Spanish Banks: Stress Test Report

The report of the stress test of 14 Spanish banks has been published.  The reports shows a capital requirement for seven of the banks of just under €60 billion.  The report can be read here.

42 replies on “Spanish Banks: Stress Test Report”

What multiple should one use to arrive at a realistic Blackrock style fine tooth comb forget about what the management say best estimate ? 5 times ?

Mr Honohan could give them some useful insights into the Irish experience. I’m sure it’s the same crap in Spain.

*systematic loan underwriting errors of Irish banks over a number of years into a massively over-heated property market opened-up an extraordinarily wide range of uncertainty.

*the absence at the outset of comprehensive specific legislation to deal with bank resolution exposed the authorities to litigation risks that slowed action.

*The banks had made their own unpublished estimates for these, but the Central Bank made an independent top-down estimate of loan-losses over a three-year horizon for a base and stress case. These estimates were considerably higher than those of the banks, and the latter strongly contested them.

* loan losses projected were outside past experience

*it seems fair to say that transparency of the process was high in Ireland, but that it proved hard to generate reliable and precise information quickly. Clearly it would have been better if comprehensive accurate estimates of future loan-losses had been available from the outset.

Unfortunately, while he is strong in terms of what is wrong with current policy he does not propose any alternative.

Here’s one: rejecting inflation mania, closely related to austerity mania. The interests of those who want to keep inflation non-existent are nothing to do with the rest of us, no matter what their errand-boys and handmaidens in the commentariat say.

“Gilmore said. “Between differences of language and so on and so forth, sometimes we can put a little too much emphasis on finding a particular word or phrase or a couple of phrases and reading too much into that.”

Perhaps he read too much into the June after midnight statement?

The Social Democrats have finally ended the suspense, choosing former Finance Minister Peer Steinbrück as their candidate to unseat Angela Merkel in next year’s general elections. Though widely credited with helping lead Germany through the financial crisis, he can be abrasive. Does he stand a chance?

merkel_lite with a hint of green!

On a very cursory look, I get the impression that the Spanish banks are in much better shape that the Irish banks were.
Figure 9 of the report is interesting.
A loan book of 1.5 Tn but they estimate reserves to cover it of over 200 BN. That is sizeable reserve ratio.

Further it seems that RE, at 16% of total loans, is not going to be the disaster that it was in Ireland.

The big one for Spain is retail mortgages (I take that to mean residential) at 602BN or 42% of the total.
It really all boils down to whether the Spanish banks gave out domestic mortgages as recklessly and with LTV ratios of 100%+ as in Ireland. Somehow, I doubt that they could have.
There is a good chance too that a sizeable % of Spain´s housing bubble was paid for by foreigners and foreign banks, not Spanish banks.

Even if the line that Spain has an Irish banking problem, is true in an overall sense, the components making up the problem have quite different proportions.

@ fiatluxjnr

60bn wouldn’t even cover 2 Anglos. Spain’s population is more than 8 times Ireland’s. I smell a rat

@ JR

I was in Andalucia on hols in 2010 and there were an AWFUL lot of apartments for sale. That is presumably a big chunk of the capital of the banks . The other thing is that Spanish unemployment was 20% + in 1997 and is again now but went down to 10% or less during the boom. A lot of the extra work went into building. The bailout is limited to 100bn so they have to get an answer that is less than that. The history of this crisis is the low ball estimate that is only revised when TINA and all hope is abandoned.


You could be right but the pattern is very different to Ireland, where ´los caballeros’ took most of the loot and ran.

Your point on the umemployment is well made. Without income a person cannot pay anything. The same is true everywhere.

The only solution worlwide is to increase demand. The only way to that in the debt ridden states of the western world is to take demand potential from the well off (in taxes) and translate to actual demand.

That will come eventually because it will have to come. The alternative would be far less pretty.

I couldn’t have put out a better load of bollix myself than this document


El más barato rescate de la historia!

@ All

This article by Gillian Tett underlines the importance of house price trends to consumer confidence in the US. As the lengthy opening comment by Marmora illustrates, the UK (and Irish!) housing markets benefit – or suffer – from the same influences.

The housing pain in Spain has yet to be fully acknowledged, unlike in Ireland. The recent news on the housing front – if borne out – may do more to get us out of our difficulties than all the economists and “diplomatic offenses” put together.

