Run on Spanish banks picking up speed

In a vote of no confidence, Spanish depositors are taking their money out of the Spanish banking system.

As predicted by your humble blogger, the policies being pursued both at the national level and at the EU level are undermining confidence in the Spanish banking system.  Rather than requiring the banks to absorb all the losses on the excess debt in the financial system, policies are being pursued that make the situation worse.

For example, bailing out the banks promises to pile more debt upon a country that cannot pay the debt it already has and to further burden the already failing Spanish real economy as austerity measures are implemented that divert taxes to debt service and not government services.

Clearly the Spanish depositors have gotten the message that Spain could exit the EU and the state's deposit guarantee might be honored in pesetas and not euros.  This result of this redenomination would be a considerable loss for the depositors.

As reported by Bloomberg,

Spanish banks, already hooked on cheap European Central Bank loans, are haemorrhaging deposits as the government debates whether to seek a bailout. 

Households and companies drained 26 billion euros ($34 billion) from Spanish bank accounts in July, driving the ratio of loans to deposits among lenders to 187 percent from 183 percent in December and 182 percent a year earlier, according to data compiled by the Bank of Spain. 

Shrinking deposits undermine the ability of banks to support economic growth by lending to companies and consumers. 

“There are significant outflows of deposits now in Spain and they won’t start coming back until people are sure they’re safe and that Spain is secure,” said Simon Maughan, a financial strategist at Olivetree Securities Ltd. in London. 

Spain’s financial industry is already backstopped by Europe to the tune of 100 billion euros, and is reliant on 412 billion euros of gross borrowings from the ECB. Investors demand 423 basis points more to own CaixaBank SA bonds maturing in 2015 than German bunds of similar maturity, up from a premium of about 384 when the bonds were sold in January..... 

Moreover, the terms of Portugal’s May 2011 bailout require its banks to achieve a loan- to-deposit ratio of 120 percent by the end of 2014, while Ireland’s deal demands a ratio of 122.5 percent by 2013. No such provision was included in the July memorandum of understanding for Spain’s bank bailout. 

“The first consequence of a lower loan-to-deposit ratio being set is that you have to identify chunks of assets to sell and that inevitably leads to haircuts and capital implications,” said Eamonn Hughes, an analyst at Dublin-based Goodbody Securities. “It also forces you to pay up for deposits, as we have seen in the Irish case.” 

Imposing a loan-to-deposit target for Spanish lenders may mean they would have to reduce lending by 14 percent to 24 percent, Daragh Quinn and Duncan Farr, analysts Nomura International, wrote in a report published today. “The need to strengthen customer funding could also see the emergence of a deposit war, putting additional pressure on revenues, which are already likely to suffer from the low interest rate environment,” they said.... 

There is “a clear underlying trend of accelerating deposit decline,” Nomura’s Quinn wrote in a Sept. 4 report. Term deposits by households fell 6.9 percent in July from a year earlier, while those of companies fell 24 percent, which “points to continued deposit declines in the future,” he said....

About 86 percent of Bankinter SA (BKT)’s estimated 2013 profits derive from its ability to borrow cheaply from the ECB, the analysts said, with Banco Popular Espanol SA dependent on central bank funds for about 79 percent of earnings. 

These figures give some sense of how large the impact on bank earnings is from the extraordinary measures that policymakers are pursuing.

What this figures don't show is that bankers are being paid bonuses on these profits.  Think about that.

In the absence of the extraordinary measures like cheap ECB borrowing, the bankers would have received little in the way of a bonus.

Is there any wonder that bankers are constantly saying that they need these extraordinary measures?

Meanwhile, Bank of Spain data shows lenders are offering higher deposit rates to attract cash, with interest rates on account for as long as one year climbing to 2.5 percent in July, the highest level since March. 

Declining deposits may inflict more damage on the Spanish economy if the seepage of the most reliable source of funding further dries up credit, said Maughan at Olivetree. The International Monetary Fund predicts Spain’s economy will contract 1.7 percent this year and 1.2 percent in 2013. 

“If deposits are falling, then the only option for Spanish banks to bring down their loans to deposit ratio is to cut back on the loans side,” Maughan said. “Does that sound like a good idea?”