Banking Law and Narrow Banking Proposals in Spain

1. Introduction

Narrow banking is a proposed banking model under which institutions accepting deposits would be substantially restricted in the risks they could take with those funds.

Under a strict version of narrow banking, customer deposits might be backed almost entirely by:

central-bank reserves;

cash;

short-term government securities; or

other exceptionally safe and liquid assets.

The basic objective is to separate the payments and deposit-storage function of banking from riskier credit creation and investment activities.

Spain does not currently maintain a distinct legal category called a narrow bank. A business wishing to accept ordinary repayable deposits generally enters the regulatory framework governing credit institutions.

The concept is nevertheless important to Spanish banking law because it raises fundamental questions about deposit protection, bank lending, financial stability, competition, payment institutions and the role of the European Central Bank.

2. Traditional Banking Compared with Narrow Banking

A conventional commercial bank generally performs two major functions simultaneously.

First, it accepts deposits.

Second, it uses a significant part of its balance sheet for lending and other permitted financial activities.

A simplified conventional model is:

Depositors → Bank → Loans and other assets

The bank keeps liquid resources but does not ordinarily keep every euro deposited permanently in cash or central-bank reserves.

A narrow-bank model would significantly change this structure:

Depositors → Narrow Bank → Central-bank reserves/highly safe liquid assets

Riskier lending would be financed separately through equity, long-term debt, investment funds or other sources.

The objective is to make transaction deposits less exposed to losses generated by risky lending.

3. Present Spanish Legal Position

The starting point is Law 10/2014 on the regulation, supervision and solvency of credit institutions, together with EU banking legislation.

Spanish law reserves important banking activities to authorised institutions.

The Banco de España explains that only licensed credit institutions are permitted to accept deposits or other repayable funds from the public.

Consequently, an ordinary company cannot create a product functionally equivalent to a bank deposit and avoid banking regulation simply by calling itself a technology company.

This principle would strongly influence any Spanish narrow-bank proposal.

A narrow institution accepting deposits would probably require either:

treatment as a credit institution under the existing regime; or

new legislation creating a specialised regulatory category.

4. Authorisation

Establishing a bank in Spain requires regulatory authorisation.

Under the current institutional structure, the Banco de España processes applications and submits the relevant proposal to the European Central Bank for authorisation of a credit institution.

Therefore, Spain could not necessarily establish a completely independent narrow-bank licensing structure without considering the EU banking framework and the ECB's supervisory powers.

A proposed narrow bank would need to answer a basic legal question:

Is the institution a credit institution?

If the answer is yes, ordinary banking authorisation, capital, governance, prudential and supervisory requirements become relevant.

5. Why Narrow Banking Is Proposed

Supporters of narrow banking generally focus on the mismatch between bank liabilities and assets.

Bank deposits can often be withdrawn quickly.

Bank loans, however, may remain outstanding for years.

This produces maturity transformation.

For example:

A customer deposits €10,000 and expects access to the money on demand.

The bank may use part of its available funding to support loans lasting ten or twenty years.

If an unusually large number of depositors demand their money simultaneously, liquidity pressure can arise.

Narrow banking attempts to reduce this problem by backing transaction deposits with extremely liquid assets.

6. Deposit Safety

One proposed advantage is stronger structural protection of deposits.

If €1 billion of transaction deposits were backed by approximately €1 billion of central-bank reserves or similarly safe liquid assets, losses on commercial loans would not directly threaten those deposits in the same manner as under traditional banking.

However, Spain already has extensive mechanisms protecting bank depositors.

These include:

prudential capital requirements;

liquidity requirements;

ECB and Banco de España supervision;

bank-resolution mechanisms; and

deposit-guarantee arrangements.

Consequently, the policy question is not whether today's deposits are completely unprotected.

It is whether structural separation would provide benefits beyond the existing regulatory system.

7. Deposit Guarantee System

Deposits held with authorised credit institutions are generally covered by an applicable deposit-guarantee system subject to statutory conditions and limits.

Banco de España specifically distinguishes genuine credit institutions from payment and electronic-money institutions on this basis.