@PR Guy

Perhaps not but one very salient point has been missed when comparing Spain to almost all of the other EU countries by commentators and that is the fact that in around 2002/2003 the Regulator in Spain rightly recognised that the accounting standards for provisioning for bad debts were badly flawed insofar as General Provisions were not allowed since about c2001 if memory serves. The Spanish Regulator correctly recognised that this was nonsense as a General Provision is simply a recognition that the economic cycle does tend to go down as well as up and setting something aside was sensible. I can recall at th time that the accountants were up in arms over the Regulators move as it was exactly the opposite of what they believed was a correct bad debt provision namely that it should only be specific, which we now know to be complete bull. The economic cycle matters big time.

As the Spanish banks included (or more correctly were allowed to include) a General Provision in their results since c2003 this had the effect of increasing the buffer to take the initial wave of the real estate losses and obviously curbed the profitability of Spanish banks relative to the Irish during the early boom years meaning that the excesses that we saw here were not replicated to the same extent in Spain.

In addition as noted above many of the vacant apartments in Spain are losses sitting on the books of Irish,UK and German banks which is not the same as the vacant apartments in Leitrim village for instance.

Like others above I think the figure of 60bn is a tad on the low side. However, it seems to me that the Spanish property bubble was not on the same scale as ours and the recap costs, in terms of GDP, are likely to be far lower than ours.

This is bad news for us and helps explain why the FANGs are not bothered about state that all legacy bailout costs should be burdened to the local sovereign. Unless the Spanish crisis gets a whole worse than this, or Greece is forced out, we are going to become increasingly isolated and left to our own devices.

@ bazza et al

If you are right, and I hope you are, the more isolated we are the smaller the problem and the easier a morsel it will be for the FANGs to swallow (before March 2013?).

The loss of sovereignty implicit in the Irish bailout has not really impacted in the national consciousness. But countries such as Spain and Italy are in an entirely different category. They are not willing to give up their room for national manoeuvre and, as the budget just announced by Moscovici underlines, neither is France.

It would appear that the ECB believe them…
“The European Central Bank (ECB) welcomes today’s publication by the Spanish Government and the Banco de España of the results of the independent evaluation of the Spanish banking sector.
Consistent with the programme supported by the EU, as stated in the Memorandum of Understanding on financial-sector policy conditionality of July 20, 2012, external consultants have conducted a bank-by-bank bottom-up stress test and an asset quality review. ECB staff were involved in the Strategic Coordination Committee and the Expert Coordination Committee, together with the Spanish authorities and staff from the European Commission, the European Banking Authority and the International Monetary Fund. These committees have overseen and approved the work carried out by the external consultants, and they have assessed the stress test as stringent and the asset quality review as thorough.
The ECB strongly supports the Spanish authorities’ plans to ensure that capital needs are met in a timely manner.”

Credibility on the line?

During the bubble years Spain was building 700,000 residential units per year,which was greater than the combined total of Germany ,france and Italy. Professor Krugman likened it to Florida which also had a lagre coastline and is a popular holiday destination. Both Spain and florida had a massive property bubble and bust.

Below is the elementary property valuation error that bankrupted Spain;
Professor Neil Crosby’s online response to this Irish Independent letter
“Bubble values” 29th February 2012

“The analysis may be simplistic but unfortunately it is not flawed.
Banks ask valuers to tell them what the market value/exchange price is
at a point in time and then lend vast amounts over time based on that
simple number. The surveyor gives them that simple number and do not
think it is their job to tell the banks that the question they have been
asked is stupid on its own and what they should have asked for is the
underlying value. It was obvious in 2005 and 2006 that prices in the
property market were higher than could be sustained by any rational cash
flow analysis. But in a culture that rewards individuals for short term
performance rather than longer term perspective, it was in neither the
bankers’ nor the valuers’ interests to stop it. I cannot see anything in
what the UK regulatory authorities have proposed that makes me think
they understand the role of property valuation in driving asset bubbles
and will prevent it all happening again sometime in the 2020s.”

Neil Crosby
Professor of Real Estate and Planning
University of Reading

John Corcoran – Neil Crosby is quite right to point out the critical and corrupting role of valuers and banks in the property bubble. RICS and other property related professionals should hang their heads in shame for not raising the alarm bells and not challenging landowners, banks and homeowners about the outrageous rise in property valuations which had no relationship with reality or ‘underlying value’. Their role is similar to that of ratings agencies which were paid to sign off triple A ratings by their clients for instruments most of which related to property assets..Sadly it does not require a university professor to point this out.

Anyone with a modicum of experience in property and development knew we were headed for trouble and I am sure I was not the only person to flag it up. If these so called professionals had been held to account by their so called professional bodies ( as the General Medical Council regulates doctors) half of them would have been struck off. Their primary responsibilty should have been to the reputation of the valuation profession and not their commission. In many countries property is taxed and valuers are independent or are part of the state.

