Download - Tano Santos National Banking
National banking in a monetary union: the case of Spain
Tano Santos
Columbia Business School
Columbia University
Columbia Business School
Introduction
● An overview of the Spanish banking sector in the context of the real estate bubble:
① Private credit in Spain: The time series and the cross section
• Growth of private credit: Luis’s presentation
② Spain: A “banking” economy
• Banks and Cajas: What were the cajas?
• The evolution of the aggregate balance sheets:
③ Policy responses to the crisis: Before and after the crisis
④ Going forward
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Columbia Business School
THE CREDIT CYCLE
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Spain: Credit: The long view
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Credit/GDP Trend
Credit to other resident sectors by credit Institutions (BE041301 ) as a fraction of GDP. Quarterly. 1974Q4 to 2010Q2. The trend is estimated with a backward MA-20. Source: Bank of Spain and INE
Tano Santos
Columbia Business School
Spain: Credit: The cross sectional view
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Germany Spain France Italy
Loans to other residents granted by monetary financial institutions as a fraction of GDP for Spain, Germany, France and Italy. Quarterly. Smoothed with an MA-4. 1998Q4-2010Q4. Data source: Eurostat
Tano Santos
Columbia Business School
THE SPANISH BANKING SECTOR
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The Spanish banking sector: A quick look
● The Spanish banking sector has changed enormously over the last 25 years as a consequence of the rise of the “cajas”
– Deposit institutions with all banking activities but owned by non-for-profit foundations
– Supervised by the bank of Spain
– Strong political connections: To a large extent some of them, not all, dominated by local political elites.
– Fundamental difference with banks:
• Corporate governance issues
• No mechanism for recapitalizations
● The cajas no longer exist!
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The Spanish banking sector: The rise and fall of the cajas
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Banks Cajas
Banks vs. Cajas: Assets of each of these institutions as a fraction of total assets of both.Banks (BE045101) & Cajas (BE046101 ) divided
by total assets, respectively. Monthly. January 1962 to September 2010. Source: Bank of Spain
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Banks Cajas
Banks vs. Cajas: Loans to the private sector by banks (BE041203) and cajas (BE041204) as a fractions of loans to the private sector by credit institutions
(BE041202 ). Monthly. January 1962 to November 2010. Source: Bank of Spain
Tano Santos
Columbia Business School
The Spanish banking sector: Cajas: The liability side
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Deposits Debt Capital, reserves & OBS
Cajas: Balance sheet – Liabilities as a percentage of total assets Deposits (BE046202; left axis), debt issued (BE046207; right axis), and capital, reserves and “obra benefica y social” (OBS,
BE046208 plus BE046209; right axis ) as a percentage of total assets (BE046201). Monthly. MA-12. December 1962 to September 2010. Source: Bank of Spain
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Columbia Business School
The Spanish banking sector: Credit institutions: Wholesale funding
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Credit institutions: Debt as a percentage of total assets. Debt (BE04.2.7) as a percentage of total assets (BE04.2.1). Monthly: January1962 to January 2012.
Data source: Bank of Spain
Tano Santos
Columbia Business School
The Spanish banking sector: The asset side
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Credit institutions: Loans to construction and real estate developers as a percentage of loans granted to firms
(BE4.18.4 plus BE4.18.10 divided by BE4.18.1) Quarterly: 1998Q4-2011Q4. Data source: Bank of Spain
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Credit institutions: Real estate exposure Loans to construction companies, real estate developers and mortgages
as percentage of loans to the private sector (BE4.18.4 plus BE4.18.10 plus BE4.13.4 divided by BE4.13.1)
Quarterly: 1998Q4-2011Q4. Data source: Bank of Spain
Tano Santos
Columbia Business School
THE POLICY RESPONSE
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The policy response: Did Spaniards know about the bubble?
● The real estate bubble had been the focus of policy debates since the early 2000s:
① Fall 2003: Report from the European Commission alerting of the dangers of house appreciation in Spain
② Fall 2003, Rodrigo Rato, Spanish VPM, acknowledges that the housing market is overheated but that this did not mean a brusque adjustment
③ 2002-2003, several studies from the Bank of Spain pointing out that the housing market was overpriced between 8% and 20%
④ 2004: General election campaign rotates around the “bricks and mortars” growth model of the conservative party, in power until then.
⑤ Miguel Sebastián, future head of the PM’s economic office and M.A. Fdez.-Ordoñez, future governor of the Bank of Spain, write extensively in the press about the dangers of a brusque bursting of the bubble and its long run impact.
