1

The Global Crisis Effects

on the Spanish Bank System
1

Javier Sánchez Verdasco, CIIA, €FA

1
Global Crisis and Spanish Banks 1
 2
The Balance Sheet of a Bank

Santander 30.09.08

100% Due from banks

Equity

90% Portfolio
Other liabilities
Other assets
80%
Other loans

70%
Issues (Bonds
60% sold to investors)

50%

40%
Loans to clients

30%
Deposits from
20% clients

10%

0%
Activo Pasivo

2
Global Crisis and Spanish Banks 2
 3

3
Global Crisis and Spanish Banks 3
 4

The Securitisation Process

Inversores
BANKS
BANCO INVESTORS
(Activos)

OTHER ASSETS C
MA STHG A G E
OR
B AC K E D
S E C U R IT IE S
SIV (Special Inv. Vehicle)
MORTGAGES
C ASH

MORTGAGES D u e to b a n k s
(P ric e o f
m o rtg a g e s )

M O R TG AG E
CASH B AC K E D
S E C U R IT IE S

RATING
The institutions
Guaranteeing the bonds start
to downgrade their own rating,
Issue of Bondsde Títulos since they have to tackle
more defaults

4
Global Crisis and Spanish Banks 4
 5

International Context. 1st phase

z The first phase ran from August 2007 to the

beginning of September 2008

z Was marked by the impact of the financial

turmoil on the balance sheet and income
statements of numerous financial institutions at
international level.

z This turmoil originated in the subprime

mortgage segment, although it progressively
spread to lower-risk financial

5
Global Crisis and Spanish Banks 5
 6

International Context. 2nd phase

z The second phase (intense crisis), run from

September to Novembre 2008

z Was marked by certain systemic events, each

individually of notable size. Practically all the
key financial markets were blocked, and this
hit financial institutions hard.

6
Global Crisis and Spanish Banks 6
 7
Recent failures of selected financial institutions
2008
z 7 February – United Kingdom, Northern Rock was nationalized £ 88 billion
z 14 March - United States Bear Stearns absorbed by a commercial bank
following a significant Federal Reserve subsidy $ 29 billion
z 7 September - United States Freddy Mac and Fannie Mae were de facto nationalized $ 200 billion
z 15 September - United States Lehman Brothers filed for bankruptcy protection
z 17 September - United States AIG was nationalized $ 87 billion
z 29 September – Benelux Fortis rescued €16 billion
z 29 September – United States Wachovia bought by Citibank $12 billion
z 29 September – Germany Hypo Real Estate rescued $ 50 billion (raised to 71 on 6 October)
z 29 September – Iceland Glitnir rescued $ 850 million
z 29 September – United Kingdom Bradford & Bingley rescued $ 32.5 billion
z 30 September – Belgium Dexia rescued $ 9.2 billion
z 30 September – Ireland Irish banks rescued $ 572 billion
z 7 October – Iceland Lansbanki nationalized
z 9 October – Iceland Kaupthing nationalized $ 864 million
z 16 October - Switzerland UBS rescued $ 59.2 billion
z 19 October – the Netherlands ING € 10 billion
z 20 October – France French government lent money to 6 large banks € 10.5 billion
z 27 October – Belgium KBG € 3.5 billion
z 4 November - Austria Nationalization of Kommunalkredit Constantia Privatbank was nationalized
and sold to five Austrian banks for one euro
2009
z 15 January - Ireland Anglo Irish Bank nationalized
z 30 March – Caja de Castilla la Mancha (Spanish saving bank) taken over by government
Source: Financial Times, UK Office for National Statistics and OECD.

7
Global Crisis and Spanish Banks 7
 8
International Context. 3er phase
z The third phase of the crisis, which is running
from December 2008 to now.
z Banks are facing from different starting points,
according to the extent to which they have
been penalized in the first two phases.
z The basic characteristic of this phase is the
sharp slowdown in the most developed
economies which will, in turn, be adversely
affected by the global slowdown in lending.
z The recessionary tendencies are going to pose
further problems for banks in the next few
quarters although they will be more traditional,
limited and familiar than those experienced so
far.

8
Global Crisis and Spanish Banks 8
 9

The chain of errors committed by the agents:

The Financial Institutions
z The institutions that granted loans made mistakes, especially in
the United States, where the originate-to-distribute model
became widespread.

z In the United States, in the years preceding the summer of 2007,

lenders granted mortgage loans against collateral (real estate),
whose value rose ever higher, generating incentives to lend to
individuals with the lowest credit quality.

z This, combined with a business model in which the loans were

packaged, turned into securities and sold on the market, meant
that the incentive for lenders to correctly assess and
subsequently monitor the risks was very low, since they did not
retain the risks of the loan

9
Global Crisis and Spanish Banks 9
 10

The chain of errors committed by the agents:

The Rating Agencies. The Regulators
z The rating agencies also made mistakes, of almost
scandalous proportions. They surprised investors by
downgrading some securities from triple AAA to junk bond
status overnight.

z In many countries, indeed, regulators and supervisors also

made mistakes, failing to limit the perverse effects of the
dynamics and incentives to under-assess the credit risks in
the housing lending.

z The lax interpretation of the international accounting

standards in relation to the need to consolidate off-
balance-sheet vehicles like conduits and SIVs, are
illustrative in this

10
Global Crisis and Spanish Banks 10
 11

The chain of errors committed by the agents:

Central Banks
z Central banks have not been free from mistakes either. The
long period of low interest rates led financial institutions,
firms and households to become very highly leveraged.

z Although this stimulated economic growth, it also allowed

the large imbalances that are now so starkly revealed to
build up.

z This world-wide expansionary policy, the risks of which

were clearly signalled by the BIS, has probably been the
most important factor contributing to the present crisis.