Radical reform is required or we will surely revisit this crisis again in the near future.

Steve Says:

Neil Crosby Professor of Real Estate and Planning University of Reading

Neil has been Professor of Real Estate at the University of Reading since 1994 having been previously Professor at Oxford Brookes and lecturer at Reading and Nottingham Trent Universities. Before that he was a practising valuation surveyor in a combined residential and commercial property private practice firm based in Nottingham. He specialises in commercial property appraisal and the commercial Landlord and Tenant relationship and has undertaken a series of major research studies funded by the UK Government and the UK property industry in these areas. In 2002 he was awarded the International Real Estate Society’s annual achievement award for his work in real estate research, education and practice. He has published well over 100 papers on the various topics listed above and the third edition of his textbook on Property Investment Appraisal with Andrew Baum was published in 2007.

John Corcoran*

Irish Commercial Tenants Association

*John is a distinguished postgraduate of the London School of Economics and Political Science and was awarded the degree Master of Science in Economics in 1978. While at the LSE he studied under Professor of Economics Basil Yamey and Professor of Accounting and Finance Will Baxter. Professor Yamey was a member of the UK’s Mergers and Monopolies Commisssion and an authority on monopolies and cartels. Professor Baxter was a world authority on inflation accounting and valuations and developed the concept “deprival value

Oliver Wyman led the exercise ….
Oliver Wyman in 2007 named Anglo Irish Bank as the best bank in the world in a piece of research published to coincide with the World Economic Forum in Davos, Switzerland . [5][6] The next year the Irish Government was forced to nationalise the Bank at a cost of €25 billion. [7][8][9] Oliver Wyman in 2009 also validated Bank of Ireland ’s bad debt levels at €6 billion over three years to March 2011, a bad debt level which Bank of Ireland had exceeded by almost €1 billion within a matter of months.

Can anyone comment on the rumoured (rumoured, that is, a couple of years ago) exposure Anglo or the othe banks have (or had) to risk protection sold on the Spanish property market?

This may or may not have gone to NAMA from 2009, many of the more routine interest rate and currency swaps would have.

Assuming it both did exist and hasn’t been closed out, I wonder how it has been marked, and whether developments in Spain affect either fair valuation or marking.

Has any one followed this? For ref, below is an extract or two from Page 7 on in:

This section aims to find the channels and the directions of potential contagion from other
countries to Ireland, looking at external linkages of the Irish banks. The Irish financial system
had been more closely integrated with the U.K. in the past, but in recent years links with
continental Europe and the U.S. have been strengthening. There are many external linkages
of the Irish banking sector, stemming from: direct equity exposures in cross-border banks;
direct exposure through loan books in other countries; deposit and funding sources from
other countries or from numerous foreign banks operating in Ireland; stock market
participation—through securities and asset management firms—in other countries; holding of
credit risk transfer instruments written on assets located in another country indirectly
exposing Irish banks to international shocks……………

…..Fifth, Irish banks are directly and indirectly exposed to property markets abroad. All the top
three banks have loan-book exposures to the U.K. property market. At least AIB and Anglo
IB sell mortgages in the U.S.—AIB through its U.S. subsidiary, and Anglo IB through its
representative office. The latter is more focused on commercial property lending in the U.S.
BOI had launched a new venture with a leading Spanish bank, La Caixa to provide extra
mortgage options for Irish people buying property in Spain, which included equity release
from existing BOI mortgages. Part of the real estate price risk is mitigated by the Irish banks
buying risk protection against these exposures. Irish legislation on covered bonds broaden the
scope of risk protection by making loans from countries such as the U.S., Canada,
Switzerland and Japan eligible for the collateral pool.5 However, Irish banks could be
indirectly exposed to property markets by selling risk protection (buying of covered bonds,
credit default swaps, and mortgage backed securities) to other banks which are exposed to
foreign property markets. From anecdotal evidence, some small IFSC banks, exposed to
international property markets, are selling CDS to other domestic-oriented banks, making the
latter indirectly exposed to these property markets even though their loan books are not.

@desmond Brennan
Kathleen Barrington wrote way back..
“In another report published in 2006, Oliver Wyman said that Anglo Irish Bank was one of four ‘‘supermodels’’ which had consistently achieved 30 per cent year on year growth.
It had done this by focusing on property development finance and building on the professional reputation of its underwriters, who had established themselves as leaders in this field.
But it wasn’t long after the Davos endorsement that Anglo’s share price began to slip, as some of the world’s more savvy investors took the view that the supermodel was skating on thin ice.”

I wonder why the Spanish Government choose them”??”????

