As predicted by the FDR Framework, there is only one way that investors can be convinced that the potential reward from investing offsets the risks of these banks. That way is for investors to see the current asset-level data so they can independently analyze and value both the real estate exposure and the banks.
There are two methods for letting investors see the current asset-level data.
- Invite in a select group of potential investors. There are several problems with doing this that were previously discussed in the first part of the Looting of the Irish posts. These problems include that the investors might not use the information as intended. As Naked Capitalism has documented with CDOs, sometimes an investor buys the equity in a deal so that they can also purchase a short position.
- Disclose to the entire market.
Spanish banks that together need as much as 15.2 billion euros ($21 billion) to meet minimum capital levels now must persuade investors that their battered balance sheets offer the potential return to match the risk.
... Yesterday’s announcement sets in motion a timetable that gives lenders as long as a year to raise funds or risk being taken over by a government bailout fund.
Investors may be skeptical that the Bank of Spain’s estimates of how much capital the banks need fully reflect losses hidden on balance sheets, putting the onus on them find investors quickly, said Inigo Lecubarri, a fund manager at Abaco Financials Fund in London.
“At this stage, I don’t think anyone will be really convinced by anything,” said Lecubarri, who helps manage about $200 million at Abaco. “People will only be convinced when someone credible comes and puts some money on the table to invest.”
Spain’s credit rating was cut to Aa2 by Moody’s Investors Service yesterday, which said the cost of shoring up the banking industry will eclipse government estimates.
Moody’s said Spanish lenders may need as much as 50 billion euros to meet new capital requirements. The Bank of Spain said its estimate of 15.2 billion euros may end up lower as some savings banks opt for stock listings that will reduce the amount of capital they need under Spain’s new rules imposed last month.
“The number from the Bank of Spain comes at the lower end of the range that analysts have been estimating for the capital needs of the Spanish banks,” said Luis de Guindos, a former deputy finance minister in the government of Jose Maria Aznar and a professor at IE business school in Madrid.
... “My opinion is that capital needs are not the main issue,” said de Guindos. “I think the best way to convince investors is to have full clarity and transparency on real- estate exposure of the savings banks.”
The exposure of Spanish savings banks to the real-estate and building industry amounts to 217 billion euros, the Bank of Spain said Feb. 21. About 100 billion euros of that is already classified as “potentially problematic,” of which 38 percent is covered with provisions, the regulator said.