages of raw materials, including fuel.

Many of Banco Central’s branches were located in the republican zone, subject to nationalist blockade. But under the bank’s new chairman of the board, Ignacio Villalonga, the bank consolidated its position to become one of the Big Five of Spanish banking after the war.

One reason for Banco Central’s growth was that its policy of acquiring or merging with other banking institutions was compatible with the tight new regulations on banking that Franco instituted in an attempt to put Spain back on its feet, in May 1940, Franco passed restrictions preventing banks from entering new areas of business. The only way for banks to grow under these restrictions was to acquire the existing operations of other banks, and Banco Central’s business investments gave it the ready money to do so.

The devastation left by the war presented the bank with many opportunities. Like other major Spanish banks, Banco Central created industries from the ground up, providing not only capital but also managerial expertise to run the new firms. The bank often gained seats on the boards of directors of the companies it financed. This close relationship between banks and industry led to a high rate of postwar industrialization, although Spain remained underdeveloped compared to the rest of Europe. It also solidified Banco Central’s position in the business world.

In 1958 and 1959 the Franco government took steps to improve the country’s depressed economic condition, joining the International Monetary Fund, the International Bank for Reconstruction and Development, and the Organization for European Economic Cooperation (OEEC). In 1959, with the help of these international organizations, the government set up a financial stabilization plan. The plan’s provisions included devaluing the peseta; limiting government spending; limiting both government and private credit, which had fueled inflation; improving tax collection; abolishing price controls; freezing wages; establishing higher bank rates; and encouraging foreign investment. In addition, the International Monetary Fund, the OEEC, the U.S. government, and a group of U.S. banks came up with $5.75 million in assistance.

In 1962 the reforms continued with the establishment of a new government department to plan and coordinate economic development, and laws reforming Spanish banking were passed in April and June that year. These laws nationalized and reorganized the Bank of Spain and gave all authority over currency and credit to the government. In effect, the reforms institutionalized the positions of the major Spanish banks.

In the new financial environment, Banco Central continued to concentrate on developing industries that could meet rising consumer expectations. During the 1960s, Banco Central created Saltos del Sil, a hydroelectric development in Galicia; Compania Espanola de Petrleos S.A., the first privately owned petroleum company in the country; and Dragados y Construcciones S.A., a leader in the construction industry. To comply with the new banking regulations, Banco Central also formed Banco de Fomento in 1963 to compete in the newly established industrial bank category.

By the end of the 1960s, analysts abroad referred to a Spanish “economic miracle.” A rising standard of living and increased opportunities for middle-class business ventures led Banco Central to offer more consumer services, such as credit and checking accounts.

Even so, by the beginning of the 1970s, Spanish banks were known for their conservative approach to doing business, the legacy of Franco’s restrictive measures. In comparison to other European banking systems, there were too many Spanish banks in proportion to the population. Spanish banks also had too many branches and their staffs were too large. Those weaknesses were demonstrated all too well when rising oil prices in the 1970s led to raging inflation and the collapse of many firms—along with the banks that had lent them money. To combat inflation, the government raised the bank rate to make it comparable to international rates, extended business access to credit, and eliminated legal restrictions between industrial and commercial banks.

Banco Central concentrated on “saving” other financial entities during this period by buying them up as they failed and making them part of the Banco Central chain. The bank doubled its number of operating offices between 1970 and 1975, bringing its total to over 1,000 offices. Banco Central also followed a strategy of financially supporting Spanish industrial capacity, which increased the bank’s influence in industry.

By the 1980s, Banco Central was the largest Spanish bank, but it was not considered flexible enough to compete effectively in the liberalized and internationalized Spanish economy of the post-Franco era since its longtime chairman, Alfonso Escamez (known as “the dean of Spanish banking”) refused to reduce his operating costs to become more competitive.

If Escamez refused to modernize, the Spanish banking community was not immune to the forces of change. As the gentlemanly traditions of the financial world crumbled in the face of the new need to compete effectively, cousins Alberto Alcocer and Alberto Cortina (los Albertos to the popular press) put their business acumen to work to challenge Escamez. From their base as operators of their wives’ construction company Construcciones y Contratas (Conycon) and executors of family money, the cousins began to buy Banco Central stock in 1988, eventually joining forces with the Kuwait Investment Office (KIO) for about a 12% stake. The cousins then demanded a managerial role in the bank and received five of the 24 seats on the bank’s board. They were determined to streamline operations and make it an international player. “We knew that the management of Banco Central was antiquated but we trusted our instincts, our people and management capabilities to improve it,” Cortina told the Financial Times.

Escamez, however, was furious, and determined not to allow control to be wrested from him by young businessmen with foreign money. He offered to buy them out. Failing that, he turned to another tactic, merger with Banco Espanol de Credito (Banesto) and its friendly chairman, the young Mario Conde, to offset the influence of his challengers. The new unit was to be named Banco Español Central de Crédito, and with consolidated assets of over Pts7 trillion (about $60 billion) it would have become one of the top 25 banks in Europe.

Forty-year-old Conde was new to his position (he became chairman in December 1987). Newsweek had described his appointment as “a changing of the guard ... in Spain’s financial community.” But Banesto, Spain’s second-largest bank, still represented old-line financial conservatism and family-oriented elite control, just as Banco Central did. Conde had taken over from 78-year-old Pablo Granica, who had followed his father in controlling Banesto. Both banks were seen as cumbersome and old-fashioned, without the flexibility to compete effectively in the new market that EEC membership would mean.

The planned merger also failed to stop the original impetus for it: the Albertos began to buy up Banesto stock so they would continue to have a voice in management of the new merged unit.

When the Albertos assured Conde that they would sell out of Banesto if the merger were called off, the nine-month-old plan came to an inglorious end. The Kuwait Investment Office sold its Spanish banking interests (and then invested in other Spanish industries). Cortina resigned from his seat on the board of Conycon in the wake of a scandal about an extramarital affair and was replaced by his wife. Conde was left to bring Banesto back to financial viability on his own, and Escamez was left back in control at Banco Central, with no successor in sight.

Banco Central has a long history of financing the development of Spanish industry and its name is one of the most prestigious names in Spanish banking. With a network of branches in 23 countries, especially Latin America, where it has traditional ties, it also has a strong international presence. But as full membership in the EEC looms, its history and size alone are not enough to ensure success. It will also have to take some difficult steps toward a more streamlined operation.

Principal Subsidiaries

Banco Popular Argentino; Banco de Valencia; Banco de Fomento; Banco Central of New York (U.S.); Banco Central Corp. (Puerto Rico); Banco de Asunción (Paraguay); Banco Central of Canada; Centrobanco (Panama); Banco de Granada; Banco Internacional de Comercio; Banco Gallego.