http://www.forexcrunch.com/rumor-caixa-bank-is-on-the-edge/
One of Spain’s largest banks, Caixa Bank (also known as La Caixa) is rumored to be in dire economic straits. The institution is thought of as “too big to fail” and if its troubles are indeed confirmed, the 100 billion euros bailout may not be enough.
The situation could intensify if Greece elects an anti-bailout government on Sunday.
Caixabank recently acquired Banca Civica, made out of small caja banks, and perhaps this is what brought the bank to the edge. This is one of the reasons that rating agencies downgraded the bank’s rating.
Depositors have been withdrawing money from Spanish banks at an accelerated pace since the situation deteriorated in mid-May. The phenomenon is especially strong within Spain’s expat community/
John Ward reports about this rumor doing the rounds. Earlier this week, EU competition chief Joaquin Almunia said that one Spanish bank might close down. It seems he was referring to smaller banks.
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http://hat4uk.wordpress.com/2012/06/15/spain-crisis-exclusive-dash-for-banking-consolidation-a-recipe-for-worse-disaster-insiders/
SPAIN CRISIS EXCLUSIVE: Dash for banking consolidation “a recipe for worse disaster” – Insiders
La Caixa singled out as “heading for the rocks”
Playing with fire in Spain
Spanish banks have borrowed more money from the ECB than any other country – €227.6 billion. Between them, Spain’s three biggest banks Banco Santander, BBVA, and La Caixa, “have combined assets of about $2.7 trillion. Spain’s three biggest banks are nearly twice as big as the entire Spanish economy. Now it looks like the third of those is in dire straits.
A series of rushed merger deals in recent months has seen La Caixa grow in size but not in stability. This was a major consideration in persuading Moody’s to knock the bank’s credit rating down a whole five notches a month ago. But there are rumours today (Friday) that the institution may well be in much worse shape than either the markets or credit agencies realise.
By assets as declared, La Caixabank is the biggest of Spain’s recently downgraded banks: whereas Bankia weighs in at €318bn, Caixa is worth some €355bn. But under pressure from the Rajoy Government, for much of this year the bank has been taking over many local and national concerns large and small. And according to insiders there, the due diligence has not been all it might have been.
“We are buying some very bad books,” says one source, “purely to make things look better for market analysts and stress tests. But a lot of the time, we are buying danger. And every time the danger is covered up, it becomes more dangerous still.”
Says my usual source in Madrid (not himself a banker, but employed by various US institutions in an advisory capacity), “As I commented last year, the idea that critical mass makes collapses less likely is completely erroneous. Sure, there’ll be fewer of them – but so damn big that, when they happen, everyone panics. And of course, if you just buy anything regardless of quality because there’s a politician kicking your ass, well, it’s like accelerating when you see the rocks. Crazy, just crazy.”
Recently, a La Caixa Bank employee literally headed for the border and went to ground elsewhere after stealing around €1.2m from the bank. He left a wife and two young children behind. Every day, increasing numbers of ordinary Spaniards are withdrawing their funds.
“The bank’s hopeless position is well known by now,” says my insider, “but the Government in Madrid it makes the situation worse with all this pressure. Spain as a whole must now be helped, but everyone thinks there is not enough money to do this. We will see much more stealings and suicides before too long.”
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http://www.bloomberg.com/news/2012-06-14/the-eu-smiled-while-spain-s-banks-cooked-the-books.html
Only a few years ago, Spain’s banks were seen in some policy-making circles as a model for the rest of the world. This may be hard to fathom now, considering that Spain is seeking $125 billion to bail out its ailing lenders.
But back in 2008 and early 2009, Spanish regulators were riding high after their country’s banks seemed to have dodged the financial crisis with minimal losses. A big reason for their success, the regulators said, was an accounting technique called dynamic provisioning.
By this, they meant that Spain’s banks had set aside rainy- day loan-loss reserves on their books during boom years. The purpose, they said, was to build up a buffer in good times for use in bad times.
This isn’t the way accounting standards usually work. Normally the rules say companies can record losses, or provisions, only when bad loans are specifically identified. Spanish regulators said they were trying to be countercyclical, so that any declines in lending and the broader economy would be less severe.
What’s now obvious is that Spain’s banks weren’t reporting all of their losses when they should have, dynamically or otherwise. One of the catalysts for last weekend’s bailout request was the decision last month by the Bankia (BKIA) group, Spain’s third-largest lender, to restate its 2011 results to show a 3.3 billion-euro ($4.2 billion) loss rather than a 40.9 million-euro profit. Looking back, we probably should have known Spain’s banks would end up this way, and that their reported financial results bore no relation to reality.
