Spain’s Cajas to Reveal Real Estate Losses
The Bank of Spain is to force the cajas, Spanish savings banks to reveal the extent of their property losses. The thinking behind this move is the same as the thinking that prompted the stress tests in both the US and Europe; officials believe that these exercises will demonstrate greater transparency and assuage investor concerns about escalating loan loss estimates for loans not yet written down.
According to El Pais, Bank of Spain Governor Miguel Ángel Fernández Ordóñez will then force the weakest three cajas to become banks like BBVA and Banco Santander rather than savings banks (akin to savings and loans or thrifts in the U.S. or building societies in the UK like the former Washington Mutual, Dime Savings Bank, or Halifax). Government believes this will give these companies greater access to capital, especially foreign capital.
The government wants to avoid an Irish outcome in which the banks were bailed out by government, weakening government finances and bringing the country to a bailout and the brink of default (more on this later). It believes the transparency fostered by this process will help raise private capital and avoid this outcome. However, I believe this process will have the opposite outcome if done poorly and accelerate Spanish sovereign concerns.
The El Pais article states:
The key for the Government is to avoid a situation like that of Ireland , where the banking rescue ignited public debt and eventually put the country at the brink of insolvency.To this end, the Bank of Spain and the Executive consider it essential that the cajas get financing in the markets. They want to get private investors to provide capital cushions.That seems very unlikely at this point, at least at normal prices, as doubts about the cajas in the market are formidable. "Consequently, the Bank of Spain has rushed to accelerate reform of the sector, the conversion of the cajas into banks, and recapitalization measures that could partially open the door to investors," Alfonso Garcia Mora, managing partner of AFI, said.
Below is a Bloomberg video clip reviewing the Spanish property market and the reasons so many loan losses are expected.
Sources
- Fondos extranjeros acechan a las cajas – El Pais
- Ordóñez quiere que todas las cajas sean fundaciones – La Vanguardia
I doubt that it will work. All of the British building societies that converted to banks ended up having to be rescued or taken over.
The cajas will be found to be in an even worse state. The transparency will mean that they have to close many of them. Only a fool will want to put money into such a bank.
I doubt that it will work. All of the British building societies that converted to banks ended up having to be rescued or taken over.
The cajas will be found to be in an even worse state. The transparency will mean that they have to close many of them. Only a fool will want to put money into such a bank.
DavidLazarusUK,
Nationwide seemed to weather the crisis well, (but I may be wrong) would the cajas in Spain not have been following much the same business model as them?
I think the demutualised builiding societies went on to take large risks as banks that contributed to their need for rescue. Hasn’t the building society model proved pretty robust over the crisis?
Yes the cajas are similar to the UK mutual building societies, with a huge difference. Many were run by the local town or city government and there is a huge problem with political corruption. Many spanish mayors are resident in spanish jails for their involvement in property scams. There is one town where an English expat, became a councillor. Being a foreigner he was put in charge of the dog patrol. Though since the rest of the council are in jail he now runs the town single handed because the other councillors refuse to relinquish their seats. The town where my parents have a home, the mayor runs the council from jail. That broadly explains why the cajas are in such trouble.
The UK’s building societies were hit by the property crash and many had to merge with other societies or were taken over. The problem being the bank induced property bubble.
All the demutualised building societies were a disaster. They all ended up being taken over or going bust like Northern Rock. The mutual model has done very well considering the severity of the UK property crash.
If the banks had been banned from the residential property market as they had once before the property market would have been much more subdued. Isolating the property market from the wholesale markets and banks might be one thing that can both encourage savings, reduce bubbles and risks for all concerned. Then restricting mortgages to repayment only mortgages with fixed maximum leverage of 3.5 times a single income or 2.5 times two incomes, it would deflate the market, allow first time buyers to get aboard but would not allow house prices to get out of line with incomes. Housing is far too important to be speculated on. The UK government is currently paying billions in housing benefit for a property bubble that they created over the last thirty years. Deflate that bubble and housing benefit costs collapse reducing the deficit.
DavidLazarusUK,
Nationwide seemed to weather the crisis well, (but I may be wrong) would the cajas in Spain not have been following much the same business model as them?
I think the demutualised builiding societies went on to take large risks as banks that contributed to their need for rescue. Hasn’t the building society model proved pretty robust over the crisis?
Yes the cajas are similar to the UK mutual building societies, with a huge difference. Many were run by the local town or city government and there is a huge problem with political corruption. Many spanish mayors are resident in spanish jails for their involvement in property scams. There is one town where an English expat, became a councillor. Being a foreigner he was put in charge of the dog patrol. Though since the rest of the council are in jail he now runs the town single handed because the other councillors refuse to relinquish their seats. The town where my parents have a home, the mayor runs the council from jail. That broadly explains why the cajas are in such trouble.
The UK’s building societies were hit by the property crash and many had to merge with other societies or were taken over. The problem being the bank induced property bubble.
All the demutualised building societies were a disaster. They all ended up being taken over or going bust like Northern Rock. The mutual model has done very well considering the severity of the UK property crash.
If the banks had been banned from the residential property market as they had once before the property market would have been much more subdued. Isolating the property market from the wholesale markets and banks might be one thing that can both encourage savings, reduce bubbles and risks for all concerned. Then restricting mortgages to repayment only mortgages with fixed maximum leverage of 3.5 times a single income or 2.5 times two incomes, it would deflate the market, allow first time buyers to get aboard but would not allow house prices to get out of line with incomes. Housing is far too important to be speculated on. The UK government is currently paying billions in housing benefit for a property bubble that they created over the last thirty years. Deflate that bubble and housing benefit costs collapse reducing the deficit.