Spanish financial system: the rescue is almost complete


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The restructuring of the Spanish financial system has been set in motion
Progress in the restructuring of the financial system.
Credit: The road to recovery.

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Spanish financial system: the rescue is almost complete

  1. 1. Spanish financial system: the rescue is almost complete Ana Rubio. Head Economist. Financial Systems XI Seminar of the Mortgage and Financial Sectors in Spain. Cesine Madrid, 23 January 2014
  2. 2. Index Section 1 Progress in the restructuring of the financial system Section 2 Credit: The road to recovery Page 2
  3. 3. The restructuring of the Spanish financial system is set in motion Problem Solution Asset quality: real estate and others Higher provisions, sufficient capital (severe stress test), Independent audits and transfer to Sareb Lack of differentiation between entities Stress test (capital needs identified at entities managing only 30% of total system assets), additional transparency requirements Capital needs exceed the government’s capacity ESM credit line is a credible backstop. Total injections of 5% of GDP (like UK), manageable burden for public debt 45 savings banks (cajas), with peculiar legal form 11 now, and 9 have become banks. New regulation of cajas removes political influence Late reaction, in part due to institutional problems Clarification and reinforcement of FROB-Bank of Spain functions. Regulation on crisis management, restructuring and resolution frameworks Page 3
  4. 4. Balance-sheet clean-up has been focused on real estate assets Real estate exposures net of provisions (EUR bn) Source: Bank of Spain The bulk of the problems were in real estate assets 250 200 Foreclosures In 2012 real estate exposures halved, and exposure by end-2013 is estimated to be around EUR100bn 150 Credits The worst-affected entities have transferred 90% of their assets to Sareb, and are subject to restructuring plans 100 50 The system has almost finished cleaningup real estate exposures, in particular the sound entities 0 Dec-11 Asset sales and others Transfer to Provisions Sareb Royal Decree Laws Dec-12 Page 4
  5. 5. Only a limited part of the system is subject to restructuring Percentage of assets in entities under public aid or restructuring programme (%) Source: EU Commission The stress test identified capital needs at entities that only represented 30% of the system’s total assets European regulation on public aid has made the process longer than in the US The agreement regarding the end of the Spanish banking rescue is positive, and underlines that steps are being taken in the right direction Page 5
  6. 6. Spanish entities are ready for the ECB comprehensive assessment Composed of 3 pillars Valuation Supervisory Risk Assessment to review key risks, including liquidity, leverage and funding In principle, details point to a balanced exercise with a wide enough scope Asset Quality Review (AQR) to analyze the quality of banks’ assets, collateral valuation and provisions However, some issues require further clarification: bail-in, stress test procedures (end-January), publication of data so as to replicate the exercise… Stress Test to examine the resilience of banks’ balance sheet to stress scenarios The exercise is pivotal to eliminate all concerns about the solvency of the European banking sector Spanish entities went through a similar exercise during the summer of 2012, so no major surprises are expected Page 6
  7. 7. However, there are some pending issues The system does not need additional restructuring plans, but an efficient implementation of current plans is crucial Problem Desirable solution Complete the restructuring Quick resolution of intervened institutions, as international experience shows that public banks can be inefficient. Overcapacity is a concern Liquidate Sareb’s assets The sales should be gradual Restore liquidity conditions Restoration of the interbank and wholesale markets, to break the vicious circle of banks and sovereigns. Banking union is the way forward Page 7
  8. 8. European problems persist: Financial fragmentation European banks: Average exposure to EU members The crisis has caused a reversal of flows between EU member states, both core and peripheral Source: BIS Fuente: BIS 800000 700000 There is still a vicious circle between sovereign and banking risks 600000 500000 -42% 400000 300000 200000 -55% ECB liquidity has replaced the interbank market and the monetary policy transmission mechanism is broken 100000 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 0 Core to core Core to periphery Page 8
