NATURE OF BANK DEPOSITS IN SPAIN(Project towards partial fulfillment of the assessment in the subject of Principles and Practice of Banking)Date: 7th February 2013SUBMITTED TO: SUBMITTED BY:DR. RITUPARNA DAS ADITYA SINGHASSOCIATE PROFESSOR 765 – UG VI SEMESTERFACULTY OF MANAGEMENT STUDIES B.B.A. (H.) LL.B. (H.) NATIONAL LAW UNIVERSITY, JODHPUR WINTER SESSION (JANUARY – MAY 2013)
INTRODUCTIONThe latest available statistics on bank deposits show that €50 billion euros have left Spain sincelast year. This was announced as the German news agency DPA reported that almost €900million was withdrawn by Greek savers on May 14 alone.According to data compiled by Thomson Reuters, Greek banks have lost around €72 billion (30percent) in deposits since 2010. In Belgium, France and Italy, depositors have also taken flightfrom banks.There are growing fears in Spain that the withdrawal of €50 billion (2.9 per cent of Spain’sdeposits) will cause a bank run when customers who have lost confidence in their banks rush totake out their savings. The real magnitude of the current outflow of cash is unknown, as the dataonly includes the changes in deposit as of March of this year—the last month of publishedstatistics.Last week, Moody’s lowered its ratings on 16 Spanish banks, with a three-notch downgrade forthe three major Spanish lenders, Santander, CaixaBank and BBVA, motivated by thedeteriorating economic situation and the reduced creditworthiness of the government. Thiscomes two weeks after Bankia was nationalized, when the Spanish government converted itsstake in the company to equity in an effort to shore up its position.The bank was formed in 2010 through an amalgamation of seven cajas (savings banks or creditunions) with high levels of toxic assets on their books as a result of the collapse of the propertymarket since 2008.It is estimated that Bankia possess €30 billion euros worth of debts to failed developers and thosewhose land has been repossessed.Last week the Spanish newspaper El Mundo reported that customers had withdrawn €1 billionsince the nationalization the week before. The next day Bankia lost 28 percent of its marketvalue, forcing the economic minister, Fernando Jimenez Latorre, to claim that it is “not true thatthere was an exit of deposits.”Bankia Chairman Jose Ignacio Gorigolzarri also came out in defence of the bank, stating that its“clients can be absolutely calm about the security of the savings they have deposited.”These statements have helped the bank’s shares rise, closing up 23.49 percent at €1.756 euroslast Friday. But this still represents a 53 percent decrease from its listing price of €3.75 euros.Bankia declined to comment on the reports of deposits leaving the bank. The €1 billion figurewould be less than one percent of the bank’s total deposit base, but still reflects growing concernover its solvency.
The €1 billion exodus from Bankia, Moody’s downgrading and the news that Spanish banks’ badloans have hit their highest level since 1994 at 147.968 billion euros are already affectingSantander. In Britain, where Santander has more than 25 million customers and 1,400 branchesand holds millions of mortgages, loans and overdrafts, there is growing concern that SantanderUK could be used to prop up its parent company in Spain, Banco Santander. It would also affectthe financial institutions that have lent Santander UK on the interbank market.Santander has tried to reassure its customers by setting aside €2.9 billion to cover bad loans, butthese assurances are not enough. Customers remember the images of people queuing outsideNorthern Rock’s UK branches to get out their cash in 2007.In Spain, the latest statistics published by the Bank of Spain show that bank deposits at the endof March were up 0.7 percent from the previous month at €1.16 trillion. However, this figure isdown four percent compared with last year.Until recently, the outflow of cash was confined to wealthy depositors and institutional investors.Now, there are signs that ordinary savers are withdrawing more money than normal. If thisbecame the norm, it could cause a genuine domestic bank run.One video uploaded to YouTube reflects what is happening in Spain. A woman, alongsidedozens of journalists, waits for Minister of Finance and Public Administrations CristobalMontoro to arrive in his official car to the ministerial building. When the minister leaves the car,accompanied by some of his aides and bodyguards, the woman goes to the minister, shakes hishand and says, “I am a citizen who was passing by. I am worried, my money is in Bankia. Doyou think I should go to the bank and take it all out?”“No,” answers Montoro.“Are you sure?” explains the woman. “Yes, yes,” responds Montoro.“I have been working all my life, and if someone takes my money, I will kill someone,” repliesthe anonymous woman.The biggest fear in Europe immediately is over the Greek banking system. If a bank run occurs,every bank in the world would be affected—even seemingly healthy ones. The first to beaffected by concerns over Greek solvency would be so-called “peripheral” countries like Spain.According to Expansion newspaper, US investment bank Goldman Sachs has been tasked withproviding an independent assessment of the banks’ financial problems.Tristan Cooper, sovereign debt analyst at Fidelity Worldwide Investment, has called for a rapidintervention by the European Central Bank (ECB). He told Dow Jones, “Once a bank run begins,it is very hard to stop without a credible deposit guarantee… Given the fragile fiscal position ofSpain, the European Central Bank is under increasing pressure to step in to calm depositorsnerves.”
