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The Caja problem: why Spain is in deep trouble


10:53 am - June 22nd 2012

by Frances Coppola    


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Ever since the financial crisis of 2008, there have been cries for large banks to be broken up. The idea is that no bank should be so large that it cannot be allowed to fail because if it did it would pose a threat to the domestic or international financial system.

So far no banks have actually been broken up, apart from some that failed in 2008 – Lehman and ABN AMRO, for example. But governments and regulators around the world have been looking at ways of limiting bank size and trying to ensure failed banks can be resolved quickly and safely.

Except in Spain.

The Bank of Spain took the opposite view. When Spain’s property bubble burst in 2008, many of the cajas lost huge amounts of money, leaving them seriously distressed or actually insolvent. The Bank of Spain’s chosen rescue strategy for these cajas is to merge them with other banks.

Bankia was such a creation. In December 2010 seven cajas merged to create the monster that is Bankia. All of the seven were in financial trouble and would probably have gone bankrupt due to bad property loans if the merger had not gone ahead. In July 2011 Bankia was floated. Foreign investors wouldn’t touch it, so the shares were mainly sold to Spanish companies and individuals.

It now appears that some of the cajas that merged to form Bankia were, shall we say, somewhat less than accurate in declaring the extent of their bad loans. Not surprisingly, the investors are furious. Private investors are currently pooling funds with the intention of pursuing civil action, and Spanish prosecutors are investigating whether the IPO was fraudulent.

Meanwhile, of course, Bankia has gone bust. But it is a large bank – the fourth largest in Spain in terms of assets. Its operations are too extensive and too critical to the Spanish economy for it to be allowed to fail.

Nor was Bankia the only monster the Bank of Spain tried to create. It also tried to merge the solvent Cajastur and two smaller cajas with the desperately troubled Caja de Ahorros del Mediterraneo, itself a sprawling conglomerate of twenty-seven smaller banks that it had gradually absorbed over the previous twenty years.

CAM was a non-profit-making organisation with extensive ties to the regional government of Valencia: the chairman of the board was personally appointed by the then President of Valencia, who was subsequently prosecuted for bribery, fraud and corruption.

There are other caja merger disaster stories too. Caja Unnim was created in 2010 from the merger of three cajas: it went bust in 2011, was nationalised and then sold to BBVA for 1 Euro. Catalunya Caixa, Spain’s fourth largest savings bank,  was created in July 2010 from the merger of Caixa Catalunya, Caixa Tarragona and Caixa Manresa: it was partially nationalised in 2011, as was Nova Galicia Caixa, created in 2010 from the merger of Caixa Galicia and Novacaixa.

The end result of this disastrous merger activity is that, according to the IMF, more than half of the large and medium-sized banks in Spain are now partially or wholly dependent on state support.

Only the three largest banks are both fully independent and well-capitalised. All the rest are either already nationalised, about to be partially nationalised (Bankia) or are likely to require partial nationalisation as economic conditions worsen.

How this can be regarded as an improvement on the previous network of smaller regional banks is beyond me. Smaller banks can be, and in my view should be, allowed to fail.

So the challenge for the EU and the IMF is how to separate the banks from the sovereign without causing terminal damage to both. Spain rightly fears the failure of its banks: but far more should banks fear failure of the Spanish sovereign, because if that fails they must fail too – and the rest of Europe with them.


A longer version of this post is at my blog.

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About the author
Frances is an occasional contributor to Liberal Conspiracy. She spent 17 years of her life working at a senior level in banks, but now is a professional singer, singing teacher and image consultant. She blogs here.
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Story Filed Under: Blog ,Economy ,Europe ,Foreign affairs

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Reader comments


With the way the Spanish banks were constructed, the Spanish banking crisis should be NO surprise to anyone: http://andreasmoser.wordpress.com/2012/06/13/spains-banking-crisis-is-no-surprise/

Can’t really disagree with any of this….

Too big to fail poltically motivated banks with huge undisclosed losses from a burst property bubble are Spain’s problem, though the sovereign itself isn’t totally fault free.

Ultimately this situation makes it impossible for the economy to really regain confidence, as no-one knows hte true position of lenders – and indeed is what the US did so well when it when through the early stages of the financial crisis. They took the pain early, foreclosing on properties desperately underwater, shutting down smaller regional banks who were effectively bankrupt and through the TARP program.

I would even suggest that the best solution for the euro crisis would actually be to write down and acknowledge losses, take the pain upfront, deal with the surrounding issues and enable the economy to move on and regain confidence rather than the current plan which is simply to ignore many of the fundamental and structural issues behind the crisis and kick the can down the road some more.

3. Luis Enrique

this is interesting stuff Frances

if you take 100 small banks and merge them into 5 big banks, these big banks may now be “too big to fail”, whereas a small bank could have been wound up without too much collateral damage. However, if your 5 big banks are insolvent because a very large proportion of the constituent 100 banks were insolvent, say 75 of them for example, I’m not sure any economy could tolerate 75 small banks going under simultaneously. So maybe Spain was buggered either way (although you are no doubt correct to say that trying to save the small banks by merging them together has not helped).

