Spain, which for years underestimated losses at its banks, is poised to overestimate how much they can earn in an economy mired in recession.
Outside advisers hired by the Spanish government to conduct stress tests on the nation’s lenders estimated that losses could reach €274 billion in the next three years. The adviser, management-consulting firm Oliver Wyman, predicted banks could earn €23 billion a year before loss provisions, about what they made in 2011, even if the economy contracted by 6.5 per cent under an adverse scenario.
Overestimating earnings could lead Spain to ask for too little financial assistance from the European Union to recapitalise its ailing banks. That increases the risk that the bailout will fail to restore market confidence in the nation’s banking system and provide only a short respite, as did four previous attempts since 2010.
The studies by Oliver Wyman and Munich-based Roland Berger Strategy Consultants GmbH, which found the capital needs to be between €26 billion and €62 billion, will play a significant role in determining how much aid Spain will request. The exact figure will be decided after a more detailed bank-by-bank examination by the two firms is completed in September.
The report by New York-based Oliver Wyman concluded that most of the potential bank losses could be weathered by profits, provisions and existing capital buffers. The Roland Berger analysis reached a similar conclusion, though it didn’t provide a breakdown of how much would be met by earnings.
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