Paul Krugman stated in Der Spiegel that more liquidity injections from the ECB are necessary.He added that the ECB should cut interest rates and give unlimited money to banks andgovernments.Krugman believes that there should be an “unlimited intervention of the ECB” to save Spain andItaly, and said that an exit of Greece from the euro zone would cause a flight of capital incountries of the periphery and a bank run.The immediate problem is that many banks in crisis-hit countries such as Spain and Italy havefew assets to give to the ECB as collateral for the loans.But a policy of handing billions to the banks, like the €1 trillion the ECB auctioned in Decemberand February, will only benefit major bank stockholders, hedge fund managers and financialspeculators. It would strengthen the hand of the very same financial elite that is demanding theimplementation of drastic austerity measures across Europe.The crux of the "pain for Spain" was exposed, when the world learned that despite all attempts tothe contrary, Spanish banks are no longer perceived as safe by the locals, and the result was arecord 5% deposit outflow from local banks: cash that was promptly redeposited elsewhere inthe Eurozone. And as money flow theorists know all too well, if cash is exiting the Spanishbanking system - i.e., if the confidence is just not there, not only is growth impossible, not onlyare any austerity plans or otherwise to push GDP higher futile, but all attempts to save the localbanking system - which is now reliant on the ECB for funding to the tune of a record €412billion, and which means the country has already been bailed out by the ECB - are futile andmerely sunk, literally, costs. In short: the deposit outflows continued, and while not at the recordJuly 5% pace, a whopping €17 billion, or 1.1% of total, deposits left the country for good and isunlikely to come back.From Reuters:Consumers and firms continued to pull their money out of Spanish banks in August but at aslower speed than in July, with private sector deposits falling slightly more than 1 percent asSpain was sucked into the centre of the euro zone debt crisis.Private-sector deposits at Spanish banks fell to 1.492 trillion euros at end-August from 1.509trillion euros in the previous month, hitting their lowest point since April 2008.Which also means that if the continued Spanish government cash decline persisted into Augustafter plunging from March to July (as we reported before), then at this point not even a long-overdue bailout request by Rajoy will do anything more than push up Spanish bonds for a weekor two before the Spanish house of cards finally comes tumbling down.
But back to Spains deposits, or lack thereof, in todays scary chart of the day:Naturally, the above chart means that with the ECB needed to step in Spanish banks, the entirecountry has already been effectively bailed out.
