There is confusion enough around the budget squabble in the EU with all the usual antics (does this ritual strike a note in the USA?) as to attract attention from other and more vital developments .If you have any intention of understanding what is going on in – especially regional – banking in Europe the following article in El Pais:
(I have tried to recount as faithfully as possible using my Spanish) is vital:
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The final plans for the recapitalisation of regional banks in Spain are to be announced midday Wednesday by Joaquín Almunia vice-president of the European Commission – as agreed between the Commission and the Spanish government. The rescue fund (FROB) will receive the European money on December 15th and they will be distributed to the institutes on December 30th in time for closure of the annual books.
This will be done without unfair subsidising according to the EU rules. The muster is seen as punishment by the banks, as they mean it will hurt shareholders, bond owners, guarantors and employees. The agreement concerns Bankia, Novagalicia, Catalunya,Caixa and Banco de Valencia.
The Commission has all but finished a template for the public support in the restructuring of banks.
It will involve a pruning of staff with about 6,000 in Bankia [fourth largest Spanish bank – a “dustbin” merger of failed local banks or cajas] and 2,000 in Nova Galicia with a closure of 1,000 branch offices. On top of that there are 1,000 redundancies in CatalunyaCaixa (that might be sold off to a competitor).
Since 2008 these Caixas have made 22,000 redundant that at the moment employ 110,000 to now about 100,000. [About ¼ of 2008 staff has been let go]. But that is only the firing part.
The Commission also demands in return for public aid that they are sanitised so as not to introduce unfair competition. The banks are to concentrate on their regions and local banking. The rest is to be sold off as soon as possible – a sort of back to basics. CatalunyaCaixa and Banco de Valencia are in the process of selling off, and cuts will be left to the buyer.
The original estimate by Oliver Wyman was for 43.6 bio. EUR (of the 59.3 for the whole sector). the nationalised recapitalisation of the four institutes will now end around 35 bio. EUR. The reduction is due to two factors:
1) The sell-off of toxic assets to the “Bad Bank” reduces capital need.
2) A “haircut” to the preferential stock and the subordinated deposits.
The most affected will be Banco Financiero y de Ahorros [the “bad bank” of the “bad bank” Bankia] and its subsidiary Bankia. Of the 20,000 currently employed 4,500 will be outright firings and 1,000-1,500 will be in the units sold off.
The most likely sell offs are: Miami Bank, the funds management and trading. According to the mandate from the Commission the commercial banking of Bankia is to concentrate on Madrid, Valencia and Canary Islands Area, Ávila, Rioja, Segovia and Barcelona – where the original seven regional banks came from. The sales will be to the highest bidder. The firings will be based on the labour market reform that limits the benefits to 150,000 EUR maximum – which is 300,000 EUR LESS than was rejected a couple of month ago.
Novagalicia is to concentrate on its”natural territory” Galicia, Asturias y León and gets between 3 and 4 years to sell off its industrial business. Of the 2,000 being let go 1,200 are employed in EVO bank. FROB will also sell off Banco Gallego.
Novagalicia has not been put to auction – in contrast to CatalunyaCaixa and Banco de Valencia – to give time for investors to be contacted by the CEO José María Castellano. This reduces the need for public money according to market sources.
A general auctioning off has been avoided as Bankia will need at least three years before it is ready and it is to be avoided that the “Big Three” (Santander, La Caixa and BBVA) lower their bids. A third reason is political: To give the Galicien President Alberto Nuñez Feijóo possibility to maintain a bank in Galicia.
CatalunyaCaixa and Banco de Valencia are – as mentioned – left to the buyer and are of no particular interest to “Europe”. They have already reduced staff from 8,500 to 7,200 and from 1,980 to 1,610. (I.e. around a ¼ reduction).
The trade unions complain in unison with the management over the heavy handed treatment from “Europe”.
“The Commission applies the rules for state subsidy to force the large banks saved to sell off certain business areas or countries. It is the same thing that happened with ING Groep N.V. (ADR) (NYSE:ING) that had to separate its banking and insurance activities and disinvest in some countries.
