Monday, May 14, 2012

Bankia bailout receives thumbs up from EU, IMF, and World Bank; thumbs down from depositors

The Telegraph report on the latest Spanish bank reform shows just how vast the gap is between depositors and official entities that support bank bailouts.
Shares in Bankia, Spain’s fourth largest savings bank which was part-nationalised last week, slumped to half the value of their listing price last year and Spanish savers rushed to remove deposits from the stricken lender. 
Apparently, the bank bailout triggered a loss of depositor confidence and a run on the bank.
”The banking reform was well received and supported by all authorities - EU, IMF and the World bank,” Spanish foreign minister Jose Manuel Garcia Margallo said ahead of the eurozone finance ministers' meeting in Brussels this afternoon.
Having never seen a bank bailout they didn't approve of, authorities praised the bailout that rather than boost depositor confidence triggered a run on the bank.  This praise creates a rather large gap between the fantasies of the authorities and the actual facts.

Your humble blogger notes that he predicted that the Spanish government's bank bailout led reform would fail.  A run on the bank is as clear an indication of failure as there is.

If and when the Spanish government and the other authorities want to solve the bank solvency crisis, they will adopt my blueprint for saving the financial system and require the banks to

  • recognize their losses (the Swedish model);
  • provide ultra transparency so market participants can confirm the losses have been recognized; and
  • rebuild their book capital levels through retention of future earnings.

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