Today, however, it is not Spanish banks that will dominate the newsflow, but the resumption ofSpanish riots as Rajoy announces shortly the details of his plan to promote futher austerity, evenas more and more insolvent regions demand that the insolvent government bail them out. Fromthe FT:As protesters descended on Spain’s parliament for a second night on Wednesday, Mr Rajoycalled on Spaniards to ignore “short-term interests”. His government is also preparing to unveil anew reform programme and the results of a banking stress test.There was more trouble for Mr Rajoy in the regions when Castilla La Mancha, run by his centre-right Popular party, requested a €800m bailout from the central government. Castilla La Manchais the fifth of Spain’s heavily indebted regional administrations to request financial assistancefrom Madrid.The political turmoil continued to put pressure on Spanish stocks, with the Ibex share indexfalling 0.6 per cent on Thursday morning. On Wednesday, events in Spain triggered a sell-off ofEuropean shares as investor concerns mounted about the eurozone’s fourth-largest economy.The financial pressures on Mr Rajoy’s government have been intensified by a constitutionalcrisis brewing over the Catalonia region, which called snap elections this week that could hastena move toward independence.“Spain is increasingly slipping from his hands,” said Alfredo Pérez Rubalcaba, the leader of thecountry’s opposition socialist party. “There are very clear fractures in Spain, and the one I ammost worried about is social fracture.”
Reuters – Money flies out of Spain, regions pressuredSpaniards alarmed by the dire state of their banks are squirreling money abroad at the fastest rate sincerecords began, figures showed on Thursday, and the credit ratings of eight regions were cut. Spain is thenext country in the firing line of the euro zone’s debt crisis, with spendthrift regions and shaky banksthreatening to blow a hole in state finances and pushing funding costs towards levels that signal theneed for a bailout. The European Commission gave new help on Wednesday, offering direct aid from aeuro zone rescue fund to recapitalize Spanish banks and more time for Madrid to reduce its budgetdeficit. That helped lower the risk premium investors demand to hold Spanish 10-year debt rather thanthe German benchmark on Thursday, but it remained close to the euro-era record, at 520 basis points.Bank of Spain data showed a net 66.2 billion euros ($82.0 billion) was sent abroad last month, the mostsince records began in 1990. The figure compares to a 5.4 billion net entry of funds during the samemonth one year ago.The Financial Times – Spain reveals €100bn capital flightMadrid was dealt a double blow on Thursday after it emerged that almost €100bn in capital had left thecountry in the first three months of the year and the head of the European Central Bank lambasted its
handling of Bankia, the troubled Spanish lender. Data published by Spain’s central bank showed €97bnhad been pulled out in the first quarter – around a 10th of the country’s GDP – as concerns mountedover Madrid’s ability to contain its twin economic and financial crises, which have forced governmentborrowing costs to euro-era highs.The Independent (UK) – Spain told to get a grip of bank crisis as bailout looms largeECB chief launches broadside at indecisive government as panic takes hold in Madrid and RomeLast week the Spanish government announced plans to inject a further $19bn into Bankia, the country’sfourth largest lender, which has been crippled by bad loans to the nation’s collapsed property sector. Anindependent audit of Spain’s banks, which are estimated by some analysts to be stuffed with more than€100bn of bad loans, is underway and will report next month. The audit is widely expected to announcethat many of Spain’s other lenders need significant capital injections too. The fear of investors is that theSpanish government will be unable to afford to rescue its banks, forcing the country to apply for helpfrom the €500bn European bailout fund and the IMF. Earlier this week Spain floated a plan to shore upBankia by issuing the bank directly with its own sovereign bonds, which would allow the lender to swapthese securities for euro loans at the ECB. But the ECB said earlier this week that it had not beenconsulted on any such plan. Analysts have also pointed out that this would merely make Spain’s banksmore vulnerable by tying their fate even more closely with a Spanish government that is in danger ofbeing frozen out of the capital markets.The Economist – The euro crisis: How to save SpainThe focus should be on fixing the banks, not on cutting the deficitGREEK politics may determine the euro’s short-term future, but it is Spain that poses the singlecurrency’s most difficult problem. The euro zone’s fourth-biggest economy is caught in an increasinglydesperate spiral of deepening recession, drowning banks and soaring borrowing costs. Spanish firms andbanks are all but cut off from foreign funds. On May 30th yields on ten-year sovereign bonds rose above6.6%, close to the level at which Greece, Ireland and Portugal had to seek a bail-out. After thegovernment’s botched nationalisation of Bankia, a troubled savings bank, Spanish depositors are jittery(see article). A bank run is all too plausible—especially if Greece, which is bracing itself for a freshelection on June 17th, is forced out of the euro soon. Even if that calamity is avoided, Spain’s slump willdrag the country inexorably towards insolvency.The Economist – Spain’s banking system: TeeteringSpain has avoided facing up to its banking problems. Now it has no choiceThe burning question is whether the scale of Bankia’s hole provides clues about the state of other weaklenders. True, Bankia had the biggest property exposure in Spain, not least in Valencia on theMediterranean coast. That region is home to CAM, a failed savings bank dubbed “the worst of theworst” by Miguel Ángel Fernández Ordóñez, who this week brought forward his exit from the post ofSpain’s central-bank governor. Bankia also made risky loans to low-income immigrants. And at least €6.6billion of the cleanup relates to industrial stakes and tax assets. But Bankia’s assumptions on the rate ofnon-performing loans in areas such as residential mortgages and corporate loans set a disturbing newbenchmark for other lenders. It seems highly likely that an external review of Spanish banks by twoconsultancies, whose initial findings are due later this month, will find more holes.