Name Calling
Dynamic provisioning is a euphemism for an old balance- sheet trick called cookie-jar accounting. The point of the technique is to understate past profits and shift them into later periods, so that companies can mask volatility and bury future losses. Spain’s banks began using the method in 2000 because their regulator, the Bank of Spain, required them to.
“Dynamic loan loss provisions can help deal with procyclicality in banking,” Bank of Spain’s director of financial stability, Jesus Saurina, wrote in a July 2009 paper published by the World Bank. “Their anticyclical nature enhances the resilience of both individual banks and the banking system as a whole. While there is no guarantee that they will be enough to cope with all the credit losses of a downturn, dynamic provisions have proved useful in Spain during the current financial crisis.”
The danger with the technique is it can make companies look healthy when they are actually quite ill, sometimes for years, until they finally deplete their excess reserves and crash. The practice also clashed with International Financial Reporting Standards, which Spain adopted several years ago along with the rest of Europe. European Union officials knew this and let Spain proceed with its own brand of accounting anyway.
One of the more candid advocates of Spain’s approach was Charlie McCreevy, the EU’s commissioner for financial services from 2004 to 2010, who previously had been Ireland’s finance minister. During an April 2009 meeting of the monitoring board that oversees the International Accounting Standards Board’s trustees, McCreevy said he knew Spain’s banks were violating the board’s rules. This was fine with him, he said.
“They didn’t implement IFRS, and our regulations said from the 1st January 2005 all publicly listed companies had to implement IFRS,” McCreevy said, according to atranscript of the meeting on the monitoring board’s website. “The Spanish regulator did not do that, and he survived this. His banks have survived this crisis better than anybody else to date.”
Ignoring Rules
McCreevy, who at the time was the chief enforcer of EU laws affecting banking and markets, went on: “The rules did not allow the dynamic provisioning that the Spanish banks did, and the Spanish banking regulator insisted that they still have the dynamic provisioning. And they did so, but I strictly speaking should have taken action against them.”
Why didn’t he take action? McCreevy said he was a fan of dynamic provisioning. “Why am I like that? Well, I’m old enough to remember when I was a young student that in my country that I know best, banks weren’t allowed to publish their results in detail,” he said. “Why? Because we felt if everybody saw the reserves, etc., it would create maybe a run on the banks.”
So to sum up this way of thinking: The best system is one that lets banks hide their financial condition from the public. Barring that, it’s perfectly acceptable for banks to violate accounting standards, if that’s what it takes to navigate a crisis. The proof is that Spain’s banks survived the financial meltdown of 2008 better than most others.
Except now we know they didn’t. They merely postponed their reckoning, making it inevitably more expensive. Someday maybe the world’s leaders will learn that masking losses undermines investor confidence and makes crises worse. We can only hope they don’t manage to blow up the whole financial system first.
(Jonathan Weil is a Bloomberg View columnist. The opinions expressed are his own.)
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Ireland has this banking advice for Spain: imagine the worst and double it.
Like Ireland, Spain sought a bank bailout after being felled by a real-estate crash. Now, just as the Irish did, the Spanish are awaiting the results of outside stress tests gauging the size of the hole in the banking system.
Customers gather around a broken ATM, outside at a Banco Bilbao Vizcaya Argentaria SA (BBVA) bank branch in Madrid. Photographer: Angel Navarrete/Bloomberg
Customers stand in line and wait to purchase lottery tickets from a kiosk in Madrid, Spain. Photographer: Angel Navarrete/Bloomberg
Alan Ahearne, former special advisor to the minister of finance of Ireland. Photographer: Daniel Acker/Bloomberg
“Think of the worst possible scenario on banking losses: then double it,” said Eoin Fahy, an economist at Kleinwort Benson Investors in Dublin. “Adopt the most conservative assumptions.”
Nine hundred miles northwest of Madrid, Irish analysts wring three lessons from its own banking crisis, among the worst in history. First, quickly present an accurate estimate of the bad loans. Second, force banks to face up to losses, possibly through the creation of a so-called bad bank. Third, share as much of the loss as possible with bank bondholders.
“Spain should face the economic reality, even if they have to value property loans at discounts of 40, 60 or even 80 percent,” said Alan Ahearne, former economic adviser toBrian Lenihan, the finance minister who presided over Ireland’s response to the near-collapse of its financial system. “If the real losses aren’t faced up to, who’s that going to fool?”
Spain’s government already ordered banks to set aside provisions equivalent to 45 percent on the nation’s 307 billion- euro ($387 billion) book of loans linked to real-estate developers, Economy Minister Luis de Guindos said May 11.
Outside Audit
By bringing in outside experts to examine the banks, signs are that Spain is drawing some lessons from Ireland’s mistakes. After agreeing to a bailout of as much as 100 billion euros for its lenders, the Spanish government is awaiting the results of an audit of the banks by international firms Roland Berger Strategy Consultants and Oliver Wyman Ltd.
