If we want more solvent banks these will give less credits, better to have it clear

The post following an interesting study. Since the beginning of the crisis, financial institutions throughout the developed world have had to be rescued. The fall in activity and the prices of assets have seriously damaged bank balance sheets, which have required multimillion injections of public or private money to strengthen their solvency positions.

The deterioration of the balance sheets has not stopped and the new international rules of Basel require entities to increase their solvency positions, precisely at a time when distrust of them is greater. Ok, we want to have stronger banks so that banking crises like those experienced since 2007 and up to now do not happen again. The problem is that these regulatory requirements are far from being aseptic and going free.

As this interesting study published by the Voxeu think tank shows, the demand for higher levels of capitalization in banks has a direct impact on the amount of credit they can grant. And it is that the solvency ratios (which are measured as the ratio of capital to the total balance sheet) can increase both by increasing the total levels of capital and reducing the total volume of credits.

It is a fact, the higher the capital requirement, the more the credit tap closes. The authors of this report by the Bank of England also reach this conclusion, according to which, “in response to higher capital requirements, entities gradually increase their capital ratios (…). The banks also reduce the growth rates of their loans, “they explain- find more information http://malaysiawm.com/dabbling-into-the-sarasota-real-estate-market-some-tips Malaysiawm.

It is precisely when reading this type of documents that one wonders if the authorities tell us everything they know when, on the one hand, they ask the entities to reinforce themselves and at the same time they demand that they grant more credits. It’s going to be that the two things cannot be.

Some special characteristics of future stress tests for European banks

At the end of this year, European supervisory authorities (EBA, ECB and European Commission, among others) will carry out a stress test on community-based banking. We have already told: We do not know if there are 50,000 million missing, 700,000M € or nothing is missing. It is, therefore, the first step necessary for us to see a European banking union, and be the ECB to go directly to supervise the major financial institutions of the continent. The objective of the stress test, like previous ones, is to determine the resistance capacity of a series of large banks according to hypothetical scenarios of deterioration in the future, although with the novelty that all the protocols and processes have been agreed upon and approved, in order that the tests are homogeneous in the face of international markets.

This Monday, the European Banking Authority (EBA) has issued a statement in which it provides new details on the characteristics of these stress tests. As a whole, the objective will be to evaluate in detail more than 50% of the financial system of each country (the percentage and scope are determined by each country, in collaboration with the ECB). #

The stress tests will reach, according to the EBA, the “highest levels of consolidation”. That is to say, entities will be evaluated as a group in its broadest sense. What does it mean? For example, Bankia will not be studied just as Bankia, but including its entire business perimeter (which has been called BFA-Bankia Group, which includes its parent company and other companies).

More news: Stress tests will help determine the “resilience” (ability to adapt to problems) of European banks “under a common methodology and adverse macroeconomic scenarios developed in cooperation with national authorities, the European Commission, and the BCE. ” They must be consensual and they will adhere to the 2014-2016 period.

Another change that may be key refers to the treatment “of positions held for sale”. That is those assets that financial entities intend to sell, and those that must be placed on the balance sheet at a market-adjusted price (the same is not true for shares that are not ready for sale, and their valuations do not have to be updated). Sovereign debt, one of the most important assets at the strategic level, must also be subject to stress (this, depending on how it develops, can be very hard depending on which banks) based on parameters that will be applied directly.

In addition, national authorities “may develop macroeconomic sensitivities and impacts of additional and specific market risks ” in the cases they deem convenient. The banks must send all these results to the EBA, which will publish them.

The objective of the entities will be to maintain above certain percentages of regulatory capital (the so-called Common Equity Tier 1) of 8% in the baseline scenario and 5.5% in the adverse scenario. The objective is to measure the ability of banks to remain solvent even in hypothetical macroeconomic scenarios with new falls in activity. Less is left…

The banks ‘too big to fail’: The most competitive, but also the ones that take the most risks

The Federal Reserve of New York has recently published a series of studies and reports focused on the analysis of banks too big to fail (TBTF, could be translated as “too big to drop”), and its effects on the market and the financial system in general. The results, although they are based on the American bank itself, seem to me of a global interest, since in Spain and in Europe we also have examples of those huge white banking whales.

