Thursday, May 17, 2012

Contrary to Spanish government expectations, bailout has led to run on Bankia

In its efforts to try to reassure depositors by nationalizing Bankia, the Spanish government has instead triggered a bank run.  According to a Reuters' article,
Customers of troubled Spanish bank Bankia, nationalized last week, have taken out over 1 billion euros ($1.3 billion) from their accounts over the past week, El Mundo newspaper reported on Thursday. 
The newly appointed chairman, Jose Ignacio Goirigolzarri, informed a board meeting that customers had pulled out funds since the bank was taken over by the government, El Mundo said, citing information from the board meeting it had seen. 
The government took over Bankia, the country's fourth largest lender, on May 9 in an attempt to dispel concerns over the bank's ability to deal with losses related to a 2008 property crash.... 
Shares in Bankia slumped 10 percent on Wednesday, compounding a week of falls, as small investors who had participated in a July stock market listing sold their holdings which have lost over half their value since the flotation.
Regular readers might recall that your humble blogger predicted on March 28, 2011 that
the Spanish financial regulators are setting the country up for significant financial instability if the regulators' estimate of the amount of capital needed for the savings banks is too low.
Subsequently, on June 10, 2011, you humble blogger observed
Several months ago, this blog predicted that it would be very difficult for Spanish cajas, like Bankia, to raise equity from private investors without disclosing their asset-level data. 
There is no reason for investors to take a leap of faith when they do not have the information they need to determine if Bankia is solvent today (the market value of its assets exceeds the book value of its liabilities). 
As Mr. Rato pointed out, the Irish crisis changed everything.  One of the things that changed was relying on bank management and the regulators for valuing the bank's assets.  Those investors who invested in the Irish banks after the stress tests lost their investment.  Where is the asset-level data to show that Bankia is any different?
The fact that Bankia was nationalized confirms both the prediction and the need for providing ultra transparency so that investors can independently assess the risk of each bank.

The fact that Bankia was nationalized also explains why there is a bank run.  The stock was sold to individuals.  Individuals who would trust that the Spanish government had accurately assessed the bank's assets and its solvency.

The nationalization of Bankia less than one year after the stock was sold sends a loud message that the Spanish government is not to be trusted.  Hence, the depositors have started a run on the bank.

Bankia officials deny a bank run and instead claim decline in deposits was seasonal.

The Guardian has posted the market's response to this announcement.

Following today's denials from Bankia, City analysts are warning this afternoon that Europe could see bank runs in earnest unless progress is made to resolve the crisis. 
Capital Economics pointed to reports of deposit outflows in Greece, saying: 
Concerns are growing that bank runs could soon become a regular feature in other troubled countries in the region deemed at risk of following Greece's lead. 
The recent rapid decline in Greek bank deposits underlines our warnings that it could be market pressures exerted through the banking system which prompt some form of euro-zone break-up.Greek bank depositsThis graph shows how Greek bank deposits have been falling for months.

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