“Banks: accelerating consolidation and reform
12. The banking sector is sound but remains under pressure. Although impaired assets have increased with the downturn, Spanish banks overall report robust capital and provision buffers, supported by a strong supervisory framework. But the risks remain elevated and unevenly distributed across institutions, focused mainly on the savings banks. The situation is also complicated in that much of banks’ repossessed real assets is land, which is particularly difficult to value. On the liquidity side, although funding is generally of good duration, market conditions remains difficult and access limited. Further strains may arise from the unwinding of the exceptional liquidity measures by the ECB, the ending of the funding guarantee scheme, and from the intense competition for deposits. These funding difficulties, coupled with lower earnings due to weak credit growth, provisioning for troubled assets and the system’s overcapacity, will likely lead to pressure on profitability.
13. Consolidation needs to accelerate to reduce overcapacity and produce more robust institutions. Progress, under the aegis of the Fund for Orderly Bank Restructuring (FROB), has been too slow, though the recent agreement between the two main political parties in this regard is encouraging. Much more progress needs to happen before the FROB deadline of end-June 2010. The Bank of Spain should be prepared to intervene promptly if pockets of weakness remain. To this end and to enhance investor confidence, a comprehensive and transparent bank-by-bank “diagnostic” based on conservative assumptions on asset valuation and prospects could usefully be carried out.
14. The legal framework of savings banks should be updated for the new economic context. Performance among savings banks is highly diverse and the sector has an important role to play, but the current legal structure is not well suited to Spain’s needs going forward. Under the current framework, cross-region mergers still need to be approved by regional governments, the sector remains closed to external investors, and savings banks’ capacity to raise external capital remains limited, putting public funds are at risk. The legislative and policy priority should be to: (1) reduce political influence in savings banks; (2) enhance their ability to raise external capital, and (3) offer an opportunity to transform into stock-holding companies, and, indeed, requiring this for systemically important savings banks. This reform should be implemented promptly so savings banks can have the full range of options to raise capital as soon as possible”.
Madrid, 25 de mayo de 2010