spanish financial system: the rescue is almost complete

Spanish financial system: the rescue is almost complete

Ana Rubio. Head Economist. Financial Systems

XI Seminar of the Mortgage and Financial Sectors in Spain. Cesine

Madrid, 23 January 2014

Index

Section 1

Progress in the restructuring of the financial system Section 2

Credit: The road to recovery

Solution

Asset quality: real estate and others

Lack of differentiation between entities

Higher provisions, sufficient capital (severe stress test), Independent audits and transfer to Sareb

Stress test (capital needs identified at entities managing only 30% of total system assets), additional transparency requirements

Problem

Capital needs exceed the government’s capacity

ESM credit line is a credible backstop. Total injections of 5% of GDP (like UK), manageable burden for public debt

45 savings banks (cajas), with peculiar legal form

11 now, and 9 have become banks. New regulation of cajas removes political influence

Late reaction, in part due to institutional problems

Clarification and reinforcement of FROB-Bank of Spain functions. Regulation on crisis management, restructuring and resolution frameworks

The restructuring of the Spanish financial system is set in motion

The bulk of the problems were in real estate assets

In 2012 real estate exposures halved, and exposure by end-2013 is estimated to be

around EUR100bn

The worst-affected entities have transferred 90% of their assets to Sareb,

and are subject to restructuring plans

The system has almost finished cleaning-up real estate exposures, in particular the

sound entities

Real estate exposures net of provisions (EUR bn) Source: Bank of Spain

Balance-sheet clean-up has been focused on real estate assets

0

50

100

150

200

250

Dec-11 Asset salesand others

Transfer toSareb

ProvisionsRoyal Decree

Laws

Dec-12

Credits

Foreclosures

Only a limited part of the system is subject to restructuring

The stress test identified capital needs at entities that only represented 30% of the

system’s total assets

European regulation on public aid has made the process longer than in the US

The agreement regarding the end of the Spanish banking rescue is positive, and underlines that steps are being taken in

the right direction

Percentage of assets in entities under public aid or restructuring programme (%) Source: EU Commission

Valuation

Supervisory Risk Assessment to review key risks, including liquidity, leverage

and funding

Asset Quality Review (AQR) to analyze the quality of banks’ assets, collateral

valuation and provisions

Stress Test to examine the resilience of banks’ balance sheet to stress scenarios

In principle, details point to a balanced exercise with a wide enough scope

However, some issues require further clarification: bail-in, stress test procedures (end-January), publication of data so as to

replicate the exercise…

The exercise is pivotal to eliminate all concerns about the solvency of the

European banking sector

Composed of 3 pillars

Spanish entities went through a similar exercise during the summer of 2012, so no major surprises are expected

Spanish entities are ready for the ECB comprehensive assessment

Desirable solution

Complete the restructuring

Liquidate Sareb’s assets

Quick resolution of intervened institutions, as international experience shows that public banks

can be inefficient. Overcapacity is a concern

The sales should be gradual

Problem

Restore liquidity conditions Restoration of the interbank and wholesale markets, to break the vicious circle of banks and sovereigns.

Banking union is the way forward

The system does not need additional restructuring plans, but an efficient implementation of current plans is crucial

However, there are some pending issues

European banks: Average exposure to EU members Source: BIS Fuente: BIS

The crisis has caused a reversal of flows between EU member states, both core

and peripheral

There is still a vicious circle between sovereign and banking risks

ECB liquidity has replaced the interbank market and the monetary policy

transmission mechanism is broken

European problems persist: Financial fragmentation

0

100000

200000

300000

400000

500000

600000

700000

800000

Dec-0

5M

ar-

06

Jun-0

6S

ep

-06

Dec-0

6M

ar-

07

Jun-0

7S

ep

-07

Dec-0

7M

ar-

08

Jun-0

8S

ep

-08

Dec-0

8M

ar-

09

Jun-0

9S

ep

-09

Dec-0

9M

ar-

10

Jun-1

0S

ep

-10

Dec-1

0M

ar-

11

Jun-1

1S

ep

-11

Dec-1

1M

ar-

12

Jun-1

2S

ep

-12

Dec-1

2M

ar-

13

Jun-1

3

Core to core Core to periphery

-42%

-55%

• ECB direct supervisor of ≈ 130 banks from Nov 2014

• No details

• COM proposal on SRM: Jul 13

• Trialogue negotiations expected to finish by April-May 14

• New State Aid rules: Jul 2013

• ESM direct recapitalisation: final regulation pending

Single Regulation (EU 28)

