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
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