The TBTF banks not only have the implicit (and explicit) support of the governments but sometimes even the regulators and supervisors themselves favor its creation, with all the risks of market capture and lack of competition that they suppose. This is the case, for example, of the Institutional Protection System (SIP) that gave rise to BFA-Bankia. With the tutelage of the Bank of Spain, seven Spanish banks in trouble ended up becoming a real financial monster that ended up being nationalized after an injection of capital of more than 22,000 million euros. Those that were serious but manageable problems ended up becoming a single gigantic problem.

In one of the most interesting papers published by the NYFED, the researchers find evidence that suggests that “those banks with stronger public support commit to more risky loans, which translate into higher impaired loan rates.” That is, the fact that a bank is so big that it knows it has the State’s ultimate support (because dropping it would be much worse) means that it acts more risky and irresponsible, which in turn sharpens the risk of some kind of rescue in the future.

If the problem is the excessive size of the banks, the solution seems easy, right? That the regulators partition them and that they are smaller by law. A moment, which is not so easy. Another study by NYFED analysts concludes that “there is a robust inverse relationship between the size of a bank and the scale of its operating costs.” In summary: That banks, the larger, are more profitable and more competitive, which translates into cheaper credit and potential greater competitiveness of the economy in general.

Along the same lines, the US banking association (which has the beautiful name of Clearing House) commissioned the consulting firm Oliver Wyman to prepare a report on the effects of size in relation to cost and financing. “The big banks had an advantage in the cost of financing more than 30 basis points,” the authors explain. That is, they can grant credit under more advantageous conditions. It sums up well the team of researchers of the New York FED in his blog: Having banks of a limited size does not come free.

Thus, we find ourselves with a paradox in which several opposing interests converge. On the one hand, imposing limits from the Government on the size of banks is not an aseptic measure. It has direct costs in a more expensive credit and in a less competitive financial system. But on the other hand, it is also against the taxpayers that the creation of large TBTF banks is favored, which end up taking great risks knowing that ultimately the Government has no other option than to rescue them. What a dilemma. How do we manage this crossroads?

[Edito]: Precisely on this issue of the banks TBTF wrote last Thursday Mayra Rodríguez Valladares, one of the greatest specialists I know in banking and regulatory matters. In an article published in American Banker, MRV recognizes that it has been analyzing for a year the different bills that have been proposed in the US to precisely put an end to the problem of banks that are too big. The best solution that has been found in the project HR2266, which basically would force banks with assets worth more than 500,000 million dollars to identify and preserve in their balance sheets “the portion of profits that is attributable to the subsidies they receive for the fact of being TBTF. ” This reserve subsidy would count as capital in case of insolvency, but would not be counted as regulatory capital of Basel III. That is, it would be a counterweight that would stop the incentive to grow disproportionately. Seems like a good idea.

Bankia case judge is now investigating the reformulation of accounts: A key moment

Judge Fernando Andreu, who directs the Bankia case in the National Court, issued a car last week in which he claimed an immense battery of documents, contracts, valuations, etc. The bulk of this documentary evidence is needed by the experts appointed by the Bank of Spain to assess independently whether the different actions that were carried out at the now-nationalized bank were correct or if there are indications of a crime.

Thus, Andreu has claimed all the documentation held by BFA-Bankia in relation to irregular operations that have been reported to the supervisory bodies or to the Anticorruption Prosecutor’s Office, as well as more details about the contracts of the Lazard consulting firm , and Excel files with all the provisions for insolvencies that the bank would have had to approve. Tons of information.

But I have been particularly struck by the fact that the Bank of Spain experts has asked for all kinds of documents (refinanced risk inventories, internal circulars, risks in the promoter sector, etc.) and a wide range of “detailed explanations” related to the reformulation of accounts approved by BFA-Bankia in May 2012. And it is that one of the key moments in the recent financial history of Spain is still largely unclear.

