Saturday, May 26, 2012

Bankia bailout shows why it is important to 'go in and have a good look at the assets'

As reported by Bloomberg,
The Bankia (BKIA) group, a Spanish lender nationalized earlier this month, will seek 19 billion euros ($23.8 billion) of government funds as it provisions against real estate and non-property loans.... 
The group needs a further 4 billion euros to cover real estate on top of provisions already ordered by the government, and 5.5 billion euros for the rest of its loan book, it said. 
The unraveling of Bankia has deepened concern about the health of Spain’s banks and increased the government’s financing costs as it struggles with the debt crisis. 
The restructuring costs for BFA, which come on top of 4.5 billion euros from a first government bailout, compare with a May 11 estimate from Economy Minister Luis de Guindos that less than 15 billion euros of public funds would be needed to support the whole industry.
Since reality has turned out to be radically different than the government minister suggested, there is a very good reason to doubt anything that the government has to say about the banks going forward.
“Bankia is the tip of an iceberg as we’ve been saying all along,” said Tobias Blattner, an economist at Daiwa Capital Markets in London, in a phone interview yesterday. “It’s a very large institution, it’s systemically important and it needs to be dealt with properly.”...
Which is why your humble blogger has been saying that Bankia should be required to provide ultra transparency and disclose all of its current asset, liability and off-balance sheet exposure details.  That way, the market can assess just how insolvent it is.

At the same time, because Spain has a modern financial system with deposit guarantees and access to central bank funding, the government does not have to bail out Bankia.  Rather, it can let Bankia rebuild it book capital levels through retention of future earnings.

If Bankia is representative of the Spanish banking system, the IIF has done a study that indicates it will take about 4 years for Bankia to retain enough earnings to rebuild its capital base.
Bankia announced yesterday a restated 2011 loss of 2.98 billion euros, “without reservations from auditors.”...
It is not surprising that the auditors would have no reservations.  Through the end of 2011, Bankia was operating under regulatory forbearance and was allowed to engage in practices like 'extend and pretend'.  As a result, there was no need for Bankia's financial statements to reflect the permanent loss of value on many of its loans.
De Guindos told parliament on May 23 that Spain would provide as much public money as necessary for the Bankia group as he said it was a “specific case,” without any read-across for the rest of the industry.
There is no read-across of course if one assumes that borrowers do not approach multiple banks to see which will give them the lowest cost loan.

There is no read-across of course if one assumes that Bankia had a monopoly on all the bad real estate related to Spain's real estate bubble.

There is no read-across of course if one assumes that Mr. De Guindos knows what he is talking about after Bankia asked for a bigger bailout than he thought the entire Spanish banking system would need.
“It’s a big number for the restructuring, much more than the government had previously required, and shows the importance of going in and having a good look at the assets,” said Daragh Quinn, an analyst at Nomura International in Madrid.
Please re-read the highlighted text as here is an analyst saying why ultra transparency is needed.  The simple fact is that market participants don't believe either the government or the bank!

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