|Por Gaspar Ariño, de Ariño y Asociados.
After the extensive financial reforms, we have now entered a period of uncertainty marked by the creation of Bankia and widespread confusion throughout the sector. The President of Ariño y Asociados sets out to explain the process of change and the institutionalization of the savings banks, from their inception to the present day.
The main question that must be asked in light of the Bankia situation is: what has happened to oblige a 150 year-old bank with a proven business record to spend the last few months struggling for its survival – an attempt doomed to failure?
The importance of savings banks to the country’s economic and business development has become evident as the range and complexity of their business has grown. However, this expansion has also focused the spotlight on serious structural limitations that have brought them to the current situation.
In addition to internal conflicts, the savings banks have had to face problems of identity, legitimation of decisions, conflicting competences between central government and the autonomous communities, not to mention problems of capital adequacy and solvency. All this is exacerbated by the risk of their uncertain legal position, which has been seized upon by the political parties to finance not entirely sure-fire regional activities and investments in lean times.
The problem of the savings banks surfaced in 2008 when, despite the crisis, Spain’s commercial banks were all able to raise capital to a greater or lesser degree; while on the contrary, none of the retail savings banks succeeded in doing so.
In search of solutions
After some months of confusion, an agreement took shape to restore the savings banks to proper working order, focusing on three aspects: obtaining more capital and equity, reducing political presence on the governing boards and restoring the state's jurisdiction.
Discussions centered on the most appropriate corporate structure for this new phase of the savings banks. The option that received greatest support at the time was to make them into stock corporations along the Italian line. This option has proved successful in terms of return on capital and equity and capitalization, but it is possible that increased profits have been obtained at the expense of decreased provision of banking services to lower-income people and regions.
In order to meet a complex and varied future, the Law of 11/2010, on the institutional reform of savings banks, opted not to lay down one single institutional model and instead made provision for a certain margin so that each entity could choose the solution that best suited its situation: it would be possible to maintain the traditional structure (with certain mandatory changes), or lending activities could be kept segregated in a bank, with at least 50% of the capital being retained for both models. Another option was to completely separate the financial business from social projects, with the former activity being undertaken by a bank set up for that purpose, in which the savings bank would simply be another shareholder with a minority stake.
While this legislative undertaking was in progress, the Bank of Spain was promoting a restructuring process by means of mergers that were to strengthen the weaker savings banks. The SIPs (Sistemas Institucionales de Protección, or Institutional Protection Systems) were an intelligent solution to this situation, giving rise to the six (Bankia, Banco Base, Mare Nostrum, Banca Cívica, Caja 3 and Caja España-Unicaja, which is currently being set up).
The era of the commercial/savings banks
Although it remains to be seen whether all the mergers that have taken place will be successful, at the beginning of September 2010 it appeared that the foundations had been laid to start a new era for the savings banks.
The major obstacle that had to be overcome was the general distrust caused by the system as a whole, which was shown in an increase in Spanish risk premiums affecting both Government bonds and bank issues. This was why it became necessary to promote measures that would bring about a wholescale, structural reform. The intention was to achieve this with new transparency rules, new reorganizational measures and structural reform, which was to result in most of them becoming commercial banks. Law 2/2011 laid down a particularly strict and demanding system of capitalization for the savings banks: core capital of at least 8% of the total risk-weighted assets at any given time. This 8% is increased to 10% in the case of those entities that depend on wholesale finance markets to fund more than 20% of their assets and that have not been able to place at least 20% of their equity capital with private investors.
The reason for this measure was that it was not known with any certainty how many savings banks might be affected by the crisis and it was particularly necessary to furnish guarantees to the markets for those entities that had proved to be incapable of raising funds or were over-dependent on wholesale lending.
But who is going to invest in the commercial/savings banks in the current climate of crisis, when their new organization still has to prove itself? General opinion is that the markets will not be able to absorb the entire offer of savings banks in so few months. What is more, uncertainty remains regarding the proper functioning of these banking entities whose capital will continue to be owned as majority or significant shareholdings (at least for the time being) by the savings banks, being their parent companies.
Methods of private recapitalization are not looking easy, and the alternative is to nationalize them, reorganize them using public funds and subsequently sell them to one of the major commercial banks at the best price that can be achieved by auction or a similar system.
In the spring of 2010, when the renewal of these institutions was seriously discussed, everyone was aware of the need to institute profound changes, although this would not necessarily mean that they would become commercial banks.
It would have been possible to keep the savings banks if they had wished to do so, but both the Bank of Spain and the Ministry of the Economy considered it to be impossible to achieve the institutional reform of the Spanish savings banks under the old model, for two reasons: firstly, because they did not know how to get rid of the presence and influence of the political parties in their traditional structure; and secondly, because they also felt it was impossible to free them from the influence of the autonomous community authority that entailed a close bond with the region of origin.
The best way to free them from both influences was to ensure that they ceased to exist as savings banks or credit institutions (they could continue as charitable foundations) and to adopt the structure of nationwide joint stock companies. In this way it would be possible to present national and international investors with institutions that they could understand, opening the way to raising funds by issuing ordinary shares in a corporation.
In spite of all the progress and the changes achieved, the battle for the institutionalization of the savings banks is not yet over. The autonomous communities, especially those that are controlled by nationalist parties, have not yet surrendered, and this is a serious obstacle both for the Government, which often depends on the parliamentary support of these parties, and for the savings banks themselves, which continue to suffer under autonomous community laws that are frankly invasive.
The recent laws of adaptation passed by some of the autonomous communities following Royal Decree-Law 11/2010 still tread the same path, and the situation over the past few weeks continues to demonstrate that these autonomous governments are reluctant to leave the savings banks in peace.