Alvaro Saavedra Lopez, a senior executive for I.B.M. in Spain, says many of his corporatecounterparts across the country are similarly looking for safer havens by transferring their sparecash to stronger euro zone countries like Germany “on a daily basis.”It is only a trickle so far, and not nearly enough to constitute a classic bank run. But thesegrowing transfers of deposits out of troubled Spanish banks reflect a broader fear that thecountry’s problems could make it hard for Spaniards to get to their money if banks fail andcannot be supported by the government. In a worst case, some even worry their money will beworth substantially less if Spain is forced to leave the euro currency zone and re-adopt its oldcurrency, the peseta.Money already has been pouring out of banks in Greece, where many citizens believe it isincreasingly likely that their country will be forced to leave the euro zone. But for Europeanpolicy makers and economists, the possibility of mini-runs on banks spreading from Greece toother, bigger countries like Spain — with 1 trillion euros, or $1.25 trillion, in bank deposits —poses a much more serious risk. Indeed, the outflow of money from Spanish banks couldincrease if the ratings agency Standard & Poor’s, as expected, downgrades Spanish banks, ineffect saying that their weakened state makes them riskier.The havoc that a stampede might cause to the Continent’s financial system would greatlycomplicate efforts by European Union officials to fashion a longer-term plan to ease the debtcrisis and revive Europe’s economy, because authorities would have to cope with the staggeringadded costs of shoring up banks.“A bank run can happen very quickly,” said Matt King, an expert on international fund flows inLondon for Citigroup. “You are fine the night before, but on the morning after it’s too late.” Itwas a similar liquidity crisis on Wall Street in September 2008 — which started with nervousinvestors pulling money from troubled institutions, then quickly from healthier ones — that setoff the financial crisis.In Greece, more than two years into its financial crisis, nearly one-third of the country’s bankdeposits have already left the country.There has been no such exodus in Spain so far, where over the last year about 4.3 percent ofbank deposits, or 41 billion euros, the equivalent of about $51 billion, has been transferred out ofthe country. But that amount is in addition to a decline of 140 billion euros in foreign-ownedfinancial assets in the last year, like the sale by foreigners of Spanish government bonds.The trend worries European officials. At an informal meeting of European Union leaders onWednesday in Brussels, Italy and some other countries began pushing a proposal to increaseconfidence in banks — and stem withdrawals — by creating a regionwide deposit insurancesystem to buffer account holders against banking collapses, similar to Federal Deposit InsuranceCorporation in the United States. It is especially a concern for Spain, where the national depositinsurance fund is virtually bankrupt.