A narrow-banking proposal could therefore affect the role of deposit insurance.

One argument is that extremely safe reserve-backed deposits might reduce the probability that deposit insurance would be required.

Another is that removing deposit insurance could itself reduce public confidence.

The design of any Spanish narrow-bank regime would therefore have to coordinate structural safety with existing EU deposit-guarantee rules.

8. Capital Requirements

Traditional banks require capital partly because their assets can generate losses.

Suppose a bank has:

Assets: €100 million
Liabilities: €92 million
Equity: €8 million.

The equity provides a buffer against losses.

A narrow bank holding mostly central-bank reserves would theoretically have substantially lower asset risk.

That raises an important regulatory question:

Should a narrow bank face the same capital structure as a conventional lending bank?

EU banking law currently uses sophisticated risk-based and leverage requirements rather than a separate Spanish narrow-bank framework.

Creating a special regime could therefore require amendments at EU as well as national level.

9. Liquidity Regulation

Modern European banks already operate under extensive liquidity requirements.

These include the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR).

Narrow banking goes considerably further.

Ordinary liquidity regulation effectively says:

Banks must maintain sufficient liquidity against foreseeable stress.

Strict narrow banking instead approaches:

Transaction deposits should themselves be backed by very safe and highly liquid assets.

The difference is therefore structural rather than merely quantitative.

10. Separation of Deposits and Lending

A strict narrow-banking system could divide financial activity into two institutions.

Institution A — Narrow Bank

It could provide:

current accounts;

payment services;

debit cards;

transfers; and

deposit storage.

Deposited money would primarily be invested in extremely safe assets.

Institution B — Lending Institution

It could provide:

mortgages;

business loans;

consumer finance;

project finance; and

other credit.

Its lending would be financed using capital, bonds, investment funds or other market funding rather than ordinary transaction deposits.

This structure attempts to protect the payments system from credit losses.

11. Spanish Specialised Lending Institutions

Spain already demonstrates that lending and deposit-taking do not always have to exist within the same institution.

Specialised lending institutions (establecimientos financieros de crédito) provide activities such as:

consumer credit;

mortgage credit;

credit cards;

leasing;

factoring; and

guarantees.

They cannot accept deposits from the public and therefore do not participate in the Deposit Guarantee Fund on the same basis as deposit-taking banks.

This does not amount to narrow banking, but it demonstrates that Spanish financial law already recognises institutional separation between lending and deposit-taking.

12. Payment Institutions

Payment institutions provide another important comparison.

Under Spain's payment-services framework, authorised payment institutions can provide regulated services such as:

transfers;

card payments;

cash deposits and withdrawals connected with payment accounts;

money remittance;

payment initiation; and

account-information services.

But they are not ordinary deposit-taking banks.

This creates something that resembles one element of narrow banking: payment services can exist without the institution becoming a conventional deposit-funded lending bank.

Nevertheless, legally safeguarded payment funds should not simply be confused with bank deposits.

13. Electronic-Money Institutions

Electronic-money institutions provide another partial alternative.

They can issue electronic money and provide associated payment services.

However, Banco de España emphasises that payment institutions and electronic-money institutions cannot take repayable funds from the public in the same way as credit institutions and are not covered by deposit-guarantee arrangements in the same manner.

Therefore:

Electronic money ≠ ordinary bank deposit.

A Spanish narrow-bank proposal would need to preserve this legal distinction or deliberately reform it.

14. Credit Creation

One of the most important criticisms of narrow banking concerns credit availability.

Traditional banks transform deposits into financing for:

households;

businesses;

housing;

infrastructure; and

investment.

If transaction deposits were prevented from financing lending, banks would need alternative funding.

This could include:

bonds;

equity;

securitisation;

investment funds;

long-term deposits; or

wholesale financing.

Depending on its design, narrow banking could therefore alter the cost and availability of credit.

15. Central-Bank Reserves

The strongest narrow-banking proposals rely heavily on central-bank reserves.

