As you know, Spanish regulators did things the right way. In Spain, unlike the rest of the banking world, banks were required to maintain much higher capital ratios. And for the last 18 months we have been told that regulators should learn the lesson of Spanish banks. Governments have imposed the impossible condition on banks that they must be more risk averse, and maintain higher capital ratios, but at the same time lend more. In business, the biggest risk you can take in the long run is to not take risks. The move to make banks more risk averse poses a very real threat to future economic growth.

But, be that as it may, on Saturday the Spanish government was forced to bail out the savings bank CajaSur. It wasn’t quite a Northern Rock moment, there was no run on the bank. But Northern Rock proved to be a prelude of problems to follow. Markets fear it will be like that in Spain too. Peter Dixon, who is an economist at Commerzbank, said: “The concern is over the stability of the Spanish banking sector, as well as the wider lack of financial leadership in the eurozone countries.” The IMF didn’t help when yesterday it gave its grave warning on the Spanish economy, saying: “Spain’s economy needs far-reaching and comprehensive reforms. The challenges are severe: a dysfunctional labour market, the deflating property bubble, a large fiscal deficit, heavy private sector and external indebtedness, anaemic productivity growth, weak competitiveness, and a banking sector with pockets of weakness.”

If nothing else, the problems with the Spanish banking sector show regulation alone is not enough. It also illustrates again, just in case you need it spelling out, how dangerous property bubbles can be.

Click here for: Stock markets: is it like 2008, or just a case of springtime nerves?

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