spain banks

Bankia, Catalunyacaixa and Novagalicia Banco merges to Spains largest bank

According to El País:

This bank will have assets of 476 bio. EUR and thus be the largest bank in Spain – any position on that list is liable to be overturned next time the representative of the Bank Inspection regains consciousness.

The merger between two regional banks (caixas) and Bankia (itself a merger of mergers of regional banks) is to the horror – but hardly surprise – not viable without further injection of state capital.

Mentions the figure of more than 20 bio. EUR.

On the face of it that is an impairment of say 5% of the assets: So what?

Ok, not a good thing but civilisation has seen worse.

Or has it?

  1. No matter how you inject capital into the bank it will mean a dilution of equity and of the original share holders’ fortunes. All right and proper, that is why shareholders exist – to take the first brutal knock of not having put in competent management.

Ehmmm, it is not quite that simple. You see, Prime Minister– ehmmm – there is a small hitch: It will mean that the shares of all other shareholders will have to be either cancelled or written off extensively: Yes naturally! Ehmm, Prime Minister – ehmmm – that can’t be done, as who are those other shareholders? They are – ehmm – other banks.

That means a substantial loss to the other banks, whose solidity is with one snap of the fingers substantially reduced.

  1. Next little problem. As Bank A in the merger owns shares in Bank B and C – and vice versa, there is the little problem of consolidation of the accounts. The crossholding shares (shares owned by other participants in the merger) will have to be converted into own shares, and thus not counting. This means the number of shareholders actually owning what is left of the equity before capital injection is substantially lower.
  2.  The value of the shares the merged bank owns in other banks (f.i. Bank D, E and F) will have to be impaired in value – as these banks have lost equity, due to the merger and the concomitant reduction in equity of the merged banks.
  3. Next little problem is the bank shares held as collateral against business and speculative loans are now of substantial lower value and the concomitant loans will have to be paid off. But this is – deplorably enough – not possible, as these debtors are hardly in a position to pay off these loans (which was the reason for demanding collateral in the first place). Besides seizing the collateral will only bring up the proportion of own shares……

Will this vicious circle ever stop? No, not very likely. The reality is that cut down to bare bones equity in banks cleaned of crossholdings and loans secured by bank shares as collateral – well it is probably negative.

So eventually all banks end up on the Bank Inspections butcher table where you – even under normal circumstances – are lucky if there is any equity in the financial sector.

Why do you think banks normally are so eager to help colleagues in distress and even pay for the failed banks losses?

Why do you think governments normally don’t demand shareholdings in distressed banks in return for their emergency credit extensions?

To nationalise banks you need an endless supply of money – and we haven’t even started with writing of loans to businesses and private homeowners that has no chance – whatsoever – of paying off their debt.

Now You know why “Spanish Eyes” are black.

And now You know why Japan has never been able to recover from the meltdown 25 years ago – and they will never get out of financing the banks with sovereign bonds.