By Tracy Alloway and Joseph Cotterill
Just how Basel III is Spain’s recently-announced bank recapitalisation plan?
Spain’s finance minister announced on Monday that Spanish banks would have to recapitalise by the end of September. Banks that don’t raise funds by the deadline will have to take their capital in the form of a forced (Frob) injection.
From Bloomberg:
Spain will also make banks adopt a core capital ratio, a measure of financial strength, of at least 8 percent, Salgado .. said at a news conference . Under the plan, core capital would correspond to the definition outlined in Basel III rules for 2013.
Questions over the size of the funds available have already been posed. But what about the type of capital? Is it really Basel III? Is the Frob injection really useful?
It seems — to start — there’s been some confusion about the Basel-ness of the proposed core Tier 1 ratio. Matrix analyst Andrew Lim, for instance, reckons the 8 per cent target is really being calculated on a far less-onerous Basel II basis, based on the this confusing email from Spanish bank BBVA’s investor relations:
During the Q&A session, a reference to Basel III was used by Ms Salgado in relation to this target. However, and this is probably where a lot of people is confused, the reference to Basel III was in relation to the definition of what is “core” capital (common equity, reserves and retained profits), as Bank of Spain’s current regulation does not have a definition for “core” capital (it is a Basel III concept).
In sum, there is no intention to bring forward the deductions and other impacts of Basel III. These deductions and impacts will be implemented and phased out from 2013 onwards like with the rest of our international peers.
A Spanish finance ministry spokesman said the situation was this:
…we are adopting with immediate effect Basel III assumptions for core capital as it will stand in 2013 everywhere, and we will update them along [with] the definition of core capital [as it] evolves through 2018, when all deductions take effect. Please note we assume 2013 Basel III definition, but go a step further in ratio terms, since we adopt 8%, compared to 3,5% expected in Basel III.
In other words, Spain is bringing the 2013 figures in this Basel III chart (via the Basel Committee) forward to now — click to enlarge:
Those deductions, as a hint of what’s to come, include things like preference (as opposed to common) shares, for instance. Ok.
But then there’s the question about the capital quality of any Frob injections.
The below is from UBS analyst bank analyst Matteo Ramenghi:
Last night Mrs Salgado, finance minister, set a minimum core capital ratio of 8% for Spanish banks (we understand under Basel II, not yet applying Basel III methodology) and indicated that the additional capital needed would be of up to €20bn. It is our understanding that FROB is being considered as core capital, while we would regard it as lower quality compared to pure equity.
The Frob capital injection comes in the form of convertible preference shares from the Frob, or Spain’s Fund for Orderly Bank Restructuring. As a reminder, the Frob itself has lending capacity of €15bn and can leverage itself to €99bn by issuing bonds — guaranteed by the Kingdom of Spain — to private investors.
And the equity it lends to banks really resembles more of a subordinated loan than actual loss-absorbing capital. What’s more, it pays a coupon and is excluded from core Tier 1 calculations under incoming Basel III rules for this very reason.
Did we mention the Frob is also backed by Spain?
It’s worth remembering at this point that most of the funding market’s concerns surrounding Spanish banks involve possible loan losses and the entwining of the banking system with sovereign funding. What the Frob injection does is actually strengthen that sovereign-bank loop while doing little to solve the loan loss problem.
We’re gonna reprise this bit of old caja-watcher commentary:
We don’t like the FROB restructuring given Spain’s economic predicament: putting bad banks together, even shored up with some extra capital, delays rather than fixes things – you just get bigger bad banks. With no balance sheet growth, banks cannot grow out of their problem loans, so instead you get deleverage and death by a thousand cuts, with the government eventually taking equity control when preference shares can’t be repaid in 3 years time.
The recapitalisation is also a pretty obvious signal that Spain is seeking to solve its banking system problems with itty bitty baby steps; an Frob loan here, some revised accounting rules there. Will that be enough to satisfy a nervous funding market?
And wouldn’t investors rather see a big push for clarity on loan losses (or even better — a full-on asset clean-up) and then some major recapitalisation?
We think so.
Related link:
Full Spanish banks coverage – FT Alphaville