Recapitulemos: In April 2012, the scandal breaks because Bankia does not present its accounts with the corresponding audit report (which Deloitte should have presented). This incident triggered both a panic in the stock markets and the Bankia crisis, which would end the resignation of Rodrigo Rato and the arrival of José Ignacio Goirigolzarri. A few days after his arrival, Goiri carried out an unprecedented operation: Reformulates the accounts of BFA-Bankia corresponding to December 31, 2011. That is, the recalculates, and go from giving a profit of 309 million to losses of more than 2,900 million.

These surplus losses, which unleashed the panic in Bankia shares, were not the result of any hole, or misappropriation of funds from the former managers. It was simply a retroactive application of the decrees of banking sanitation of Minister De Guindos. To put it bluntly, all the brick held by the banks should carry with it a reserve of money, in anticipation of future losses. The rest of the entities began applying them throughout the year (hence the losses of the sector in 2012), but Goiri and his team, in conjunction with the Ministry of Economy (advised by Goldman Sachs), applied them retroactively. An unprecedented event in the history of the Spanish financial system.

The outbreak of losses generated, as I said, a banking panic and the flight of investors in Bankia, as well as the almost immediate disappearance of the old banks in BFA-Bankia. Another of its consequences was that it annulled the remuneration of BFA-Bankia preferred companies, which in turn sharpened the crisis regarding this financial product. Several former directors of the bank have been denouncing that the reformulation of accounts carried out by the new managers was irregular and that it did not comply with the regulations. Your argument: You can not apply accounting rules retroactively if you do not prove the existence of supervening events close to the period over which the accounts will be reviewed.

On the other hand, both the auditor Deloitte and BFA-Bankia have defended the reformulation as a purely legal operation. At the time, they already sent the CNMV an extensive report arguing why they had reviewed the accounts: They were referred to facts and estimates “supervening”. Anyway, I think it’s great news that Judge Andreu (and his experts) are interested in clarifying one of the most momentous events of the recent Spanish financial history. Hope events.

Layoffs, changes, and appointments in the new Bankia Risk Department
Airs of change in the Risk Direction of Bankia. In banking, and as its name indicates, these departments are in charge of evaluating the possible risks associated with each operation of credit, investment, etc. The importance of a good (and independent) risk department is maximum since its technicians are those designated to determine the convenience of one or another operation. Without the approval of Risks, no credit is given. The work of these departments has been especially questioned during the crisis, as the entities increased exponentially their investments in brick, promoters, etc.

The entity chaired by José Ignacio Goirigolzarri already initiated radical changes in July 2013, when it went on to unify the Risk and Recovery units in a single direction, which would depend directly on Juan Carlos Estepa, who would report to the CEO, Pepe Sevilla.

The new model, during the last months, has undergone profound changes, personified in its main responsibility, as they have indicated to this journalist union sources, and have been confirmed by the own entity. Thus, the former Director of the Risk Area at Caja Madrid and the Admission of Risk at Bankia, María Jesús de Jaén, has decided to “voluntarily” accept the employment regulation file that the bank is carrying out at central services (and that will mean a reduction of the staff of 400 people) and leave the entity in which it entered in 2007.

Another senior official, Ángel Luis Saiz de Moratilla, who until recently was in charge of the Wholesale Risks division, becomes the person in charge of the new Recovery Unit (the one that manages the delinquency of large companies). His position will be occupied by Manuel Galarza, “who comes from Participants, a section that was progressively running out of work, due to the sale processes of the bank (Indra, Inversis …),” Bankia sources point out.

What I do not understand about the sale of Bankia by the Government
On Thursday afternoon, just two weeks after a strategy was entrusted to Goldman Sachs and Rothchild, the FROB announced the accelerated sale of a package equivalent to 7.5% of Bankia shares held by the State. Said and done, the depositors (Deutsche Bank, UBS, Morgan Stanley and London Branch) have achieved 1,304 million euros after selling 863 million shares at 1.51 euros each.