@ Grumpy
Another false dichotomy. A country can be destroyed by stupid banking decisions and also be corrupt.
The damage done by banking cannot be masked by other failings in that society.
Human beings always do this – one group succeeds and seeks to crystallise their success by attributing it to something immutable such as moral superiority as opposed to the vagaries of life. Similar arguments were used during the Irish Famine and during WW2.
Best be very careful here. 2 issues – stupid banking and a lack of meritocracy

@ All

Colm McCarthy’s view on the “naivety” of the AAA Troika ministers.

One wonders, however, if there is not a method in their madness. They simply wished to douse any false hopes on the part of Rajoy (and Monti) that they would be given a get out of jail card by an early agreement by the ESM to participate directly in bank re-capitalisation. Ireland was not even in their sights. In the process, they have, however, demonstrated that they are politically stone deaf at a European level, demonstrating the same incapacity which led finance ministers as a group to embark on the euro in the first place.

On breaking the “doom loop” between sovereigns and bank, this is, in my opinion a doomed undertaking in its own right as both sovereigns – or, at least those, issuing large volumes of bonds (the vast majority) – and banks are involved in the basic banking task of maturity transformation of financial instruments. The inextricable linkages between the two have been clearly demonstrated, most notably by Winkler cf.

Steinbrueck, the SPD candidate for Chancellor, is going on an entirely different track and not that far from the ideas put forward by Winkler i.e. that banks themselves should build up their own rescue fund. This is posited, it seems to me, on two assumption (i) that free movement of capital will continue within the EU (it can hardly be reneged upon) and (ii) that the healthier banks will eventually begin to venture out from their national kraals into which the crisis has forced them and begin to do business again with weaker entities.

Supporting such a development would be a more productive and logical use of the ESM.

re Colm McCarthy article
“Whether the ECB was acting outside its mandate in making these threats has not as yet been tested at the European Court.”

I am glad to see that Colm McCarthy is still keeping this on the agenda. It now seems the only rational course for Ireland to pursue.
As noted by @Seafoid, on another thread, ‘lying on the ground with a begging bowl’, in all its nobility, is certainly not bringing results.

Even Gene Kerrigan seems to be getting this one wrong, arguing on the Helsinki three statement that;
“If this goes wrong, it’s a disaster for the Government. Its whole strategy is based on following instructions from “our external friends”, then begging for a break on debt. It’s a disaster for us, too — because even a bad deal on bank debt is better than no deal. ”

IMHO he is incorrect, no deal and an ECJ case is far better for Ireland than a bad deal.


re Breaking the link.

While I did not read the Winkler paper, I would say that it is quite possible to break the bank/State link.
The fact that banks hold State paper to maturity or otherwise, should not impede the breaking of the ‘link’.
The link that has to be broken is whether the State is to be used as a creditor of last resort, that other creditors can commandeer to their aid in order to bail them out, in the event that bank assets, whereever situated, prove worthless.
The bank assets that would prove worthless are generally not State bonds, except in the case of Greece, which is a case of the State bringing down the banks, rather than the banks bringing down the State.

The State / Bank link can and must be broken. Unbroken it is a blank cheque to creditors and mobile capital, at the expense of unknowing and uncontracted citizens of target countries whose banks, and by extension their host State, can then be targeted at will by the then ‘protected’ mobile capital sharks.

Re: naivety

If anyone was naive surely it was our own government ministers. Did they seriously believe that anyone was going to take responsibility for our 64 billion bank bust debt? Joan was making the point on Marian’s show this morning that Germany got Marshall Aid after the war..she was cut off in mid flight by Marian..maybe this is the new thinking!

In Ireland, the two chieftains moved from the wreckage at the central bank to superannuated bliss twittering ‘resilient banks’ and ‘good shock absorption capacity.’

In Spain, Rodrigo Rato, the conservative finance minister, became IMF MD in 2004.

In the same year Jamie Caruana, Banco de España governor, caved-in to bank lobbying by agreeing to halve the reserves that banks had to be set aside to 15% of overall loans, from 30%.

In 2006, Caruana moved to the IMF with responsibility for financial stability.

The New York Times reports that when pressed at an IMF news conference in July 2008 about falling house prices in Spain, he acknowledged there might be loan losses. But he said, “The financial system in Spain is able to cope with that and is properly capitalised.”

In 2009, Jaime Caruana moved to the Bank for International Settlements and José Viñals, a former colleague at the Banco de España took his seat in Washington DC and remains there.

