Until a year ago Spanish banking was internationally extolled as one of the world’s soundest systems. The strict control of the Bank of Spain, which required higher provisions (deposits to cover certain risks) than other countries, together with a fast growing, dynamic economy such as Spain’s, enabled the system to grow solidly. Banco Santander and BBVA are the world’s largest banks, with investments in South America, USA and China. Year after year, almost all the financial institutions obtained record profits. But lately concerns have been raised regarding the solvency of the system and 2010 looks set to be an extremely difficult year for Spanish banks. Could these critics be right? What has happened?
The feeling was that the US sub-prime mortgage crisis would scarcely affect Spanish investors, who were more conservative than those in other countries. The so-called “toxic assets” did not represent a significant problem for the Spanish system. However, the credit expansion in Spain, which was the result of the housing boom, together with a negative balance of trade, meant that Spanish banks were forced to obtain the money required to finance this credit on the international market. When the sub-prime crisis exploded, the world financial system reduced loans to a minimum. Due to lack of confidence, all the banks wanted to recover their loans and would not consider renewing them, resulting in Spanish banks having to face numerous debt maturities with foreign banks in 2009 and 2010. This caused a reduction in availability of loans for companies and private individuals as the banks main concern was to repay their own loans to foreign banks. But unlike other countries the provision of public funds to rescue Spanish banks was minimum. Credit did not flow, but the system remained sound.
So why are there concerns regarding the solvency of Spanish banks in 2010? Payment defaults. With unemployment of around 20% and after a real estate crisis, both private individuals and developers are increasingly unable to meet loans. But once again we must thank the Bank of Spain for its supervisory work in previous years. The provisions made by Spanish banks against defaults are the highest in the world (much was learnt from the previous crisis at the beginning of the 90s), and there is a high percentage of real guarantees (properties) for most of the loans. The banks will have to hold on to many properties and sell them, and the smaller banks, and especially the Savings Banks, will have to merge. In 2010 some institutions will experience specific problems, but the solvency and security of deposits is guaranteed.