The Government thus achieved what it intended: A coup d’état in the face of the European Elections, even at the cost of selling perhaps with some precipitation (we are still in the low part of the cycle, and the activity has not yet recovered). The message is now clear: When we arrived, the financial system exploded, but thanks to our reforms we have not only managed to restore confidence, but also return investors to the paradigmatic financial entity of this crisis.

The problem is that I, who am trusting by nature, cannot avoid asking certain things that I can not explain. We are told that investors have returned because the reforms undertaken have restored confidence, because the recapitalizations have been successful and because the new managers of the bank are taking the appropriate measures. I will not be the one to question it.

What I do not understand is what investors see that makes them think that they will make the investment in Bankia profitable. Since it was nationalized and José Ignacio Goirigolzarri entered, Bankia has gone from a default of 8.66% to one of almost double (14.65%). The entity has also lost business (since Brussels forces it to engage in retail banking in its territory of influence) and has had to get rid of crown jewels like Indra, Iberia, etc. These operations have mostly given capital gains, but in return, they eliminate a recurring source of income via dividends. Add to this the ridiculous margin of interest that banks can currently use due to the low ECB rates, as well as the flight of deposits and customers lived through 2012 and part of 2013. Also, add to the reputational and economic costs of arbitrations and several judicial fronts. A cocktail, which is not known to be less dangerous.

How is it explained then that an entity that has doubled its failed assets and that has lost the diversity of business sources is now so attractive to investors? So extremely good is the management of the new president that in itself, and despite the clear deterioration of the fundamentals of the entity, makes investors fight to enter? What role does the 19,000 million public money inject play, as well as the transfer of assets to Sareb? I honestly do not understand, so I accept the explanations …

Why do they impose a limitation on the payment of dividends to Spanish banks?

Last Friday, the 21st Bank of Spain announced in a brief statement that it extended to all of 2014 the limitation, already imposed since June 2013, of not giving dividends to shareholders above 25% of the profits. The BdE, according to the official version, has limited itself to sending a letter with this mere “recommendation” to both banks and banks, and these can be skipped if they prove to have regulatory solvency levels three points above the minimum required. In its latest report on Spain, the International Monetary Fund (IMF) even urged to “reinforce” the powers of the banking regulator in order that the “recommendations” could pass to executive orders.

During 2014, a new financial solvency regulation came into force and the ECB will carry out a stress test on European banks, for which the Spanish regulator “considers it convenient for institutions to persevere in the application of rigorous capital preservation policies. and strengthening solvency levels, “he explains in his statement.

What does this mean? Why do BDE and the IMF pressure the entities not to pay the dividend they deem most convenient? Is it understandable that the authorities interfere in the free decisions of the market? The explanation may be more complex but basically has its origin in the creation of capital and regulation on bank solvency..

Santander and BBVA, the European banks most affected by the braking of emerging markets

For weeks we have been hearing crisis drums with respect to the so-called emerging economies (India, Indonesia, Russia, Turkey, Brazil, South Africa, Chile and Argentina). Although the IMF still maintains that this year is expected to grow more than in 2013, more and more are seeing an enormous fragility in the area and a potential danger of global financial instability. According to these voices, the recent peso crisis in Argentina would only be a sign of alarm and anticipation in the face of the economic slowdown in Latin America.

Well, this crisis could have the two main Spanish banks (Santander and BBVA) in their two main harms . As the rating agency Fitch points out in its latest communication on the Spanish financial system, the fragility of emerging markets could especially impact “on a handful of large banks in the European Union” because of its material exposure there.

The entity chaired by Emilio Botín “is the most exposed,” according to Fitch , due to its significant presence in Brazil, Argentina and Chile. Its net exposure to emerging economies is equivalent to 370% of the bank’s core capital , the largest percentage of all the large European banks. However, despite the fact that a quarter of Santander’s profits come from these countries (Spain already only accounts for 7%), the rating agency is optimistic due to the geographical diversification of the entity.

