Eurozone: Bankia

25th May 2012

This is a moot point in several ways. Firstly Bankia is a bell-weather for the state of both the Spanish housing and its banking industry. Secondly it is another potential burden for Spain itself at a time when its burdens are rising and causing increasing concern. And thirdly it is an example of Spain's preferred "rescue" strategy of merging struggling cajas (savings banks) and in fact its creation involved the merger of seven of them.

What do you think Shaun?

Back in my article on May 8th I pointed this out about Bankia's situation:

"So Spain has a problem as everyone with any sense will realise that Bankia needs more that the 7 to 10 billion Euros of extra capital being mooted. even worse it will focus attention on the other Spanish banks which need capital."

This fed into a regular theme where nations bail out banks with as little as they can get away with rather than enough to fix the problem. We saw this happen time and time again in Ireland where every couple of months or so we got reports of a further deterioration. The errors in such a tactic are manifold as both their credibility and their reputation for honesty disappear southwards.

The Official View

Only on Wednesday in response to enquiries that Spain had still not specified how much the bail out of Bankia would cost her Finance Minister  Luis De Guindos told the Financial Times this:

"Bankia-BFA was a unique case in the Spanish financial system, because of its high market share, high exposure to real estate, higher than the sector average, and the capital it needed as result of the two [banking] reforms"

I am afraid the use of unique makes it sound like Anglo-Irish Bank. There are two main problems with doing such a thing. Firstly every one knows that Anglo collapsed and secondly that other Irish banks collapsed too as it proved to be an extreme case but not a unique one.

Echoes of Royal Bank of Scotland and a problem for bank shareholders

Bankia had a rights issue last summer as shareholders backed her with more finance. If we recall RBS having a large rights issue for shareholders (£12 billion if I recall correctly) and then collapsing only a few short months later I think you can see where I am heading. Indeed the conversion of state loans to equity raising Spain's stake to 45% has of course reduced the position of shareholders which will get yet weaker as more money is required. They have already lost around 55% of the money put in at the time of the rights issue.

Never Mind there is going to be an independent audit

Oliver Wyman and Roland Berger are going to lead an audit of the Spanish financial system. Let me give you an example of Oliver Wyman's work from 2006. This is about Anglo-Irish Bank (2010 loss 17.5 billion Euros):

"Business lending, its largest and most profitable segment, has grown by 38 % annually over the last 10 years. A centralized loan approval process has helped the bank maintain high asset quality and minimize the risks of portfolio concentration."

Unfortunately I gather that this report which declared Anglo-Irish to be the best bank in the world in 2006 somehow disappeared from their website so I am grateful to both FT Alphaville and whoever sent them a copy.

In my opinion Oliver Wyman after that report should be excluded from future work on bank audits not given it. It finds itself in a similar situation to the ratings agencies where catastrophic failure does not appear to be a barrier to future work. Indeed in something of a perversion of good business it seems to have encouraged new work.

How much will Bankia need?

Whilst Spain's Finance Minister was talking of 9 billion Euros only on Wednesday even the Vampire Squid (Goldman Sachs) estimated 13.5 billion Euros! And the latest estimates are for 15 billion Euros.

Continue reading…


More on Mindful Money:

Greece: can't pay/won't pay?

The Eurozone fear index: now is the time to panic

Europe's leaders talk of growth as Germany's stalls

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