How Spanish banks’ equity dropped steadily since 1992

A recent working paper by Alfredo Martín-Oliver, Sonia Ruano and Vicente Salas-Fumás from the Spanish Central Bank nicely illustrates how equity of (Spanish) banks slowly melted away over the past two decade. In 1992 Spanish banks held on average 12% equity capital.  In 2007 only 5% remained (top graph). Unsurprisingly, the solvency ratio – which involves risk-weighted assets – dropped much less, from somewhat more than 17% in 1992 to roughly 14% in 2007 (bottom graph). The ratio of risk-weighted assets to total assets has been dropping steadily over the past two decades for banks from all countries, see my earlier post on this paper.

Interestingly, the paper also contains a lot of information on the distribution of equity, showing that bank equity levels have been converging. In 1992 the gap between banks with 10% highest equity level and banks in the 10% lowest categorie was more than 15%. In 2007 this gap was reduced to roughly 6%.