Thursday, July 1, 2010

Spanish banks merging and restructuring

SPAIN will pump nearly $16 billion into problem savings banks amid intensified EU efforts to ease global fears for its banking systems.

In what could be a key step toward cleaning up a sector reeling from the collapse of a decade-long housing boom, Spain's central bank outlined details overnight behind a state-financed bank rescue fund that it said will support a “historic” consolidation of the country's savings banks.

This is, as I have said many times, long overdue, as it was clear to anyone on the Costa's, that there were far too many branches of far too many banks, all competing for the same business.

The Bank of Spain said it authorised injecting €11 billion ($15.8bn) in public funds to aid in the restructuring and bolster the balance sheets of the merged banks.At the same time, the European Union said it would triple the number of banks subject to public stress tests to allay a growing global anxiety over the bloc’s finance sectors.
The announcements came amid building market pressures on European banks. Bank shares have been sliding since April because of concerns that banks' holdings of sovereign debt may not be repaid in full and that government austerity will stifle economic growth and hurt private-sector borrowers.
banks, in particular, have been hard hit by concerns over how their European counterparts will fare after the European Central Bank this Thursday halts a special loan facility for euro-zone lenders.Overnight, shares of the two biggest banks, Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA, fell 6.8 per cent and 7.2 per cent, respectively, while those of smaller lenders also dropped sharply.The Bank of Spain also said that 39 of 45 savings banks, or cajas, are involved in mergers. The largest will combine seven institutions to create Spain's third-largest bank by financial assets after Banco Santander and BBVA.

Hopefully the mergers will also allow for some new lending poilicies and practices. Some kind of reform in the way Spanish mortgages work is also well overdue.

The central bank said its deployment of the €11bn in state funds would leave the Spanish financial system in “a solid and solvent position”.Meanwhile, European officials said the number of banks that would be subject to a European Union stress-test exercise will expand from the 22 big banks that were examined last year to include a further 60 to 120 banks.The tests will for the first time incorporate banks such as German Landesbanken, which aren't among the region's largest but whose possibly weak financial condition has created uncertainty in financial markets. The wider net means major banks from many EU countries that weren't included in last year's stress-test exercise, such as Ireland, will now be incorporated.The tests, designed to see whether banks have enough financial strength to deal with serious economic shocks, will also for the first time examine whether they can withstand the effects of a sovereign-debt default in the euro zone.Officials didn't identify what defaults would be contemplated. The question is sensitive because European governments have repeatedly insisted default by a euro-zone government is impossible.The tests, which are administered by national regulators, should be completed by the middle of July, officials said. A report with bank-by-bank results and details on the test's parameters will be published in the second half of July, they said.Last year's EU-wide stress tests covered a smaller swath of banks and only aggregate outcomes were disclosed. Unlike last year's US bank stress tests - which were credited with helping shake off worries over banks that had gripped financial markets - the European exercise wasn't used to mandate that banks raise new capital.This year, European governments say they are preparing plans to ensure that banks whose capital cushions fall short receive new capital. In Germany, for example, the government has vowed a vigorous examination of its banks and has signalled it stands ready to provide more capital if it is needed.“Given the current uncertainty in financial markets, more transparency can restore trust,” German Chancellor Angela Merkel said in an interview with The Wall Street Journal last week. “But building trust will only work if every country also shows how it will handle the results, for example by recapitalising its banks if necessary.”The decision to publish the EU stress-test results was made by European leaders at a June 17 summit, but they didn't agree on which banks should be included and what information would be publicly released.The resolution to include more banks was made last Friday at a meeting in Brussels that included officials from the ECB, the European Commission, the Committee of European Banking Supervisors and representatives of EU governments.Chantal Hughes, spokeswoman for EU internal markets commissioner Michel Barnier, said Mr Barnier had backed what she suggested were broader, tougher and more transparent stress tests, believing them to be “more rigorous and credible”.German banks are Europe's most exposed to bad loans, according to a study published this week by PricewaterhouseCoopers. About €213bn in non-performing loans was sitting on the balance sheets of Germany's banks in 2009, a 50 per cent increase over 2008, according to the study. German banks are among the largest holders of both commercial and private-sector loans issued in vulnerable countries such as Greece and Spain. Some are also exposed to the US and Eastern Europe.Spain's central bank, aiming to settle market disquiet about its banking system, forced the hand of other European authorities when it pledged this month to publish the results of stress tests on all its banks.Nonetheless, even with the Bank of Spain announcement, there is still considerable work to be done for the country's banks. Lenders need to cut some 50,000 jobs and close as many as 9000 branch offices to cut costs and adapt to an environment of much weaker demand for credit, according to an estimate by US consultancy McKinsey & Co.Two cajas have been subject to intervention since the beginning of the downturn: Caja Castilla-La Mancha and Cajasur. The first drained Spain's deposit-insurance fund of €3.78bn, while the state-financed bailout fund is providing €800 million to cover losses at Cajasur.Spain had already set aside €12bn in the bailout fund, and it can be leveraged up to a maximum of €99bn if needed.S&P credit analyst Jesus Martinez said the final sum drawn from the fund will depend on how the macroeconomic situation in Spain evolves, and how the individual merger processes evolve. “If problems aren't solved, more (than the €11bn) will be needed,” he said.In a related development, loan losses from the real-estate sector continue to pile up.S&P recently warned of a potential new wave of insolvencies among real-estate developers, leading to higher credit losses on lending to the sector.The latest big casualty, Sacresa SA, filed for protection from creditors in a Barcelona court on Monday, defaulting on €1.8bn in debt.

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