The International Monetary Fund, in a report released last week, said that Spain’s banks need at least 37 billion euros to weather a contracting economy.
It took Ireland 2 1/2 years after guaranteeing the financial system in 2008 to bring in outside experts to comb through the banks’ books.
In October of 2008, Lenihan called the Irish guarantee the cheapest bailout in the world, as the state had injected nothing into its lenders at that point. Two months later, he said the banks may need much as 10 billion euros. Two years later, the central bank ordered lenders to raise a further 29.2 billion euros. In September 2010, they needed a further 12.1 billion euros, as loans were sold to the country’s bad bank.
Lesson Learned
With bank costs escalating, investors shunned Irish sovereign debt and forced the nation into a bailout. As part of the rescue agreement, the central bank hired BlackRock Inc. (BLK) to assess the capital shortage at the banks. Based on those tests, the banks needed an additional 24 billion euros.
“Spain has learned one key lesson,” Fahy at Kleinwort Benson Investors said. “Bring in outside, completely independent people to assess the losses.”
Once the losses are quantified, Spain must consider how to deal with those bad loans. For now, Spain is sticking to propping up and restructuring failing lenders, defying some pressure from its aid partners to take more radical action.
Finnish Prime Minister Jyrki Katainen said on June 11 that Spain should split up some lenders, with some loans dispatched to a bad bank, as Ireland did.
Crystalizing Losses
On the advice of economist Peter Bacon, Lenihan decided to set up the National Asset Management Agency to purge its banks of about 74 billion euros of toxic real estate assets.
The agency paid about 32 billion euros for the commercial real-estate loans, crystallizing massive losses in the Irish financial system.
While the then-government originally estimated that banks would suffer an average 30 percent discount on the loans, by the time the final loans were transferred in 2010 the discount had risen to 57 percent. The capital holes were then mostly filled by the state.
“Conceptually, it’s still the best way of cleaning up the banks,” said Bacon in an interview. “I’m not sure about the Spanish banks, but if there is a credibility issue over their ability to manage risky property loans, than it’s probably better to remove them from their balance sheets.”
In theory, the removal of risky real estate loans freed the Irish banks to restart lending. In reality, that hasn’t happened, as banks hoard capital to guard against future losses on their souring mortgage loans and public funding markets remain closed.
‘Tread Carefully’
NAMA’s operations are also drawing criticism. Bacon said this week that the agency may be doomed to losses as the agency sells assets in a falling market. Irish commercial property prices have declined about 65 percent since their peak in 2007, according to Investment Property Databank Ltd.
“I’d advise that Spain tread carefully,” said Michael McGrath, finance spokesman with Ireland’s Fianna Fail, which was the main ruling party when NAMA was created. “If they set up a NAMA-type company, they may find a black hole that is much worse than they ever imagined, as was the case in Ireland.”
Once the losses and capital needs are known, the state needs to figure how to fill the holes. While the European Central Bank has ruled out imposing any losses on senior bank bondholders, the Irish playbook suggests junior bondholders may be at risk. In 2010, Ireland introduced emergency laws allowing the state to secure court orders to change the terms of junior bonds.
Bondholder Risks
In all, subordinated bondholders suffered about 15 billion euros of losses in Ireland, helped by the direct or threatened use of the new laws, due to expire this year.
Spain may be reluctant to impose losses on holders of junior debt. Bankia Group (BKIA)is among Spanish lenders that sold 22.4 billion euros of preferred stock to individual investors through retail branches, according to data compiled by CNMV, the financial markets supervisor.
Because of capital structure rules, these investors should be wiped out before losses are imposed on junior debt holders, a move Spanish Prime Minister Mariano Rajoy’s government may shy away from unless he introduces laws to protect them.
Other key differences between Ireland and Spain’s banking crisis are emerging, said Philip Lane, head of economics at Trinity College Dublin. Writing on the irisheconomy.ie website, he noted that real estate loans peaked at 77 percent of the Irish economy, compared with 29 percent in Spain. The Spanish bailout is also 9 percent of their economy, compared with 63 billion euros, or 43 percent, in Ireland.
‘Receding Horizon’
Yet the core issues are the same, according to Irish analysts, who expect Spanish banking woes to push the nation into a full bailout. Spain’s 10-year bond yield rose to a euro- era record of 6.998 percent yesterday. Ireland sought a full bailout when yields reached 7.99 percent on Nov. 19, 2010.
“Spain, like Ireland, has over the last few years been pushing through fiscal and financial reforms,” said Ray Kinsella, a professor of finance at University College Dublin. “But, like Ireland, it continues to chase a receding horizon in terms of banking stability. The situation continues to move ahead of the Spanish authorities.”
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