Bankia writedowns cast doubt on Spain's bank estimates

A Bloomberg article confirmed your humble blogger's prediction that the Spanish government would undermine its credibility by making misleading statements about the true extent of the troubled assets in the Spanish banking system.

Spain’s two-week effort to overhaul its lenders and estimate for what it will cost taxpayers may already look out of date. 

Economy Minister Luis de Guindos said May 11 that a law tightening provisioning rules, his second in three months, would require public funds of less than 15 billion euros ($19 billion).  

BFA-Bankia, the bank nationalized the same week, said on May 25 it was taking 8.5 billion euros of provisions on top of those demanded by the two decrees, as it sought a 19 billion- euro state bailout.... 

“They’ve done two reforms already and there will probably be more; I don’t know how many more,” Javier Diaz-Gimenez, a professor at the IESE business school in Madrid, said in a telephone interview. “They have zero credibility.”...

Please re-read the highlighted text because it summarizes why Spain and every other country must require their banks to provide ultra transparency.

It is only when the banks disclose on an on-going basis their current asset, liability and off-balance sheet exposure details that market participants have the information they need to independently assess the banks.  It is only when market participants can conduct an independent assessment that they trust they know the condition of a bank.

“They are trying to do the minimum all the time and kick the can down the road,” Juan Rubio-Ramirez, an economics professor at Duke University and visiting scholar at the Federal Reserve Bank of Atlanta, said by phone yesterday. 

This is a direct reflection of policymakers and financial regulators having adopted the Japanese model for handling a bank solvency led financial crisis.  The policies adopted under this model are all about kicking the can down the road and praying for a miracle to solve the problem.

Efforts so far have focused on assets linked to the real estate industry, while the government and executives including Banco Santander SA Chief Executive Alfredo Saenz have said that household mortgages don’t pose a risk. Spain’s unemployment rate exceeds 24 percent and the economy is suffering its second recession since 2009. 

“Mortgages get paid in good times and in bad,” Saenz said on April 27. “Anyone raising this problem as one of the issues for the Spanish financial system is saying something stupid.”

Bankia may have cast doubt on that position by setting aside another 2.2 billion euros in provisions for individual loans, most of which are residential mortgages.....

Unemployed people don't pay their mortgages after they have exhausted their savings.

As part of de Guindos’s latest overhaul, Spain has commissioned Oliver Wyman Ltd. and Roland Berger AG to carry out a stress test on all Spanish banks’ entire loan book. That will be followed by a detailed audit carried out by three companies. 

“There should be a higher level of non-real estate provisions, whether that’s done through legislation or informally on the back of this external review,” Nomura’s Quinn said in a telephone interview. “There will be pressure for every domestic Spanish bank, except Santander and BBVA, to raise capital if you assume the kind of provisioning we’ve seen in Bankia.”

In the absence of requiring the banks to provide ultra transparency, neither the stress tests nor the detailed audit will restore the banks' or the government's credibility.