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The policy response: Before the crisis
● The Bank of Spain took some decisions prior to the crisis that were instrumental in the ability of the banking sector to withstand the first hit:
① Dynamic provisioning
• Banks had “generic provisions” of about 3% of GDP (€28bn) at the start
• Spain was unique amongst developed countries in this aspect
• Buffer: In the private sector and in the public sector (low debt/GDP)
② Off-balance sheet transactions
• The Bank of Spain successfully prevented banks from going “Citi” withstanding pressure from the large banks.
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The policy response: Before the crisis
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million €Total provisions Specific provisions General provisions
Provisions (in millions of euros) in Spain, 2000-2010: Total, Specific and General Source: Jesus Saurina, Bank of Spain, Working Macroprudential Tools; a presentation given at the 13th Annual
International Banking Conference, Chicago, 23-24, September 2010.
Tano Santos
Columbia Business School
The policy response: The crisis comes
● Some (contradictory) ideas have dominated the policy response:
① The taxpayer should not bear the burden of rescuing the banking sector
② Debt holders should not suffer losses
• Given the wholesale funding needs there was a fear that imposing losses to debt holders and the doubts about the extent of real estate losses liquidity would drain for the entire system
• Debt holders have yet to have a loss (except preferred)
③ The system, in the aggregate, was solvent:
• Once you include the ability to recap through retained earnings
• And the reserves that the system had accumulated
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The policy response: The crisis comes
● Given the assumptions, what was the strategy?
– Strong provisioning against P&L
– Mergers amongst good and bad financial institutions:
• Funded with loans from the public sector
• Asset protection schemes with some, minimal, “bad banks” created
– Limited recap efforts
– Losses borne by the FGD (Spanish FDIC): Socialization of losses amongst banks
● But, first, Fall of 2008 market dries up:
– Debt guarantee program
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The policy response: The crisis comes
● Throughout one has the feeling that the authorities felt that they did not have a “net:”
– All promises were fiscal in nature
– Were depositors going to get nervous in case of substantial losses by the FGD?
– If losses were to be imposed on debt holders, would wholesale liquidity disappear?
– If the FROB were to issue massively (up to maximum €100bn), would the market infer something about the extent of losses? Would the sovereign be affected?
● Still, there was a slow drift linking public and private balance sheets, which eventually limited the set of options available to policy makers.
● At some point thus the strategy started rotating around what could be funded, rather than funding the actual capital needs
– Stress testing without funds available compromises credibility
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The policy response: The crisis comes
● There are two responses to the banking crisis:
① Government:
a) Debt guarantee program: Approved in the fall of 2008 (RDL 7/2008)
b) Overhaul of the banking system to, effectively, do away with the cajas (RDL 11/2010)
c) Creation of SPV (the FROB) to lend and recap banks
d) Force credit institutions to recognize and provision for losses (RDL 2/2012)
② Bank of Spain
• Intervention and merger strategy: Incentivize mergers to avoid losses to the taxpayers (and debt holders)
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March-2009: CCM intervened by the FGD: Capital injection plus asset protection scheme; “good bank” sold to Cajastur
July 2009: RDL 9/2009 FROB1 created: An SPV created to channel public funds to aid the restructuring of the banking sector via debt
October-2008: RDL 7/2008: Debt guarantee program; Maximum size €100bn; Final date: 12/31/09; Renewed several times
May 2010: Cajasur intervened; Asset protection scheme granted by the FROB1; sole loss so far
July 2010: RDL 11/2010: Reform of the cajas; legal framework for recap and governance; cajas to disappear
Summer 2010: Amendment of accounting rules on loan write downs • Recognition of value of real estate collateral applying significant haircuts and acceleration of provisioning • Increased minimum provision for foreclosed assets
February 2011: RDL 2/2011 • 8% capital on RWA for banks (10% for those that remained cajas) • FROB2: The FROB can recap credit institutions in distress
July 2011: Compliance with RDL 2/2011 • Bankia, Caixabank and Banca Cívica IPOs to comply with RDL 2/2001 capital requirements • CatalunyaCaixa, Unnim, Novacaixagalicia, CAM request FROB2 assistance
July 2011: CAM intervened • November 2011: Sale to Sabadell; FGD: Capital inyection of €6bn
