The slow death of the cajas

Ah, cajas de ahorros! The pain (in Spain) never seems to end for the country’s unlisted savings banks.

We’ve already noted how BBVA and Santander have started a race to the bottom in attracting new deposits — a race which the cajas seem set to lose, whatever it says about the Big Two’s funding needs.

The consequences for the cajas looked ever more grisly on Wednesday, especially as they set out to restructure after the end of Spain’s property boom.

Grisly to the tune of around half the 45 current cajas disappearing in two years, according to one caja chief, as the Spanish daily ABC reports (translation ours):

The former economy minister and current chairman of Caja Madrid, Rodrigo Rato, has predicted that by the end of the process of restructuring savings, which will finish in 2012, there will be only “between 15 and 20″ entities left in Spain…

…To get to 2012, the former minister estimated that financial institutions will need between 80 and 150 billion euros to adapt to the new regulation, if reservations placed on their risk assets (core capital) amount to 8%.

Hmm. That’s not such a slow death, frankly. More an expedited massacre.

Of course, Rato could well be telling the Bank of Spain what it wants to hear. The bank is rather keen to see more mergers among cajas, as its most recent financial stability report said.

Restructuring is getting to be urgent now, after all, as Dow Jones reports:

Spain’s ailing savings banks could hamper the country’s economic recovery prospects unless they are cleaned up and recapitalized very soon, bank executives said Tuesday.

The response has been too slow for some of the country’s bankers. About half the country’s savings banks are in merger talks but no tie-ups have been completed yet.

“Words no longer suffice. It’s time to act,” the head of the Spanish banker’s association, Miguel Martin, told a banking conference Tuesday focused on restructuring the country’s financial system.

The possible impact of Spain’s shaky savings banks on the broader economy has become a major cause of concern recently among investors in Spanish sovereign debt.

Well then, can they do it? We’re waiting to see how mergers among cajas would help with loan quality, which is the most important issue. Political patronage in the cajas may hold both mergers and loan improvement back — patronage which may be ingrained in cajas governors themselves, rather than governance, as this recent paper explores.

And as far as quality is concerned, troubled real estate assets probably haven’t even peaked yet as a proportion of lending — but surely a whole new wave would be set off if banks are too nervous to lend before then.

We’d also note that the lending shortfall is already being taken up by state-backed institutions, such as ICO. Not exactly the most kosher way to assuage Spain’s fiscal deficit concerns.

Something of a catch-22 all round, then. Or a catch-45, to be precise.

Related links:
Spanish banks face savings price war – FT
Spanish risk: let’s get regional – FT Alphaville
Bank of Spain hits at delays in cajas mergers – FT
Spanish banking pain, Caja Madrid RMBS edition – FT Alphaville

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