  9. 9. Banking union is much needed: the current fragmentation is incompatible with the euro Single Resolution Mechanism, SRM (EMU) Single Supervisory Mechanism, SSM (EMU) Single Regulation (EU 28) Single DGF (EMU) • No details • COM proposal on SRM: • ECB direct supervisor of ≈ 130 banks from Nov 2014 Jul 13 • Trialogue negotiations expected to finish by April-May 14 • New State Aid rules: Jul 2013 • ESM direct recapitalisation: final regulation pending CHALLENGES 1 SRM is the necessary counterpart to SSM 2 Any delay in SRM must be avoided, Council and Parliament have to overcome differences 3 A credible SRM needs a single authority and a single resolution fund 4 The legacy assets problem should be dealt with at a national level before the SRM Page 9
  10. 10. Index Section 1 Progress in the restructuring of the financial system Section 2 Credit: The road to recovery Page 10
  11. 11. What factors are affecting credit? Demand Credit Economic situation and uncertainty: Businesses are not investing The restructuring affects a limited number of entities, which do not have access to liquidity Some companies have run out of business, so they no longer have demand for credit There is asymmetric information: some clients have to resort to another financial entity that does not know them This is a common pattern in Spanish crises, and investment is starting to improve Projects have higher risk due to the economic situation The most promising sectors are those related to exports Financial fragmentation affects funding conditions. Regulation and supervision are stricter Page 11
  12. 12. Private-sector deleveraging is much needed Credit to the private sector 4 3 Source: ECB and Bank of Spain % (% GDP) Private-sector leverage is excessive. Spanish levels are above those of EMU 180% 160% 140% 48% Deleveraging will continue in terms of the stock of outstanding credit 120% 41% 100% 41% 80% 23% 46% 40% 30% 10% 6% 7% Spain 38% 41% 7% Compared to EMU, the most significant differences are in real estate businesses and mortgages 6% Sep-13 28% Dec-00 Dec-00 8% 60% Sep-13 20% 63% Dec-08 40% 11% 0% 52% 33% Dec-08 60% Businesses EMU Consumption Housing Real estate businesses Businesses Rest of businesses Page 12
  13. 13. The deleverage of outstanding credit is compatible with a positive flow of new credit Private-sector: new loans and repayments (Quarterly figures, EUR mn) Source: Bank of Spain and BBVA Research Spanish statistics on new loans include ‘novations’ (change of terms and conditions), so refinanced operations are included 350000 300000 The forecast suggests that new lending may have bottommed-out in the first half of 2013. In the future refinancing will play a less important role 250000 200000 150000 New Business Mar-17 Mar-16 Mar-15 Mar-14 Mar-13 Mar-12 Mar-11 Mar-10 Mar-09 Mar-08 Mar-07 Mar-06 Mar-05 Mar-04 Mar-03 100000 Repayments and write-offs However, new lending will not exceed repayments until the end of 2015, so private-sector deleveraging has to continue Page 13
  14. 14. The price of credit for SMEs is still higher in peripheral countries Interest rates on new bank lending (%) Determinants of interest rates on new bank lending (to non-financial corporations) (to non-financial corporations, less than EUR1mn, less than 1 year) Source: BCE Source: BBVA Research based on ECB and Bloomberg 7,0 Commercial policy ECB official rate Spread 12 months (12m-Euribor) Spread UEM (10y UEM-Euribor) Spread sovereign (10y country-10y EMU) CE Regulation 290/2009 6,5 6,0 5,5 Germany France 1.66 -1.03 1.24 0.59 1.21 0.35 0.69 0.17 0.46 0.15 0.54 Spain -1.29 1.6 0.44 1.22 -0.16 Italy -1.47 -0.06* 0.5 1.05 -- 5,0 -- Does not differ significantly from zero * Not significant at 20% confidence 4,5 4,0 The price of credit is affected by the sovereign spread. The solution is banking union 3,5 3,0 2,5 Eurozone France Spain Nov-13 Aug-13 May-13 Feb-13 Nov-12 Aug-12 May-12 Feb-12 Nov-11 Aug-11 Feb-11 Germany May-11 Nov-10 Aug-10 May-10 Feb-10 Nov-09 Aug-09 May-09 Feb-09 Nov-08 2,0 Italy Page 14
  15. 15. No major surprises are expected in the comprehensive ECB assessment and this is compatible with the flow of new credit to solvent demand Banking union is the key to reducing the current financial fragmentation in Europe Page 15