In case of the Spanish banks that receive public aid the problem is they are less diversified both geographically (they only have activities in Spain) and in their business (which is purely detail banking). That means that the measures taken by Brussels seem to affect detail banking”, Francisco Uría, partner in KPMG.
Aristóbulo de Juan, bank consultant and ex-CEO of Banco de España, believes: “It makes sense to limit the sophisticated banking business so as to leave detail banking; but not to exclude the business in conjunction like a corporative bank.”
“There is a risk they will convert into very conservative entities focussed on reducing balances and give very little credit. The nationalised institutes in the have chosen to grow little and close wholesale banking and investment banking and leave all else except traditional detail banking even though they are much healthier than the four nationalised Spanish institutes”. Vicente Cuñat from London School of Economics point out.
[Comment: Finally, at last, it seems like the hard of hearing, feeble wit and two tongues GET IT! Their whole idea of massive worldwide super banks is NOT a good idea, and certainly not going to be tolerated in a regulated community!
Another central issue is the ways to deal with various types of preferred and subordinated debt. All will be paid in shares (listed or unlisted). The formula used to calculate the “haircut” will depend on the value of the company and the type of preference: The higher the seniority the lower the “haircut”, as value seem preferred. In this case the senior debt of Caja Madrid is only punished by a 10% cut as the product was aimed at the general public. In case of Novagalicia it increases to 20% because it was in an unlisted company. In case of subordination the cut will depend on maturity.
With all these considerations it is difficult to estimate the loss to customers, but executives estimate between 45% and 60%.
These proceeding are of vital interest to a much larger audience that the Spanish public as it demonstrates how the European Union and Commission go about restructuring banks. The same master plan is probably adhered to all over Europe with variations as to timing and emphasis according to local folklore and depravity.
The separation of detail banking from everything else:
This is very much in evidence in the “White Paper: Banking Reform” for the UK from July this year which is as we speak being processed into actual law. Not only in sweeping reforms, but down to the pettiest detail – nothing is allowed to cross the master plan. The strange machinations in Danish banking where foreign branches of provincial bank are either sold off or downright closed down are another indicator.
A separation into “systemically vital” banks, regional banks and minor riff-raff is also very clear.
The present case with Bankia et alia is typically the regional bank track where the authorities hand has indubitably been forced by nitro-glycerine stability shown in the spring by the trash in FROB. It left neither EU nor the Spanish authorities other option but to take on these medium regional banks before they hazarded the restructuring of the Spanish society into a growth oriented economy.
The apparent inactivity towards the major banks:
Nothing too much should (in my view) be put into that. The apparent disagreement between the ECB and the Bundesbank – that disagreement is not so much in principle, as it is in timing and priority (or more appropriate urgency). The division of labour is pretty clear in the eye of Bundesbank: The ECB should deal exclusively with the “systemically vital banks” and leave national bank inspection to deal with the rest. The other side of the coin is that the European Commission has a Union to run and their respective countries have their constituencies to run – but they seem very concerned, that the regional banks are split up so as NOT do develop into major “systemically vital” complaints. In the “shire” it is getting apparent that Sydbank, Spar Nord, (Midtjysk Bank – and they need all the help they can get) are the designated regional banks – whether they like it or not: Sydbank has been rudely thwarted trying to expand outside it bailiwick, but on the other hand got Tønder Bank forced down the throat.
I would not say there is inactivity as to the “systemically vital” banks: There is quite an activity into their interest rate fixing (the LIBOR/EURIBOR/CIBOR fracas), their transnational tax-evasion schemes and fraudulent trading practices that appear in courts in a steady stream
The actions are admittedly not so apparent, but I can’t help noticing that in the recent emotional flap about SAS (Scandinavian Airline System) the major creditor is Nordea. Nordea is heavily involved in the other Scandinavian countries as a bank. Now politics is a bare knuckled fight where deals are made across areas of principle. My take on the SAS case is that it was a threat to Nordea: If they did not leave the Danish real estate mortgage alone and continued as a part nationalised Swedish bank to speculate against the DKK – if not: They would get hurt big time in a major bankruptcy where aircraft etc. would be impounded and sold off to the lowest bidder.
This is very much a case of different axes to different heads.