This raises a particularly important question for Spain because Spain belongs to the Eurosystem.

The Banco de España is Spain's national central bank, while monetary policy and significant parts of banking supervision operate within the euro-area institutional structure.

A private narrow bank therefore could not simply demand unlimited access to central-bank reserve accounts outside the rules governing eligible institutions and Eurosystem operations.

The legal architecture would need to determine:

eligibility for reserve accounts;

remuneration;

access conditions;

supervision;

collateral arrangements; and

interaction with monetary policy.

16. Effect on Monetary Policy

Narrow banking could change monetary-policy transmission.

Traditional banks respond to central-bank policy partly by changing:

lending rates;

deposit rates;

credit supply; and

portfolio allocation.

If enormous volumes of household deposits moved into institutions investing almost entirely in central-bank reserves, the relationship between deposits and commercial lending could change substantially.

For Spain, this cannot be considered purely as a national question because monetary policy is conducted through the Eurosystem.

17. Bank Runs

A central argument for narrow banking concerns bank runs.

Traditional banks cannot normally convert every long-term loan into cash immediately without potentially suffering losses.

Narrow banks would hold much more liquid assets against withdrawable deposits.

This could reduce the traditional liquidity mismatch.

However, it could also create another problem.

During financial stress, customers might rapidly transfer money:

Commercial banks → narrow banks

If narrow accounts were perceived as substantially safer, they could accelerate deposit outflows from conventional banks during crises.

Regulators would therefore need to examine both the stabilising and destabilising effects.

18. Competition

Narrow banks could increase competition in payments and deposit services.

A technology-focused institution could potentially provide simple accounts without maintaining a large lending operation.

Spain already has payment institutions and digital financial firms operating alongside traditional banks.

Banco de España nevertheless stresses that only authorised credit institutions may describe themselves and operate as banks in the legally relevant sense.

A narrow-bank regime would therefore require clear rules preventing customers from confusing:

banks;

payment institutions;

electronic-money institutions; and

other fintech businesses.

19. Resolution

EU bank-resolution law is designed partly around institutions that combine deposits, lending and other financial activities.

A pure narrow bank would have a substantially different balance sheet.

If assets consisted almost entirely of safe liquid instruments, resolution might theoretically be simpler.

Nevertheless, operational failures could still occur because of:

fraud;

cyber incidents;

governance failures;

payment-system disruptions;

legal liabilities; or

operational losses.

Narrow banking therefore reduces certain financial risks rather than eliminating institutional failure altogether.

IMPORTANT CASE LAW

There are not six Spanish judgments specifically deciding whether Spain should introduce narrow banking. The following cases establish legal principles that would directly affect any narrow-bank regime involving deposits, banking licences, supervision, consumer accounts and bank resolution.

1. Banco Español de Crédito SA v Joaquín Calderón Camino

Case C-618/10, CJEU, 14 June 2012

The case concerned a Spanish banking agreement and judicial treatment of an unfair contractual term.

The CJEU strengthened the requirement that national courts provide effective protection against unfair terms in consumer agreements.

Importance for Narrow Banking

A narrow bank would not escape ordinary customer-protection legislation merely because its assets were exceptionally safe.

Account agreements, charges and other customer conditions would remain subject to applicable banking and consumer law.

The case demonstrates that balance-sheet safety and contractual fairness are separate legal requirements.

2. Aziz v Caixa d'Estalvis de Catalunya, Tarragona i Manresa

Case C-415/11, CJEU, 14 March 2013

Aziz concerned Spanish mortgage enforcement and unfair contractual terms.

The CJEU concluded that Spanish procedural rules had to permit effective protection of rights arising under EU consumer law.

Importance

Narrow banking proposals often focus on institutional stability.

Aziz demonstrates that banking regulation must also protect individual customers.

Even a financially stable institution must comply with mandatory rules governing customer contracts and effective judicial protection.

3. Banco Primus SA v Jesús Gutiérrez García

Case C-421/14, CJEU, 26 January 2017

The case involved mortgage enforcement and accelerated repayment clauses.