What is more, the condition of Spanish banks is expected to worsen over the next year ascommercial real estate and mortgage losses, a big source of the nation’s bank troubles, continueto mount.On Friday, Bankia, the ailing Spanish lender, requested an additional 19 billion euros in rescuefunds, at the same time that its credit rating and that of two other Spanish banks were cut to junkby Standard & Poor’s.So far there is little sign that specific plans for a Europe-wide deposit fund are imminent. Butofficials in Brussels say the idea, along with the more controversial question of issuing eurobonds backed by the credit of all euro zone members, will be discussed in more detail nextmonth when the European Union leaders hold their next formal meeting.The idea of euro zone-wide deposit insurance has been around for a long time, but it faces theobvious political hurdle of German taxpayer resistance to backing 2.8 trillion euros worth ofdeposits in risky countries like Spain and Italy, as well as those that have already been bailed out— Greece, Ireland and Portugal.In a recent report, Mr. King, the Citigroup analyst, highlighted how the flight of money held byforeigners presaged broader bank crises in Ireland and Greece before those countries requiredEuropean bailouts. Italy, too, is now nervous about the sudden exodus of 220 billion euros inforeign money over the last year.Such hot-money flows are not unusual and do not always signify a similar migration of domesticmoney. But Mr. King pointed out that if these foreign runs began to approach the levels reachedin Ireland and Greece, where more than half of foreign bank deposits and a third of bondholdings exited those countries before they were bailed out, Spain and Italy could have their ownbanking tailspins.At their essence, bank runs are a fear-driven phenomenon. Once they start, they are difficult tostem.The less damaging versions occur when money stays in the country, but moves from weakerinstitutions to stronger ones. This was the case in Britain in 2007, when many depositors whofeared losing their money at the regional bank Northern Rock moved their funds to theinternational giant HSBC, hastening Northern Rock’s need to be bailed out by the government.Such deposit migration is now happening in Spain as people move money from weak savingsbanks, called cajas, to stronger institutions with international reach, like Santander.More devastating to an economy is when cash leaves the country en masse, as occurred inArgentina in 2001. The government imposed capital controls, making it illegal to transfer moneyabroad. Mass money emigration is now taking place in Greece, where, under euro zone rules, itwould be illegal to impose capital controls.One indicator of money flow trends is what happens to corporate banking deposits. Corporatedeposits tend to be much smaller than consumer bank savings. But because company treasurers
tend to be more sophisticated when it comes to assessing financial risk, they tend to withdrawmoney more quickly when they perceive a bank might be troubled than individual depositors do.In Greece, for example, corporate deposits have been fleeing much faster — by 27 percent overthe last 12 months, compared to 15 percent for consumer deposits.By this measure, the professional money is fleeing Spain, too, at a much faster pace comparedwith consumer funds. The country’s 721 billion euros in individual deposits is down only 1.4percent for the year. But corporate deposits have existed at a rate of 14 percent, shrinking to 190billion euros during that period, according to Goldman Sachs.While many Spanish consumers may still be trusting the government to protect their money —perhaps not realizing that the country’s Deposit Guarantee Fund has been depleted and nowexists mainly in name only — the in-the-know money is heading for the border at an increasinglybrisk pace.“If confidence in the Spanish banking sector falls any further, the possibility of panic and a bankrun becomes very real,” said Mr. Saavedra of I.B.M., who leads the banking risk managementpractice at the software group in Spain.Analysts sound a further note of caution. Because the official deposit data for Spain is currentonly through March, the figures do not reflect anxieties about the deepening political crisis inGreece since the May 6 elections.Nor do the deposit data yet track what has happened since the Spanish government nationalizedBankia, the country’s largest property lender, in the following days. Cleaning up Bankia’smortgage mess will cost at least 9 billion euros, Luis de Guindos, Spain’s economy minister,warned Wednesday.And clearly, some consumers are now picking up on the warning signals. Mr. de la Peña, thecivil servant in Madrid, said that he had recently transferred 80,000 euros, essentially his lifesavings, from Ibercaja, one of Spain’s savings banks, to Santander.But now, with daily news reports on the prospect of Greece’s possible departure from the eurocurrency union, he is seriously considering converting his nest egg to British pounds.“I’m exasperated because the situation changes every day,” he said. “But what is certain is that ifGreece now leaves, it’s going to be one huge and bloody chaos.”