The next European bank most exposed to the risk of the “Ocho fragiles” is also Spanish: BBVA. The entity chaired by Francisco González holds a 25% stake in the Turkish Garanti Bank , and is the majority shareholder in subsidiaries in Chile and Argentina. The other entities with a greater risk of being affected by the flu of the new engines of global growth would be Standard Chartered, Barclays, Absa Bank and Unicredit.

What turns the banking life. The one that was acclaimed at the time as the great differential strategy of the first two Spanish banks (pioneers in diversifying risks and investments) is now one of the main challenges. Growth above the average has its risks, and we already know that nothing is free.

This is not the only slap that the rating agencies give to Spanish banks. Last week, Moody’s published a report on the European financial system ( What lies ahead for 2014 ) in which they point to a still negative perspective for Spanish entities. Why? Because the environment is still very complicated, the delinquency will continue to grow and new provisions will be necessary in the event of future falls in the value of assets. “The benefits will remain under pressure in the short and medium term,” they explain from Moodys, due to low interest rates, low business growth and the increase in unproductive assets.

The FROB ‘gives’ a blank check to the investment bank to sell BFA-Bankia
Last week, the Fund for Orderly Bank Restructuring (FROB) published a document with the requirements to contract the design of the divestment strategy for public participation in BFA-Bankia . When the sale of Novagalicia to Venezuelan Banesco has not yet been completed (although already signed), and it is still not clear what is to be done with CatalunyaCaixa, the authorities embark fully on the process of selling the only entity that, In the words of President Goirigolzarri himself, he has options to be profitable to the public purse. #

The FROB has opened a public tender for “at least one investment bank” to begin designing the strategy to carry out the privatization of BFA-Bankia. In the event that this divestment is finally carried out (which will be done yes or yes, since it is a European mandate), this bank or banks will have to provide advice on the different steps to be followed throughout the process. To avoid frightening anyone, the FROB makes clear in its note that in no case will the provision of these advisory services cause conflicts of interest with respect to participating in the direct sale of this shareholding package.

And is that the body responsible for the restructuring of the Spanish financial system has spared no facilities to attract investment bank for itself . The contest itself does not even part with a maximum award figure. All a blank check for entities such as Goldman Sachs or JP Morgan, which have already done business repeatedly with the sale of assets of the nationalized bank. Free advice is what they have, which ends up being charged in other ways .

The other day I questioned the opportunity to sell in a hurry the majority public participation in BFA-Bankia. It is in the interest of the Government to sell as soon as possible to send a (other) positive signal to the markets ; This fact is now going to overlap with the clear incentive of the international investment bank to carry out these loans as soon as possible, of which the beneficiary parties will surely be . The question is, and is it also of the interest of the taxpayers?

Bad times for Sareb

The one known as Banco Malo (Sareb) is living, in its little more than a year of existence, a stormy time. Although it has managed to surpass the sales targets set for 2013 , the semi-public entity in charge of selling the toxic assets acquired to the nationalized bank has been engaged in an internal and external crisis for weeks.

Belén Romana, president of Sareb

Internal because recently its financial director, Walter de Luna, has resigned from his position. Although the Sareb has not given details and has been limited to thanking the work carried out by De Luna, a journalist as well informed as Eduardo Segovia speaks of “deep discrepancies” with the president of the entity, Belén Romana, a personal friend of the minister of Economics, Luis de Guindos.

The external image of the Bad Bank is also touched for several reasons. One of them is the jerking of the ears that the Troika has given due to delays in the implementation of an effective business plan and another the wrong price policy carried out by society. The European authorities see a high number of “challenges” that Sareb has to face, and do not seem convinced that they can be carried out without a high cost to the taxpayer.

Special mention deserves the scandal that we have known this week. And it is that the Sareb has sold to vulture funds houses that had already been reserved by private customers, who had already paid a signal for them . As we have been told by some affected, the curious thing is that the entity wanted to reverse the operation already agreed even though the price offered by the vulture fund was less than that of the individual. The Bad Bank, which has explained its position in a statement, should be (is my opinion) more careful with these things: There are many eyes pending what they do, and should act not only watching the general interest, but also with an unblemished ethic.