How does banking contribute to the economy of a country?

Knowing how to manage online banking, being able to differentiate between a pension plan and an investment fund, or understanding the terms that make up a payroll are very useful knowledge to easily navigate today's world.

Thomas Osborne
Thomas Osborne
21 December 2022 Wednesday 00:40
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How does banking contribute to the economy of a country?

Knowing how to manage online banking, being able to differentiate between a pension plan and an investment fund, or understanding the terms that make up a payroll are very useful knowledge to easily navigate today's world. However, the field of finance is something truly more complex whose operation we do not always understand very well.

This can mean that, at times, we may have certain stereotyped visions that deviate from the important role that the banking sector plays in contributing to the progress of our society and in the general evolution of the economy. Many of the things that we take for granted today –such as monetary and financial stability or the security of payment systems and the economic transactions we carry out– are guaranteed precisely by the activity of banks.

The willingness to serve is in the banks' DNA. And a good example of its social function became clear during the crisis caused by the appearance of COVID-19. As Belén Díaz, PhD in Economic Sciences and Professor of Economics at the University of Cantabria, explains, at that time, “Spanish banks played a key role in maintaining thousands of jobs or in the survival of companies and businesses, thanks to its collaboration with the State through the ICO credit lines, which managed to alleviate the consequences of a period of extraordinary uncertainty”.

The presence of banks throughout the national territory, the capillarity of its network of branches and online channels, knowledge of customers and adequate risk management allowed Spain to launch one of the most ambitious financing programs in Europe. , at the toughest moment of the pandemic, thanks to which companies and the self-employed received a total of 140,000 million euros in financing through these lines of guarantees.

More recently, during the Ukrainian War, banks have also demonstrated their social commitment and willingness to help, deploying actions to provide humanitarian aid, alleviate financial costs for companies and individuals, and ensure rapid inclusion for those displaced by the war.

The latest example can be found in the protocol for mortgage measures that the banks have just signed with the Government, and which in practice is an extension of the Code of Good Practices, which seeks to alleviate the difficulties that many families are experiencing due to high inflation and rise in energy bill.

The banks are also committed to the financial inclusion of people who live in rural areas, with the recent agreement reached with the Ministry of Economy that guarantees, among other issues, that there is at least one point of access to face-to-face banking services in the 243 municipalities with more than 500 inhabitants that currently do not have any, or meeting the demand of the elderly so that they are not left behind in the unstoppable digital age in which we are immersed.

A good part of the somewhat skeptical vision that some sectors may have towards banks is motivated by complex situations experienced in recent years, such as the financial restructuring of 2012, the largest that banks have faced in the history of our country. .

The reasons were diverse, and originated with the bursting of the housing bubble that began in 2007, the fall of Lehman Brothers the following year, and the arrival of the euro crisis. Although the sector as a whole had to make important sacrifices, since the banks were in charge of facing part of the debt to help entities with problems. In fact, banks provided 25,000 million euros in aid for entities with problems, and the FROB provided net aid that amounted to 42,561 million, according to data from the Bank of Spain, after discounting 4,500 million recoveries and 9,500 million recoveries estimated by Bankia. .

For its part, the Credit Institution Deposit Guarantee Fund provided aid for 23,164 million, to which must be added another 2,600 million of capital contributed by the banks to Sareb, the so-called "bad bank", to which assets of entities with problems in the previous crisis.

Another myth that is worth dismantling is that of bank profitability. Contrary to popular belief, the banking sector does not usually produce large margins, despite working with large volumes. As Díaz points out, “there is no sector that is affected by both economic activity and banking”. Precisely the argument that banks are obtaining extraordinary profits derived from the rise in interest rates in recent months is what is being used to justify one of the most controversial issues recently: the bank tax.

In terms of corporate tax, this is the sector with the highest tax burden, with a rate of 30%, 5 percentage points above that applied to the rest of the business sectors, and even further from those of cooperatives (with a rate of 15%), Foundations and public utility associations (10%) and Investment Companies (1%).

In addition, the rise in interest rates is a monetary policy decision adopted by the central banks, while the entities are mere transmitters of said policy that can imply the cooling of the economy and have negative effects on the income statement of the banks.

These data reinforce the sector's position regarding the so-called "bank tax". For the Spanish Banking Association (AEB), this charge is "an error, since it can weaken the sector's ability to provide credit, something essential for prop up the economic recovery and create jobs”.

Beyond commonplaces, all these arguments confirm that banking is a truly strategic sector for the development of a country's economy, which contributes substantially to economic, productive and social progress. And it is that its mission to facilitate investment and safeguard savings aims to provide collective prosperity and guarantee the tranquility of citizens.