Spain's nationalization of Bankia won't achieve stated goals

The Guardian ran an article that provided more insight into the three reasons why the Spanish government decided to effectively nationalize Bankia.

"It is a necessary first step to ensure solvency, the tranquility of the depositors and to dispel the doubts of the markets on the capital needs of the entity," the finance ministry said.

Regular readers know that this nationalization will not achieve the stated goals.

First, it does not ensure the solvency of the bank.  Bank solvency is defined as the market value of the banks assets minus the book value of its liabilities.  If the result is positive, the bank is solvent.  If the result is negative, the bank is insolvent.

Bankia has more than €30bn of exposure to troubled loans to property developers and repossessed land and buildings. 

The government is expected to lend or give Bankia up to €10bn aid overall, although some analysts say it will need more....

The 10 billion euros of aid is to address troubled loans to property developers and related collateral.  What about all the other bad assets on the bank's books?

As the analysts point out, Bankia will need more aid if the goal is to ensure its solvency today.

Second, it does not ensure the tranquility of the depositors.  In fact, it has exactly the opposite effect.

The tranquility of depositors is directly a function of whether they think the Spanish government has the resources to make good on the deposit guarantee.  Bank bailouts use resources and diminish the ability of the government to honor the guarantee.  Depositors flee when there are doubts about the guarantee.

Third, it does not dispel the markets' doubts about the capital needs of the bank.

The measure is further proof that Spain's banking sector has failed to digest a huge pile of toxic assets and debt left over by a property bubble that burst four years ago.... 

Extra reforms will include yet another round of provisioning against toxic real estate with banks ordered to set aside a further €35bn on top of the €54bn already provided, financial sources told Reuters. 

Bankia was created just 17 months ago by the merger of seven regional savings banks in an attempt to shore up their combined defences against the bad real estate loans, worthless building land and unsold apartment blocks they had accumulated. 

Savings banks, many controlled by local politicians, were the most reckless lenders to developers, land speculators and building companies, which have left Spanish banks burdened with €184bn of problem loans and assets.

Regular readers know that the only way to dispel market doubts is to require the banks to provide ultra transparency and disclose on an on-going basis their current asset, liability and off-balance sheet exposure details.

It is only when the market can independently assess this information that it can determine exactly how much additional capital is needed to return Bankia to solvency.

If ultra transparency is not required, the market will always assume the reason is that Bankia (and the other banks) have something to hide.  The market did this when Ireland tried bailing out its banks in a similar fashion and were proved correct.