Spanish banks in top shape or shaping up to topple over?

Escrito el 3 septiembre 2009 por Antonio Rivela Rodríguez en Uncategorized

It is widely believed that Spanish banks dodged much of the financial crisis due to better banking regulation. The argument is that Spanish banks were more prepared to handle the financial crisis due to rules introduced by the Bank of Spain like dynamic provisioning, basically having more capital reserves in boom times to pay for losses in down times. There are many articles written about this and how Spanish banks are strong in the face of the crisis, see Forbes: Spanish Banks in Top Form. As the article illustrates, BBVA and Santander beat expectations with considerable increases in interest income and more lending. In more recent news, BBVA acquired Guaranty Bank in the US, a deal arranged by the FDIC showing faith in BBVA´s financial health. BBVA’s expansion into the large US market shows their foresight to invest in a country that is rebounding from the recession. Furthermore, another sign of strength is the fact that Santander’s recent IPO of its Brazilian business, the largest IPO in Brazilian history, raised $4.6 billion making it one of the largest banks in Latin America’s biggest economy.

However, in the latest report published by Variant Perception titled Spain: The Hole in Europe’s Balance Sheet, they accuse investors who support this view of smoking crack! Notwithstanding the parlance used by the authors in this report, the findings are worth mentioning. They make the case that Spain’s crisis is more severe and that Spanish banks are more vulnerable to it than previously understood by investors. The report illustrates the severity of Spain’s economic crisis: Spain accounts for 30% of homes built in the EU since 2000, and only 10% of EU GDP; and it has as many unsold homes as the US, a country seven times its population. Outstanding loans to developers and construction companies are at $470 billion, (almost 50% of Spanish GDP) and most will go unpaid. With unemployment at 17% and growing, while Spain is showing signs of deflation means that this crisis will crush Spanish banks regardless of the extra provisions.

The report also accuses Spanish banks of taking advantage of recent changes in accounting rules to avoid posting losses; not marking loans to market because they own real estate firms and can manipulate appraisal values; and refinancing bad construction loans to 40 years at lower interest rates when it is known that these companies will likely fail. All this is to delay the inevitable effects of an economic meltdown in hopes that a turnaround will pull them out of this mess.

This report presents Spanish banks as risky when many investors and politicians think they are role models. Hopefully people won’t ignore the fact that Spain’s dynamic provisioning is still a good regulation that should be emulated in the rest of the world. However, neither extra provisions nor the banks growth internationally will be enough to save them from Spain’s economic disaster.

Article written by Brendan Quirk (IMBA – April Intake).


gmarris 22 enero 2010 - 07:34


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