plus asset protection scheme; FROB: Liquidity
November 2011: B. Valencia intervened; FROB2 recap €1bn plus €2bn liquidity
December 2011: RDL 20/2011: New debt guarantee program; Max. €100bn
January 2012: RDL 2/2012: New provision and loan los recognition
March 2012: Unnim sold to BBVA for €1; Asset protection scheme
September 2011: Unnim intervened; FROB2 recap €953m
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The policy response: The timeline
Tano Santos
Columbia Business School
The policy response: The merger strategy
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Cajas: Loan-to-Deposit ratio for the top fifteen cajas by assets as of December 2009. Source: Citi “Spanish Savings Banks: Survival of the Fittest,” June 4th, 2010
Tano Santos
Columbia Business School
The policy response: The merger strategy
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Cajas: Loan-to-Deposit ratio for the top fifteen cajas by assets as of December 2009. Source: Citi “Spanish Savings Banks: Survival of the Fittest,” June 4th, 2010
Tano Santos
Columbia Business School
The policy response: The merger strategy
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Merger to create Bankia/BFA: Balance sheet >€300bn
Merger with Caja 3: Balance sheet €65bn
Merger Unicaja-Caja España: €80bn
Merger with Banca Cívica; absorption by La Caixa
Merger to create Novacaixagalicia Merger to create Mare Nostrum
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Columbia Business School
The policy response: Credibility
● The Spanish authorities faced credibility issues from the beginning of the crisis:
– Difficult inference for investors: Were the lack of loss recognition real, gambling for survival or simply that recognizing the losses would affect the sovereign?
● In addition authorities did not handle early interventions well sending mixed signals:
– Example: Caja Castilla-La Mancha (CCM)
• Intervened by the BoS on March 2009 after merger with Unicaja fell apart
• PwC did due diligence on behalf of Unicaja on the 2008 numbers and uncovered an equity gap of €3bn.
• NPL ratios jumped from 9.32% to 14.15% after intervention casting doubts on the numbers in the entire sector
• Intervention wiped out 90% of the funds at the FGD. Obscure sale to Cajastur.
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The policy response: Credibility
● The CAM (€70.8bn balance sheet as of December 31st 2011) as an example:
– Caja del Mediterráneo (CAM) was in the middle of the real estate boom
• Operations in eastern Spain
• Heavy political control by the conservative party in power in the region of Valencia for the last 20 years. Now also in power in Madrid.
– CCM: Castilla-La Mancha, socialist party, in power for 20 years too.
– 2010 stress tests: Evaluated as part of Banco Base, a merger encouraged by the Bank of Spain of good and bad cajas (Cajastur, C. Cantabría and C. Extremadura.)
• Capital needs: 0
– Banco Base falls apart in March 30th 2011: CAM is left “hanging”
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The policy response: Credibility
● April 28th 2011: CAM requests FROB2 recap. of €2.8bn to meet the RDL 2/2011
– With that recap, CAM below the 5% but not with the generic provisions
● July 21st 2010: Bank of Spain grants 10 days to CAM’s board to present a viable plan
● July 22nd 2011: CAM’s board requests the Bank of Spain intervention
– Recap of €2.8bn and €3.0 credit line
● NPL of CAM in 2011: 20.8%
● December 7th 2011: Sale to Banco Sabadell
1. FGD acquires 100% of CAM for €5,249bn for a posterior sale to Sabadell for €1
2. FGD grants a 10-year asset protection scheme to Sabadell to absorb 80% of the losses of a set of assets valued at €24.6bn, after provisions of €3.9bn.
3. FROB extends liquidity line of €12.5bn 26 Tano Santos
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The policy response: Credibility
ISIN Amount
guaranteed (€mill)
Interest (%) Issue date Maturity date
ES0314400096 1.500 3,125 26/03/2009 26/03/2012
ES0314400104 200 3,350 27/04/2009 27/04/2012
ES0314400112 73 Quart.: Euribor (3m) + 90pb 08/05/2009 08/05/2011
ES0314400120 1.000 2,875 14/05/2009 14/05/2012
ES0314400146 45 3,000 29/05/2009 29/05/2012
ES0314400153 136 2,875 19/06/2009 19/06/2012
ES0314400161 1.000 2.850 30/07/2009 30/07/2012
ES0314400187 1.000 3,000 12/11/2009 12/11/2014
ES0314400195 500 Biannual: Euribor (6m) + 33pb 01/12/2009 01/12/2014
ES0314400187 357 3,000 23/06/2010 23/06/2014
Total 5.811
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Caja del Mediterráneo: Debt issuance under the debt guarantee program Source: Tesoro Público
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Columbia Business School
The policy response: Credibility
● Loans to real estate developers kept growing and peaked in 2009Q2 at €324.6bn
– Real estate developer cycle difficult to stop
– At that time delinquent loans were “only”
€26bn
● These type of plots created some form of “ cognitive dissonance”
– How come the level was not dropping faster?