Single Supervisory Mechanism, SSM (EMU)

Single Resolution Mechanism, SRM (EMU)

Single DGF (EMU)

CHALLENGES

SRM is the necessary counterpart to SSM

Any delay in SRM must be avoided, Council and Parliament have to overcome differences

A credible SRM needs a single authority and a single resolution fund

The legacy assets problem should be dealt with at a national level before the SRM

1

2

3

4

Banking union is much needed: the current fragmentation is incompatible with the euro

Index

Section 1

Progress in the restructuring of the financial system Section 2

Credit: The road to recovery

Some companies have run out of business, so they no longer have demand

for credit

This is a common pattern in Spanish crises, and investment is starting to

improve

The most promising sectors are those related to exports

There is asymmetric information: some clients have to resort to another financial

entity that does not know them

Projects have higher risk due to the economic situation

Financial fragmentation affects funding conditions. Regulation and supervision are

stricter

Credit Demand

Economic situation and uncertainty: Businesses are not investing

The restructuring affects a limited number of entities, which do not have access to

liquidity

What factors are affecting credit?

Credit to the private sector (% GDP) Source: ECB and Bank of Spain

Private-sector deleveraging is much needed

Private-sector leverage is excessive. Spanish levels are above those of EMU

Deleveraging will continue in terms of the stock of outstanding credit

Compared to EMU, the most significant differences are in real estate businesses and mortgages

8% 10% 6% 7% 7% 6%

30%

63%60%

28%38% 41%

40%

52% 46%

11%

41%

23%

33%

48%

41%

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

Dec-

00

Dec-

08

Sep

-13

Dec-

00

Dec-

08

Sep

-13

Spain EMU

Consumption Housing Businesses

Real estate businesses Rest of businesses

43%

Businesses

Spanish statistics on new loans include ‘novations’ (change of terms and

conditions), so refinanced operations are included

The forecast suggests that new lending may have bottommed-out in the first half of 2013. In the future

refinancing will play a less important role

Private-sector: new loans and repayments (Quarterly figures, EUR mn) Source: Bank of Spain and BBVA Research

The deleverage of outstanding credit is compatible with a positive flow of new credit

100000

150000

200000

250000

300000

350000

Mar-

03

Mar-

04

Mar-

05

Mar-

06

Mar-

07

Mar-

08

Mar-

09

Mar-

10

Mar-

11

Mar-

12

Mar-

13

Mar-

14

Mar-

15

Mar-

16

Mar-

17

New Business Repayments and write-offs

However, new lending will not exceed repayments until the end of 2015, so

private-sector deleveraging has to continue

Germany France Spain Italy

Commercial policy 1.66 -- -- --

ECB official rate 1.03 1.24 1.29 1.47

Spread 12 months (12m-Euribor) 0.59 1.21 1.6 -0.06*

Spread UEM (10y UEM-Euribor) 0.35 0.69 0.44 0.5

Spread sovereign (10y country-10y EMU) 0.17 0.46 1.22 1.05

CE Regulation 290/2009 0.15 0.54 -0.16 --

-- Does not differ significantly from zero

* Not significant at 20% confidence

Interest rates on new bank lending (%) (to non-financial corporations, less than EUR1mn, less than 1 year) Source: BCE

The price of credit is affected by the sovereign spread. The solution is

banking union

Determinants of interest rates on new bank lending (to non-financial corporations) Source: BBVA Research based on ECB and Bloomberg

The price of credit for SMEs is still higher in peripheral countries

2,0

2,5

3,0

3,5

4,0

4,5

5,0

5,5

6,0

6,5

7,0

No

v-0

8

Feb

-09

May-0

9

Aug

-09

No

v-0

9

Feb

-10

May-1

0

Aug

-10

No

v-1

0

Feb

-11

May-1

1

Aug

-11

No

v-1

1

Feb

-12

May-1

2

Aug

-12

No

v-1

2

Feb

-13

May-1

3

Aug

-13

No

v-1

3

Eurozone Germany France Spain Italy

No major surprises are expected in the comprehensive ECB assessment

and this is compatible with the flow of new credit to solvent demand

Banking union is the key to reducing the current financial fragmentation in Europe

spanish financial system: the rescue is almost complete

Economy & Finance