Back in Spain, Rodrigo Rato became executive chairman of Bankia, a disastrous merger of 5 caja savings banks which had been controlled at regional level by the conservative Popular Party. He told journalists that the bank was in a situation of “great robustness, both in terms of solvency and liquidity.”

Last June, in a speech that examined the roots of the financial crisis, Caruana highlighted the economic distortions caused by frantic property lending, and he called for banks to be quicker to recognize losses and raise capital but he did not mention Spain by name.

It’s surely great work to have and a brass neck helps.

I wrote on Spanish dynamic provisioning a few years ago.

@The Conflationist Fallacy punter …

Ah yes, Herr Professor Winkler

Let’s see who he cites .. get a sense of where he is coming from …

a cursory nod to De Grauwe on lack of a LOLR – essential these days but he ignores the substantive work of De Grauwe

Then our friend Herr Professor Sinn [nuf said there

Then Herr Issing [who punts for the matrixsQuid these days

Himself, of course.

Ah c’mon – shurely your financial system assistants can do better!

@ Joseph Ryan

I do not agree. Winkler is almost a lone voice in the debate among economists in Germany and, nevertheless, happens to be right.

It is heavy going. However, the summary in English sums up his standpoint.

Title: Why is Europe Unable to Control the Euro Crisis?
Abstract: This paper argues that Europe is unable to get the euro crisis under control because it has chosen a crisis management strategy that is diametrically opposed to the one applied in the global financial crisis. In 2008, crisis management focused on measures that instilled confidence, while policies solving more fundamental problems were only applied at a later stage. In the euro crisis – following the advice of German economists strongly attached to the views of „Ordnungspolitik“ – crisis management aims at solving the fundamental problems first. Moreover, measures successfully applied in the 2008 crisis, including joint liability mechanisms, are now portrayed as counterproductive and even harmful. As a result, Europe has made little progress in fi ghting the crisis and creating the institutional foundations to do so successfully.
JEL-Classifi cation: E44, F34, F36

An example from the German text underlines the actions taken by the German government in 2008 in the wake of Lehmans and the actions of the Irish government.

“Die Finanzkrise 2008 illustriert, dass die erfolgreiche Bekämpfung einer Krise genau jener Instrumente bedarf, die ordnungspolitisch kategorisch abgelehnt werden. Damals gab die Bundesregierung eine Garantieerklärung für die Sicherheit aller Einlagen bei deutschen Banken ab. Damit wurde aus einer einzelwirtschaftlichen Haftung der Banken eine gemeinschaftliche Haftung des deutschen Steuerzahlers. Diese Garantieerklärung wurde zudem nkonditioniert abgegeben: keiner Bank, auch nicht der schlechtesten Bank, wurde ein Anpassungs-, Spar- und Strukturprogramm vorgeschrieben. Sowohl von der Dimension als auch von ihrer Ausgestaltung ist dieser Rettungsschirm also umfassender als alles, was in der Eurokrise in den letzten Jahren diskutiert

@ Brian Lucey

What are you on about? I was interested in the purchase price of a particular house and found it in about 30 seconds. The biggest risk is that the site will be unable to cope with similar demands.

Clarity is beginning to seep in largely courtesy of the Troika and therein lies the country’s best chance of salvation.


Clarity is beginning to seep in largely courtesy of the Troika and therein lies the country’s best chance of salvation.

Indeed, without the Troika’s insistence on the repayment in full of investors in insolvent financial institutions who knows what awful things would have happened to Ireland? Best we privatize everything and let the market sort things out, as it did so well in housing and banking.

We owe the Troika a debt of gratitude.

Of course “We” in this case is the agents of financial capitalism, their lackeys in the EU establishment and Europe’s utterly discredited but still dominant neoliberal consensus.

I think we may need an Irish consumer stress test report. The KBC/ESRI consumer sentiment index fell from 70 in August to 60.2 last month.
That’s one heck of a drop.

slightly off topic, don’t know where else to put it, but has anyone read this speech by the BoE’s financial stability chief?

It basically evaluates prudential standards as applied by modern banks and regulators. It is fairly scathing. Complex risk analysis underperforms simple (even linear) models of prediction.

He also includes the following wonderful lines on ever increasing complexity in banking:
“We had tier 1 and tier 2, then we had tier 3, then we had tiers within tiers -eventually, it all ended up in tears.”

It’s about 20 pages, and occasionally rambles a bit, but it is quite readable and I think marks a new phase on the debate about bank regulation reform. Probably, nothing will be done about the problem anytime soon, but I think we will hear a lot more about this in coming years.

I have written somewhat more extensively on my own site, but i just wanted to bring peoples attention to the speech. It was delivered in the USA to the Fed.

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