Juan Ignacio Sanz: "The taxpayer would notice the positive effects of creating a bad bank"

Recently the European Union has established new criteria to recapitalize banking. The total additional capital figure exceeds 106,000 million, of which 26 correspond to Spanish banks. Faced with this situation, the financial sector in Spain has put on the table the possibility of creating “a bad or toxic bank” financed by the State that brings together the dubious real estate assets that currently weighed the profit accounts of financial institutions. The professor of banking and capital markets at ESADE, Juan Ignacio Sanz, analyzes these two issues.

Why is it necessary to recapitalize European banks

European credit institutions have realized that they are heavily invested in public debt, something that was already alerted by some critical voices: the European Central Bank financed the banks and these, instead of giving loans to families and companies, bought public debt. And now they have realized that they have surpassed themselves. The Greek case has shown that public debt does not correspond to reality. For this reason, the European Union has demanded that banks increase the level of their own resources in order to increase their cushion and be able to face potential losses.

The EU has set the minimum level of maximum quality capital of banks at 9%. What does this figure refer to?
They are shares listed on the stock exchange.

Banks that do not reach this percentage, how can they attract more capital?
First, going to private investors, which is difficult at the moment, because if they find a private investor who wants to put money in their banks, they will demand a quota of political power superior to that represented by the capital injected; secondly, financing itself through the country’s own State, but the states are already quite overburdened with public deficit to be able to make contributions to the banks; and third, by using the European Financial Stability Fund.

And how is the European Financial Stability Fund financed?
As Germany cannot contribute all the surplus, there are other world states, especially China, but also Russia and Brazil, which have an interest in Europe being stable, so they would be willing to make an extraordinary contribution to guarantee the stability of the area euro.

Who sets the solvency criteria of banking

<br /><br />Who sets the solvency criteria of banking

The European Union, which does not mean that there are consultative bodies composed of specialists, such as the European Banking Association or the Bank for International Settlements, which are the ones that establish the technical criteria and inform the EU.

To what extent are Spanish financial institutions invested in public debt?
The large bank in Spain is fundamentally exposed to Spanish public debt and not so much to Greek and Italian. According to the stress tests of the month of July, BBVA had 55 million euros in debt; Santander Bank, some 46 million euros, and CaixaBank, close to 36 million euros. The financial entities with a high level of exposure to Greek public debt were the German ones, but they have started to get rid of it and now who has a higher volume of risk concentrated in Greece are the French banks.

This situation where does it place Spanish banks?
The doubts that have arisen about the Spanish public debt is what has made the Spanish financial institutions have required a tranche of the capital of the highest quality of 9%, they have been forced to compute with disabilities the volumes invested in Spanish public debt with a probability of loss. For its part, all the major Spanish banks have stated that they will not have problems to reach the 9% level and, even, some already have it.

What are the main problems of Spanish financial institutions to face the crisis?
One is shared with the rest of European banks by the simple fact of being located in Europe and invested in Spanish debt. The second problem is overinvestment in the real estate sector. In October, the Bank of Spain published the number of loans granted to the construction and real estate sector and this amounted to 420 million euros.

What percentage of these loans can be toxic

<br /><br />What percentage of these loans can be toxic

The Spanish Mortgage Association estimates that about 15% of the loans granted to the real estate sector are doubtful. To the extent that the real estate sector does not recover, banks will not collect the loans that have been granted to developers and builders, whether of finished developments, work in progress or land – whose value in the latter case is zero.

And what consequences can this have on the health of the financial system?
While these assets are in the balance sheets of financial institutions, they will have to continue making accounting provisions for late payment, which means that they will have to discount a percentage of their profit figure to cover these losses. It is a certainty that this will happen since the real estate sector will not recover, so the profit of the banks will be mortgaged in the coming years.

There is the talk of the creation of a “bad bank” that brings together all the toxic real estate assets. To what reference the term “bad bank”?
The State creates an entity that receives all dubious real estate assets. These leave the banks, which do not have to bear the losses due to late payment of these loans, which means a clean slate and a new account. For its part, the State receives the real estate assets and, in return, issues public debt to pay the banks for these assets: instead of paying them in cash, it offers them treasury bonds, which the banks will sell to their customers or charge for your interests

And what will the State do with the dubious assets?
During the duration of the crisis, they will be parked, outside the banking system, and will not continue to erode it. Obviously, they will cost us all money, but it is considered that this is better than keeping them in the balance sheets of the banks, because either the loans will not be paid and the banks will have to discount the amounts of the losses of their results, or they will have to sell assets

How much would the absorption of toxic assets cost the state treasury?
Nearly 100 billion euros, which amounts to 25% of the total portfolio of real estate loans granted.

How could it affect the rating of Spanish debt and public accounts?
The Spanish public debt represents 70% of GDP, about 700 billion euros. If we add the 100 billion euros that the doubtful assets would cost, the debt would be at 80% of GDP. They are not tremendistas figures inside Europe: the Italian debt represents 120% of the GIP and the Greek, a 160% of the GDP.

What effect would the creation of the “bad bank” have on the economy?
To the extent that banks begin to grant loans, the two beneficiaries would be companies and families. If the economy recovers, the State should start to enter more money with which to repay this increase in public debt.

Would the taxpayer understand that public money was destined to pay the doubtful assets of the banks?
More than understanding it, I think you would notice the positive effects of creating “a bad bank”. Other states have done it. The experience has been good. It was one of the first measures taken by countries such as France at the beginning of the crisis when the delinquency levels began to grow. On the other hand, Spain chose to endorse the international issues of banking.

If the Spanish government had created “a bad bank” before, would the Spanish economy have fared better?
Yes, because the situation now is one of continued erosion, of hundreds of thousands of loans that are financing mortgages granted to families and companies whose repayment capacity has deteriorated a lot.

If the banks with public money are bought for their toxic assets, why not forgive the debts contracted by families that can not pay the mortgage
Small businesses and families will wonder why they are so different from Greece, that half of the public debt is forgiven, while they have to continue paying their loans. But that’s how it is. On the other hand, banks are favorable to refinance everything. It is always better for a bank to extend the life of a loan instead of foreclosing and having to keep the home. To the extent that companies and families recovered again, the level of bleeding unemployment would fall, which is the main problem we have.