The CJEU examined the ability of Spanish courts to review contractual provisions under EU unfair-terms legislation.

Importance

If narrow banks were permitted to provide any credit alongside payment services, lending contracts would remain subject to ordinary borrower-protection requirements.

More broadly, the judgment shows that reforming the institutional structure of banking does not replace contract-law safeguards.

4. Abanca Corporación Bancaria SA and Bankia SA

Joined Cases C-70/17 and C-179/17, CJEU, 26 March 2019

These proceedings concerned accelerated-maturity clauses in Spanish mortgage contracts.

The CJEU considered the consequences of unfair contractual provisions and the powers of national courts.

Importance

The judgment reinforces a general principle relevant to any proposed banking structure:

prudential regulation does not replace consumer protection.

A narrow bank could possess an exceptionally safe balance sheet while still facing legal liability for unlawful customer terms.

5. Banco Santander SA v Antonio Albás Sánchez and Others

Case C-598/15, CJEU, 7 December 2017

This Spanish reference concerned mortgage enforcement and protection available to consumers following enforcement.

Importance

The case demonstrates the importance of procedural rights within banking relationships.

If a narrow-banking model separated deposits from lending, lending institutions would nevertheless remain subject to legal requirements concerning enforcement and customer protection.

6. Banco Santander SA v Banco Popular Español SA

Case C-410/20, CJEU, 5 May 2022

This case arose from the resolution of Banco Popular.

Investors sought remedies connected with securities acquired before the institution entered resolution.

The litigation required the CJEU to examine the interaction between investor remedies and the EU Bank Recovery and Resolution Directive.

Importance for Narrow Banking

Banco Popular's failure is especially relevant to debates concerning banking structure.

It demonstrates why European banking law contains elaborate mechanisms dealing with failing institutions.

Narrow-banking advocates seek to reduce the probability that essential deposits and payment services become entangled with losses elsewhere on a bank's balance sheet.

The case does not establish that narrow banking is legally required. Instead, it illustrates the resolution problems that any alternative banking structure would have to address.

7. Banco Santander SA v Demba and Bonet

Joined Cases C-96/16 and C-94/17, CJEU, 7 August 2018

These Spanish cases concerned default interest and unfair terms in consumer lending.

The Court examined how national jurisprudence concerning disproportionate default interest interacted with EU consumer law.

Importance

The decision illustrates another distinction central to narrow-banking proposals.

A financial system may separate safe deposit-taking from lending, but the lending sector still requires regulation concerning:

pricing;

default;

transparency;

contractual fairness; and

enforcement.

Narrow banking therefore cannot replace the wider body of banking and consumer-credit law.

20. Possible Spanish Narrow-Banking Model

A hypothetical Spanish model could contain three institutional layers.

Layer One — Safe Transaction Banks

These institutions could:

accept transaction deposits;

provide payment accounts;

execute transfers;

issue debit cards; and

hold customer deposits primarily against central-bank reserves or highly safe securities.

Their lending powers would be severely restricted.

Layer Two — Commercial Credit Institutions

These institutions could provide:

mortgages;

corporate loans;

consumer credit;

project finance; and

other lending.

Funding could rely more heavily on long-term instruments rather than immediately withdrawable transaction deposits.

Layer Three — Capital Markets

Investment funds, pension funds, securitisation markets and institutional investors could supply additional financing.

Such a structure would represent a major change from the current universal/commercial banking model.

21. Advantages of Narrow Banking

Potential advantages commonly identified in the narrow-banking debate include:

Greater deposit security: Transaction deposits would have stronger asset backing.

Lower liquidity mismatch: Short-term deposits would not finance the same volume of long-term loans.

Simpler institutions: Deposit banks could have less complicated balance sheets.

Potentially simpler resolution: A reserve-backed institution could be easier to resolve than a complex universal bank.

Reduced risk transfer: Losses from speculative or risky credit activities would be less directly connected with transaction deposits.

However, these are theoretical or policy advantages rather than conclusions established by Spanish law.

22. Possible Disadvantages

A narrow-banking model could also produce substantial costs.

