Spain’s banking problems lie with the regional banks (the cajas) that lent all the money to property developers to fuel the boom times.
In theory, the cajas sound good – they are small, local and focus entirely on retail and commercial banking, lending to local businesses.
Almost all of these banks were controlled or influenced by one of Spain’s local governments. The politicians in power would have voting rights in its local cajas and would also sit on the board of the bank and nobody in Madrid bothered too much about it whilst all was well.
There were about fifty cajas – now reduced to ten. It is now becoming clear that the local developers were in cahoots with the local politicians. Public sector construction works would be won by ‘favoured’ contractors who would receive loans from the bank.
Investigators are trying to get to the bottom of the value of all of the loans – but don’t hold your breath – this is likely to take years. And this is the problem at the root of the banking crisis – nobody seems to know the extent of the losses on the bank books. The practice in Spain has been for the banks to largely provide their own valuations!
We’ve seen recently George Osborne unveil the final details of the reforms to the UK banks proposed by the Independent Commission on Banking. Essentially, the retail arms of the banks are to be separated from investment banking. But, won’t these new ring-fenced banks look a bit like the cajas of Spain?
The UK banks that have failed, Northern Rock, Bradford & Bingley and HBOS were all pure retail banks.
The real security lies in making the banks stronger – holding more capital and liquid reserves which they now do.
Tim Corfield June 2012