So whilst having a banking system constituted of lots of small banks is preferable to having a few large banks, for all sorts of reasons, such a system remains vulnerable to a wave of bank failures.

4. Luis Enrique

badly phrased ” I’m not sure any economy could tolerate 75 small banks …” of course the USA could because for them 75 small banks is peanuts. What I mean is I’m not sure any economy can tolerate a large chunk of its financial system failing, whether that large chunk is made up for a few big banks or lots of small banks.

“Only the three largest banks are both fully independent and well-capitalised.”

A very important point. Especially for those who argue that the UK should have regional, mutually owned, politically directed, retail banks (you know, nef, Compass, that lot).

Those three solvent banks are the shareholder owned banks.

Those cajas are the mutually owned, not for profit, politically directed, regional and local banks.

The proposed solution for the UK is exactly what we see failing in Spain.

It now appears that some of the cajas that merged to form Bankia were, shall we say, somewhat less than accurate in declaring the extent of their bad loans. Not surprisingly, the investors are furious. Private investors are currently pooling funds with the intention of pursuing civil action, and Spanish prosecutors are investigating whether the IPO was fraudulent.

IIRC the government initially blocked the investigation. *googles*

Attempts to investigate Bankia have been blocked by the People’s party in the national parliament and the Madrid regional assembly, but Spain’s attorney general has admitted that it is under investigation.
http://www.guardian.co.uk/world/2012/jun/08/spain-savings-banks-corruption

[Mr Rajoy’s] People’s Party has blocked an investigation of Bankia, which was run by managers the party appointed.
http://www.economist.com/node/21556953

7. Luis Enrique

I’m not sure whether merging banks makes it better or worse

on the one hand you are taking good banks and getting them into trouble by merging them with bad banks.

on the other hand, say the bad banks are insolvent to the tune of assets-liabilities=-X, so bailing out the system would cost X, then you merge them with good banks who are solvent to the tune of assets-liabilities=Y, then the cost of bailing out the system has fallen to Y-X

8. Frances_coppola

1 Andreas

I love that picture. The “leaning building” is so emblematic of the mess that Bankia is in!

2 Tyler

I agree. Bailouts don’t address the fundamental issues – they just buy time. The European banking system needs restructuring.

3,4,7 Luis

As a principle, merging failed banks with solvent ones is reasonable. But the extent of the caja consolidation, and the awful state of many of their balance sheets, turns a reasonable principle into a dangerous one. The bad banks overwhelm the good ones and both are brought down. Similar to Lloyds TSB being overwhelmed by the extent of HBOS’s losses.

Also, in Spain’s case, the principle of merging bad with good has not always been observed. The IMF report to which I linked noted that in some cases weak banks were merged with each other to create a weak mega-bank. They were undoubtedly referring to Bankia.

The cajas represent less than 50% of Spain’s banking system by assets. Again quoting the IMF, 47% is held by the three largest banks, which are not the ones in trouble (at the moment). I take your point about economic shock, but I can’t see that the cajas represent that sort of risk. Not all of them are or were in trouble.

6 ukliberty

Ooh, that’s interesting – I missed that! However, Bankia was a political creation. It’s not very surprising that the politicians stand behind it.

ukliberty picked one sentence, which may well be a slip, out of an article which describes how Bankia was formed and floated under the Zapatero Socialist administration. The PP currently controls Madrid but did not from 2004-8 when most of the bad lending occurred, so blaming Rajoy for the failure of the auditors and market supervisors under Zapatero is being economical with the truth.


Reactions: Twitter, blogs
  1. Liberal Conspiracy

    The Caja problem: why Spain is in deep trouble http://t.co/OoJeJ3s9

  2. Colin-Roy Hunter

    The Caja problem: why Spain is in deep trouble
    Las Cajas: por qué España tiene problemas graves.
    http://t.co/MXdxHQjS via @libcon

  3. Thomas Milman

    The Caja problem: why Spain is in deep trouble | Liberal Conspiracy http://t.co/x8nV7tKp via @libcon

  4. Jason Brickley

    The Caja problem: why Spain is in deep trouble http://t.co/jHxaKnBl

  5. leftlinks

    Liberal Conspiracy – The Caja problem: why Spain is in deep trouble http://t.co/dF1Yfsv7

  6. sunny hundal

    'The Caja problem: why Spain is in deep trouble' http://t.co/wep4SznZ – excellent explainer by @Frances_Coppola

  7. Frances Coppola

    RT @sunny_hundal: 'The Caja problem: why Spain is in deep trouble' http://t.co/yp54HwcI – excellent explainer

  8. Tim Coldwell

    RT @sunny_hundal: 'The Caja problem: why Spain is in deep trouble' http://t.co/yp54HwcI – excellent explainer

  9. Brian Myrie

    RT @sunny_hundal: 'The Caja problem: why Spain is in deep trouble' http://t.co/yp54HwcI – excellent explainer

  10. BevR

    The Caja problem: why Spain is in deep trouble | Liberal Conspiracy http://t.co/kg6pmYRK via @libcon

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