Monday, October 06, 2008

How Safe Are The Spanish Banks?

There has been a lot of talk in recent days about the Spanish banking system being more stable than that of many of its European neighbours. There does seem to be some foundation for this in that Spanish banks have been obliged to provision heavily against possible defaults and have slightly more operational restrictions on their activities. Also, the fund which guarantees deposits is looking reasonably healthy, and in the case of a single collapse it’s quite likely that the Spanish state will step in to guarantee that nobody loses all of their life savings. We are told, although it’s difficult to be sure about such things, that the main Spanish banks have not been heavily involved in the trading of dodgy sub-prime mortgages and the like. Spain has one of the lowest guarantees of deposits in Europe, only €20,000 is absolutely secure and the government here is very reluctant to raise this, despite the fact that other countries are doing just that as the crisis spreads.

The other side of the balance sheet is not necessarily so comforting. The German government has just had to step in with hefty assistance for a mortgage bank that has got into trouble. I’m not completely clear about what has happened, but this is in a country which I assumed to be free of the sort of speculative bubble market in property that Spain or the UK has experienced. Also, check out the size of the reported bail-out and it dwarfs the money which is set aside in Spain for such events. That’s for a single bank, and this is a key point. If it’s just one or two that get into trouble then the problems can be absorbed even at a hefty expense. However, the key issue in all of this is confidence, and that is why nobody ever admits that there is a problem with a bank until after the shit has hit the fan. In Spain there could be significant problems for banks caused by two factors, their exposure in terms of loans to the construction sector and the increasing problems of indebtedness arising from people being unable to keep up with high mortgage payments. A lot of properties in Spain seem to have been overvalued by the companies responsible for assessing this, meaning that many people effectively have 100% mortgages when the official percentage awarded was substantially less than this. Mix this with falling property prices and growing unemployment and the stage is set for a sharp rise in payment defaults.

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