11
Global Crisis and Spanish Banks 11
 12

The chain of errors committed by the agents:

Central Banks
z As a result, as soon as house prices began to fall in the
United States and monetary policies became less
expansionary in the face of the inflationary risks arising
from commodity price rises, the credit expansion cycle
was broken.

z That caused significant rises in default rates, which

affected the securities that had been distributed on the
market among large numbers of investors, and the crisis
whose main events I have mentioned was triggered.

12
Global Crisis and Spanish Banks 12
 13
WHAT HAS HAPPENED IN SPAIN?

z At the beginning of the crisis, many international analysts

identified the Spanish banking system as that which would
suffer the greatest problems on account of:

1. its need for external financing

2. its dependence on wholesale markets
3. the degree of its exposure to the property

13
Global Crisis and Spanish Banks 13
 14

“On the right side there’s nothing left, and

on the left side there’s nothing right”. Jacob Frenkel
z On the liabilities side, Spanish banks have been very
active in seeking financing on the international wholesale
markets. But they have focused on the longer maturities.

z Spanish banks’ recourse to wholesale markets including

asset-backed securities. bears little resemblance to that
which is currently proving highly problematic.

1. Because of the high quality of the securitised portfolios.

2. Securitisation was not conceived of as a business in itself to

transfer risk. Rather, simple transparent structures were created to
raise financing.

3. The prudential regulation and supervision .Banks did not establish

complex off-balance-sheet structures (conduits and SIVs) acting
like parallel banks. (Since they had to consolidate as per risk and
capital consumption is concerned)

14
Global Crisis and Spanish Banks 14
 15

“On the right side there’s nothing left, and

on the left side there’s nothing right”. Jacob Frenkel
z Continuing with the analysis of the liabilities, The particular
banking model followed in Spain is based on

1. Retail business,
2. Spanish banks manage a large part of the assets of investment
funds and sell insurance products. Evidence of this is the strong
rate of growth of deposits in recent months, showing a notable
response by banks.

z Accordingly, Frenkel’s phrase does not apply to Spain on

the liabilities side: there is still a lot left on the liabilities side
of Spanish banks’ balance sheets,

z In particular a broad deposit base and a significant

volume of wholesale financing that matures in the medium
and long term

15
Global Crisis and Spanish Banks 15
 16

“On the right side there’s nothing left, and

on the left side there’s nothing right”. Jacob Frenkel
What is happening on the assets side?

z Spanish banks have not invested in the complex and

opaque products that have turned out to be highly
problematic (“toxic”)

z However, we are seeing a sharp rise in the doubtful assets

ratio (non performing loans); although this is not linked to
this type of complex product, rather it is linked to
developments in the real economy and therefore what
may be called a classic banking cycle problem.

16
Global Crisis and Spanish Banks 16
 17
WHAT WILL BE HAPPEN TO BANKS IN SPAIN?

First challenge: Financial sources

z The closure of financing markets will damage Spanish banks in a

different way, depending on the strength of the right side of their
balance sheet (some small savings banks will probably suffer
z The cost of financing in the wholesale markets will rise, hitting
margins.
z Greater competition among banks to attract deposits, and the
fact that they are replacing lower-remunerated sight deposits
with time deposits, will also put pressure on the financial costs
Spanish banks have to bear.

In short, the banking sector will have to live with a structure of

higher financial costs, which will squeeze the net interest margin
and, therefore, the capacity to generate revenues.

17
Global Crisis and Spanish Banks 17
 18
WHAT WILL BE HAPPEN TO BANKS IN SPAIN?

Second challenge: Lower demand for credit

z The lower demand for credit is a natural response to a

weaker economic climate than in previous years.

z For banks, this will mean a smaller volume of activity, that

is to say, slower growth or even contraction of their
business

18
Global Crisis and Spanish Banks 18
 19
WHAT WILL BE HAPPEN TO BANKS IN SPAIN?

Third challenge: Weakness of economic situation

z Apart from the global deceleration, which primarily affects

consumption and capital investment, the Spanish
economy is in the midst of adjustment in the property
sector.
z This adjustment had already begun, gradually, before the
summer of 2007, bringing the sector progressively into line
with the change in the determinants of residential
investment.
z This gradual rate of adjustment was altered by the
international financial crisis, which established a climate of
mistrust and uncertainty which, in turn, intensified the
slowdown.

19
Global Crisis and Spanish Banks 19
 20
WHAT WILL BE HAPPEN TO BANKS IN SPAIN?
Third challenge: Weakness of economic situation (cont)

z The consequence for the banking sector has been a rapid

growth in doubtful assets ratios since end-2007.
z This growth has been recorded across-the-board, but
especially in construction and property development.
z Despite the counterweight provided by the existence of
the general provision in Spain and the very low starting
levels of the doubtful assets ratio, this has led to the need
for greater credit write-downs, which have to be taken to
the income statement
z This is the third reason why profits will be under pressure in
the banking sector

20
Global Crisis and Spanish Banks 20
 21

Please, compare these financial structures

Santander 30.09.08 CaixaTarragona 30.09.08

100% 100%
Due from banks
Equity
Portfolio Activos
90%
Financieros Netos Interbancario Neto
Other liabilities
Other assets
80% 80%
Other loans Otros Activos

70%
Otros Pasivos
Issues (Bonds
sold to investors) Emisiones
60% 60%

50%

40% 40% Préstamos a

Loans to clients
Clientes
30% Depósitos
Deposits from
deClientes

20% clients
20%

10%

0% 0%
Activo Pasivo Activo Pasivo

21
Global Crisis and Spanish Banks 21
 22

Thanks for your attention

Have a good time in Spain

jsverdasco@incompany.es

22
Global Crisis and Spanish Banks 22