“15,000 million euros to restructure the Spanish banking sector are perfectly assumable”, states an ESADE expert

The Director of ESADE’s Master in Finance, Jordi Fabregat, recommends that Catalan savings banks speed up its transformation into private banks in order.

CNA / Àlex Recolons / Josep Ramon Torné

March 12, 2011 03:02 AM

Barcelona (ACN).- The Bank of Spain issued yesterday the amount Spanish banks would need to strengthen their ‘core capital’ and meet Basel III rules as well as the tougher new Spanish legislation on the sector. 15,512 million euros is the number. International investors and rating agencies speculated weeks ago on the amount, ranging from15,000 million euros to 40,000 millions. Investors speculated that Spain would not be able to face these requirements, a hypothesis that mirrors the Irish case and, in particular, benefits their speculative interests. Jordi Fabregat, from the prestigious business school ESADE, thinks that the 15,512 million euros are not a problem for Spain’s economy. Fabregat, who is the Director of ESADE’s Master in Finance, told CNA that the amount is “less than what he expected”. In addition, he emphasised that the amount “is perfectly assumable”. Moreover, Fabregat explained that this amount might be reduced, as many of the financial entities will start trading in the stock exchange and might get capital from there. Fabregat stated that Moody’s down-rating of the Spanish public debt is due to the general economic situation, more than the Spanish financial sector’s situation. He recommended the Catalan savings banks continue their efforts to increase their ‘core capital’ and speed up their restructuring into private banks.

Jordi Fabregat said that the Spanish Restructuring Fund for the Banking Sector (FROB) already gave 11,000 million euros for the first savings banks mergers in 2010. The FROB was created by the Spanish Government in coordination with the Bank of Spain. This amount and the current 15,000 millions represent 26,000 million euros, a much smaller quantity than the FROB’s limit, which is 99,000 million euros. Fabregat underlined that the banking sector will very likely not need to borrow the 15,512 million exclusively from the FROB, as “many entities will start trade in the stock markets or they will look for other sources of funding”.

The ESADE expert also stated that it is “surprising” that the same day this amount is known, Moody’s down-rates the Spanish debt. “Certainly, what an external audit evaluates is the Spanish economy’s growth in general terms”, more than the situation of the financial sector, he explained. “In addition, the generalised need to look abroad for credit may worsen the difficulties to get this foreign credit” if many entities do so simultaneously, he added.

“Convinced” about a tax increase if the deficit is not reduced

The ESADE professor thinks that “it is essential to reach the objective to reduce the percentage of public deficit over the GDP”, which already decreased from 11 to 9%. Fabregat thinks that “it is absolutely important to reduce it to 6% in this year”, in order to show that the State “is able to control its expenditure”. Fabregat is “convinced” that the Spanish Government will increase taxes if it sees meeting this objective endangered.

However, the economist said that “it is essential to realise that the Bank of Spain is being very tough and it is already demanding now requirements set in Basel III” that are foreseen to be implemented between 2013 and 2019 in the rest of the world. The difference between the 8% of ‘core capital’ required by Basel III and the 10% required by the Spanish legislation to savings banks “is logical”, according to Fabregat, “because the entities that depend on asking money to international markets or do not have shareholders, are limited to get money”. Thus it is logical they are legally obliged “to have more capital”.

“If they end up trading in the stock exchange market and they become regular banks, with shareholders that put money, they will only be required an 8%” of ‘core capital’, he explained. The clearest example is Bankia (the bank from the merger lead by Caja Madrid savings bank). When it will turn into a regular bank , “it will reduce its need for
capital from the current 5,000 million euros to less than 2,000 millions”. Many investors will put money into this as it will become a joint-stock company.

For Fabregat, “it is important to take these steps as the financial structure of a private bank is more logical”. The savings banks have “the difficulty” that they cannot access the markets as easily as they do not have shareholders and they can only access financial markets to issue debt. For this reason, “the most logical thing” for the Catalan savings banks to do is “create a bank and leave the rest of their activities such as the foundation and the social work in the hands of a savings bank”.

The other way out, according to this economist would be to get private investors entering into those savings banks, although this is “complicated” in the current circumstances. Fabregat advices to the savings banks obliged to turn into a private bank to “be transparent” and to adopt “technical decisions and not political ones”.

On the savings banks’ deadline fixed by the Bank of Spain for next 30th of September to reach the 10% of ‘core capital’, Fabregat indicated that “it never seems enough, although in this case it is enough”. However, Fabregat reminded that “trade unions and business associations were so shameless to be negotiating the labour market reform for 2 years”. The Bank of Spain fixed this deadline “because it is time to speed up things”, he indicated. In addition, there are a lot of loans that are expiring and need to be renegotiated.