01 October 2012

George Hay: Spain adds bank stress tests to saga of missteps

Half of the 14 banks tested get off scot-free, with no requirement to boost capital. The main reason is that Spain thinks its banks can make €59 billion of profit over the next three years. True, if Madrid can implement its latest austerity drive and rein in its high sovereign yields by accepting a eurozone bailout, it’s not impossible that these profits could materialise.

But to decisively break the “doom loop” between the banks and their ailing sovereign, a really conservative approach would have been better. Without the leg-up from profits, BBVA is the only one of the 14 banks under review that wouldn’t need capital. Throw in the tests’ other weaknesses – such as the failure to stress banks’ equity portfolios, and the assumption that there’s still some value in undeveloped land – and the industry as a whole would need €112 billion, according to JPMorgan.

Another way to look at it is to compare Spain’s stress test with that of Ireland. The Irish test assumed the overall sector took credit losses of 24 per cent. Spain’s equivalent number is 17 per cent. Spanish banks would have needed €94 billion had they used the Irish criteria, according to Nomura.

Spanish banks might protest they are in better shape. But that’s not the point. The European Union made €100 billion of capital available to restore confidence in the system. Spanish prime minister Mariano Rajoy’s only excuse for not using the whole lot was his promise that the assumptions would be conservative enough. Given that they aren’t, Spain has missed yet another opportunity.

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