Credit could become more expensive.

Banks would need alternative funding for lending.

Financial activity could migrate elsewhere.

Risk may move from regulated banks into investment funds, private credit or other parts of the financial system.

Crisis flows could increase.

Depositors might rapidly move money from ordinary banks into narrow banks during financial stress.

Bank profitability could change.

Traditional banks earn income partly from transforming deposits into credit.

Monetary-policy transmission could change.

A very large reserve-backed sector could affect how ECB monetary policy reaches businesses and households.

Therefore, narrow banking redistributes financial risk rather than automatically eliminating it.

23. Narrow Banking and Digital Finance

Digital technology makes the concept increasingly significant.

A digital institution could theoretically provide customers with:

payment accounts;

instant transfers;

debit cards; and

mobile account access

without operating a conventional loan portfolio.

Spain already permits payment institutions to provide numerous payment services under Royal Decree-Law 19/2018.

However, Banco de España makes an important legal distinction: fintech firms providing payment services are not necessarily banks, and payment/electronic-money institutions cannot accept ordinary repayable public deposits like credit institutions.

Thus, technological similarity does not mean legal equivalence.

24. What Spain Would Need to Change

A genuine narrow-bank regime would require policymakers to resolve several major questions.

First, legislation would have to define what qualifies as a narrow bank.

Second, authorities would need to determine whether it remains a credit institution under EU law.

Third, rules would have to specify permissible assets.

Fourth, access to Eurosystem central-bank reserves would need to be determined.

Fifth, capital and liquidity requirements would need appropriate treatment.

Sixth, the relationship with deposit-guarantee legislation would have to be established.

Seventh, resolution rules would need adaptation.

Finally, authorities would need to address the consequences for credit supply and monetary-policy transmission.

Because Spain participates in the Banking Union and Eurosystem, many of these matters could not realistically be redesigned through Spanish banking legislation alone.

25. Current Legal Position

Under Spain's existing framework, narrow banking remains primarily a policy concept rather than a separate authorised banking category.

The current system instead distinguishes between:

Credit institutions — authorised to accept repayable deposits and engage in banking activities.

Payment institutions — authorised to provide specified payment services but not ordinary deposit-taking.

Electronic-money institutions — authorised to issue electronic money but not ordinary bank deposits.

Specialised lending institutions — able to conduct specialised credit activities but unable to fund themselves through ordinary public deposits.

These distinctions already produce partial functional separation, but none constitutes strict narrow banking.

Conclusion

Banking law and narrow-banking proposals in Spain concern a fundamental question: should safe deposits and payment services remain combined with commercial lending inside the same banking institution?

Spain currently follows the broader European model of regulated credit institutions rather than a strict narrow-bank system. Only authorised credit institutions may accept ordinary repayable funds from the public, while payment institutions, electronic-money institutions and specialised lenders perform more limited financial functions.

A genuine Spanish narrow-bank regime could require transaction deposits to be backed predominantly or entirely by central-bank reserves and other exceptionally safe assets while separating those deposits from riskier lending activities.

Such reform could potentially reduce maturity mismatch and isolate transaction deposits from credit losses. But it could also affect bank funding, credit availability, profitability, crisis flows and monetary-policy transmission.

The relevant case law—including Banco Español de Crédito (C-618/10), Aziz (C-415/11), Banco Primus (C-421/14), Abanca/Bankia (C-70/17 and C-179/17), Banco Santander (C-598/15), Banco Santander/Banco Popular (C-410/20), and Demba and Bonet (C-96/16 and C-94/17)—does not create a Spanish narrow-banking regime. Instead, these authorities demonstrate the surrounding legal requirements concerning customer protection, lending contracts, enforcement and bank resolution that any narrow-bank proposal would have to accommodate.

Therefore, the central legal point is that narrow banking in Spain is a potential structural reform, not an existing separate form of banking licence. Any comprehensive implementation would have to fit not only Spanish banking legislation but also the EU prudential framework, Banking Union, bank-resolution system and Eurosystem monetary architecture.