– What percentage of these loans were being
refinanced?
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Loans (in €bn) to real estate developers (BE4.18.10) and delinquent loans (BE4.18.21)
Quarterly: 1999Q1-2011Q4. Data source: Bank of Spain
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The policy response: Credibility
€66bn against P&L
€17bn against generic provisions
€22bn against reserves in restructuring
• There has been substantial write-offs
in the system
• Against reserves and P&L
• Total: €105bn
• There has been some injection of public
capital via equity & preferreds
• About €20bn
• Some private capital in the IPO of
Bankia, SEO of Sabadell, …
• But all in all little in terns of fresh capital
to absorb losses Write-offs: January 2008-june 2011 Source: AFI
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Columbia Business School
The policy response: Credibility
€mn %RWA
BFA-Bankia 4,465 2.3
NovaCaixaGalicia 3,627 7.2
CatalunyaCaixa 2,968 6.1
CAM 2,800 6.1
Banca Civica 977 2.2
Unnim 953 5.6
Grupo BMN 915 2.3
Caja España-Duero 525 2.1
BBK-cajasur 392 1.3
17,617
● The FROB has distributed relatively little to
institutions in distress
● The only loss so far are the €392mn on an asset
protection scheme granted to BBK when it took
over Cajasur
● Of the list there are two pending resolution
CatalunyaCaixa and NovaCaixaGalicia
● Banco de Valencia was intervened late in 2011 and
the FROB injected €1bn
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FROB injections up to November 2011
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Columbia Business School
The policy response: An evaluation
● Good things:
– Resolution of secular problems in the Spanish banking sector
– The cajas no longer exist
– Removal of political influence in the Spanish credit sector
● Spanish authorities have not succeeded in removing the doubts over the losses:
– Merger strategy made the problem of adverse selection worse making it difficult for private capital to come in.
– Wholesale funding is closed for most Spanish banks
– They are wholly dependent on LTRO liquidity
– Credit crunch: New credit down by 30% in 2011
31 Tano Santos
Columbia Business School
GOING FORWARD
32 Tano Santos
Columbia Business School
Going forward: NPL ratios: The aggregate picture
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NPL ratio: Private sector credit (BE4.53.12 divided by 4.53.1) Monthly: January 1970- February 2012
Data source: Bank of Spain
February 2012: 8.24%
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NPL ratio (%): Construction and real estate developers (BE4.18.15 Divided by 4.18.4 & BE4.18.21 divided by 4.18.10))
Quarterly: 1999Q1-2011Q4. Data source: Bank of Spain
Tano Santos
Columbia Business School
Going forward: NPL ratios: The aggregate picture
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NPL ratio: Mortgages (BE4.13.17 divided by BE4.13.4) Quarterly: 1998Q4-2011Q4 Data source: Bank of Spain
Tano Santos
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Unemployment rate (right axis)
Mortgages NPL, 1 year euribor and unemployment rate Quarterly: 2005Q1-2011Q4. Data source: Bank of Spain & INE
Columbia Business School
Going forward: Private estimates
● The private estimates of capital needs vary widely
● This creates enormous problems for the Spanish authorities who are left with little options: Either the satisfy the most pessimistic of the estimates or doubts will persist.
● There are challenges in estimating the extent of losses:
– A unique situation in Spain’s banking history
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Private estimates of recapitalization needs for the Spanish banking system. Source: “Spain: Stressed Out”, independent Strategy, April 2012
Tano Santos
Columbia Business School
Going forward: LTRO and the diabolic loop
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Credit Institutions: Assets (in €bn) other than shares issued by the public sector (BE4.4.4)
Data Source: Table 8.1.b Balance sheet Bank of Spain
Tano Santos
Columbia Business School
Going Forward: Options
● There are two options:
① Bad bank à la NAMA
• Example: Buy all real estate developer loans, mark them down by 60% (as in NAMA)
• This would provide capital relief from RWAs of €26bn
• Assuming Tier-1 targets of 9-10% leaves an estimated capital deficit of €60bn
• Other losses? Political problems (what about me)?
② Intervention of other institutions and creation of “several” bad banks
• Take on problematic systemic institutions, chop them off creating a very good bank that can attract private capital and a bad bank
37 Tano Santos