Spanish Banking Sector: A Period Of Recapitalisation And Clean-Up

Nearly six months after the European agreement on rescuing the Spanish banking system, the industry is moving into a new decisive phase. By approving their restructuring plans, based on a sharp reduction in the size of their balance sheets, the European Commission has authorised those Spanish banks in greatest need of capital to receive the necessary funds from the European Stability Mechanism.

At the same time, a few weeks after its by-laws were laid down, the acquisition of a majority of the capital in Spain’s ‘bad bank’ by private investors is a sign of the effective commencement of operations, and will trigger the transfer of problematic real estate assets from Group 1 Spanish banks, an essential precursor to the cleaning up of their balance sheets.

On 28 November, by approving restructuring plans for the 4 Spanish banks in Group 11, where the need for capital is greatest, the EC Vice President in charge of Competition Policy gave the green light to the first phase of recapitalisation of the Spanish banking sector, in accordance with the timetable drawn up by the Troika. This clears the way for the payment to the Spanish government of a sum of €39.5bn from the European Stability Mechanism. This payment is part of the €100bn credit line made available to the Spanish banking sector following agreement between the Spanish authorities and their European partners last summer.

This is an essential step along the road to cleaning up the Spanish banking sector. It comes alongside the creation of the troubled asset ring-fencing structure, SAREB4, whose byelaws were set out last month, but whose capital was only released on 12 December, which now makes it possible gradually to transfer “toxic assets” currently held on bank balance sheets.

Scale of recapitalisation revised downwards As expected, the final amount of the recapitalisation of Group banks is smaller than the requirements assessed by Oliver Wyman during its audit of the quality of real estate assets. In all, Group 1 banks will increase their capital by €37bn, €9bn less than the consultant estimated in its adverse scenario drawn up in September. This downward revision is due mainly to the “burden sharing”5 of investors in the Spanish banks receiving government support, which aims to reduce as far as possible the cost to the Spanish taxpayer. The holders of subordinated debt and preference shares of BFA/Bankia, NCG Banco and Catalunya Banc will therefore have to bear significant losses.

By Julie Enjalbert

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