Following in Ireland's footsteps, Spain announces bank capital shortfall that reflects politics and not reality

As reported by Bloomberg, the Spanish banking system has a 59.3 billion euro capital shortfall.  A number that is entirely consistent with the 100 billion euro bailout Spain is seeking and entirely inconsistent with actual economic reality.

Regular readers are familiar with governments destroying their credibility by engaging in rounds of hiring third parties to estimate the losses and capital shortfall in the banking system.

The reason there are several rounds is that the markets don't find the estimates credible and, more importantly wonder, what are they hiding because they are not requiring the banks to disclose all of their exposure details.

This is at least Round 2 for Spain.  Would you find an estimate of a 59.3 billion euro capital shortfall credible when the Street is talking at least 150 billion euros?

Round 3 for Spain is already in the works.  This round will be a loan by loan review (BlackRock Solutions makes a lot of money for this analysis).  This round will come much closer to 150 billion euros.

But again the question will be what are the banks hiding?

The only way to restore trust in the banking system and the size of the capital shortfall is to require the banks to provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.

With this information, market participants can calculate the losses at each bank.

More importantly, market participants can see which banks are capable of rebuilding book capital levels through retained earnings and which banks cannot.

Spain’s banks have a combined capital shortfall of 59.3 billion euros ($76.3 billion), according to a stress test designed to remove doubts about a financial industry pummeled by real estate losses. 

The Bankia (BKIA) group, a nationalized lender, had a 24.7 billion-euro capital deficit in the tests conducted by management consultants Oliver Wyman that also showed Banco Popular Espanol SA (POP) had a 3.22 billion-euro shortfall. The stress tests of 14 lenders showed no capital deficit for seven banks, including Banco Santander (SAN) SA, Banco Bilbao Vizcaya Argentaria SA (BBVA) and Banco Sabadell SA. 

Spain commissioned the independent stress test as part of the conditions agreed in July for a European bailout of as much as 100 billion euros for its banking system, which has been saddled with more than 180 billion euros of losses linked to souring real estate assets. 

The attempt to show how its banks would bear an extreme scenario in which the economy would shrink for three years in a row is part of the government’s drive to show it is fixing Spain’s economy as it considers whether to seek a further rescue package from Europe. 

“These are important stepping stones on the way for Spain,” said Holger Schmieding, chief economist at Berenberg Bank in London, referring to the stress test. Even so, “there will always be people in the market who question the numbers,” he said.

So long as bank balance sheets are 'black boxes', it is reasonable to question the numbers.  Experience has shown that those who have said the situation is worse than the latest government estimates have always been proven right.

Update
From the Telegraph live:

Greek bad loans have hit a record of 57 billion euros, 25% of all loans.

Greek bank recap needs 50 billion euros.  Spanish 59.3 billion euros. 

Spain's figures are simply not credible despite what the official sector says (they said the same thing about Ireland too).

17.04 In a statement, the Bank of Spain said:The 14 main Spanish banking groups (taking into account the integration processes currently under way) have participated in this test. The groups account for around 90% of the Spanish banking system’s assets.The results confirm that the Spanish banking sector is mostly solvent and viable, even in an extremely adverse and highly unlikely macroeconomic setting:• Seven banking groups, accounting for more than 62% of the analysed portion of the Spanish banking system’s credit portfolio, do not have additional capital needs.• Additional capital needs have been identified for the remaining groups, on top of those existing as at 31 December 2011, that amount to €59.3 billion when the integration processes under way and deferred tax assets are not taken into account. This amount falls to €53.75 billion when the mergers under way and the tax effects are considered.

17.10 Here is a breakdown of the banks' individual needs. The table shows that Santander is the strongest of the Spanish lenders. The lender exceeds the minimum capital requirements by at least €19bn. It's no surprise to see that Bankia is the weakest. The bank was nationalised in May.
In short: seven banks need cash. Seven don't.

_{The baseline scenario presumes a capital ratio requirement of 9pc for banks and a cumulative decline in real GDP of -1.7pc over the period to 2014, while the adverse scenario sees a capital ratio requirement of 6pc, which envisages a cumulative decline in GDP of -6.5% over the same period (Source: Bank of Spain/Oliver Wyman).}

17.25 The European Commission has welcomed the results of the audit. In a statement, it said:The capital needs for individual banks disclosed today are a key step in the process of restoring and strengthening the soundness of the Spanish banks. They will form the basis for the eventual recapitalisation of banks with the help of the programme. The necessary State aid provided to Spanish banks will be determined in the coming months. It will be based on today's published results. It will also reflect measures to be taken by the banks, such as the disposal of assets, other restructuring measures and tapping funding markets, and subordinated liability exercises. In addition, the capital shortfall of credit institutions receiving public funds will be adjusted as a consequence of the transfer of assets to the Asset Management Company.Banks with a capital shortfall will present recapitalisation plans. Upon approval of these recapitalisation plans by the Bank of Spain and the European Commission, banks requiring state aid will present restructuring or orderly resolution plans to the Spanish authorities, which will notify these to the European Commission for approval under EU state aid rules. Upon approval of these restructuring and/or orderly resolution plans, the recapitalisation of a first group of banks is scheduled to occur by November.

17.31 The European Banking Authority (EBA) has also welcomed the results. It said:The assessment process and the stress test results disclosed today are a major step towards strengthening and restoring the soundness of the Spanish banking system, which is ultimately crucial for a sustained recovery of economic growth and employment.

17.39 While Jean-Claude Juncker, head of the EuroGroup, is "comforted" by the announcement. He issued this statement:The final State aid provided to Spanish banks will be lower than the reported capital shortfall, given measures to be taken by the banks in accordance to their recapitalisation and restructuring plans.The assessment shows that the total financial assistance agreed in July should be more than adequate to cover the final capital needs, including a comfortable safety margin. It should ensure that the recapitalisation process of banks can proceed efficiently and in accordance with previously agreed timelines. I very much welcome that progress on implementing the commitments as defined in the Memorandum of Understanding is well on track. I am confident that the reforms attached to this financial agreement will contribute to ensuring a return of all parts of the Spanish banking sector to soundness and stability.

17.50 Christine Lagarde, managing director of the IMF, praised the audit's "thorough and transparent independent valuation of assets". 

It was a very thorough and transparent independent valuation of assets except of course that the banks did not provide exposure level detail so that the market participants could independently confirm the findings.