Spain confirms that insolvent banks can continue operating

Your humble blogger has frequently said that modern banking systems are designed so that banks can continue to operate even when they are insolvent (whether or not their book capital levels reflect this insolvency).

Banks can continue operating when the market value of their assets is less than the book value of their liabilities because of the combination of deposit insurance and access to central bank funding.

With deposit insurance, when the banks become insolvent, taxpayers become their silent equity partner.

The Spanish government confirmed this statement while setting up its plans to needlessly use government debt to recapitalize several banks.  Each of these banks was operating before its state rescue and it is only now that the extent of their insolvency is being acknowledged.

As reported by Reuters,

Spain's bank restructuring fund has unveiled a negative valuation of three state-rescued banks ahead of an injection of European funds to recapitalise the troubled lenders. 

Galician lender NCG Banco is worth a negative 3.09 billion euros (2.51 billion pounds) and Catalunya Banc a negative 6.67 billion euros, the restructuring fund FROB said in a statement late on Monday. 

It said the valuations would serve as basis for the amount of European aid it will give the nationalised lenders in coming days. 

The FROB last week received 40 billion euros in euro zone funds to resolve its sickly banking sector after a burst property bubble. 

Banco de Valencia, which was recently sold to Caixabank (CABK.MC: Quote, Profile, Research) for a symbolic one euro, was valued at a negative 6.34 billion euros.