Spain privatizes savings banks

The Spanish government culminated the reform of its financial system by privatizing its savings banks (also known as cajas).

A new law for regulating savings banks (LORCA), approved by the cabinet last week, will change the juridical status of cajas, a sector in dire need of recapitalization given their exposure to the real-estate bubble collapse.

The reform takes place at a key moment for the Spanish economy, amidst b reservations of financial markets over Spain's real solvency, before the publication of the stress-tests for banks and cajas, and with the looming redemption of 24 billion euros (30.39 billion dollars) in sovereign debt.

Toward Private Cajas

The new LORCA law, which is designed to turn existing savings banks into full banks, will allow savings banks to issue, up to 50 percent of its total capital, shares with political rights, similar to those issued by any other commercial companies. In the past, when issuing shares, cajas will have to place their financial business under the custody of a bank.

If a savings bank sells more than half of its share assets in the stock market, it will no longer enjoy the condition of a savings bank and become a foundation. A five-percent limit for single investors will no longer be applicable.

The reform was passed with the support of the main opposition party, the Popular Party, and was described by Spanish Prime Minister Jose Luis Rodriguez Zapatero as "essential, urgent and necessary." The prime minister defined the new law as "the most important in the history of the Spanish financial system."

Until now, the Spanish financial system did not allow a professionalized management for its cajas since these were largely left under the control of regional governments, with close ties to the ruling political parties in the regions in which the cajas were based.

Moreover, savings banks could not be valued in the stock market and were legally obliged to direct part of their profits toward social and charitable projects.

While their social welfare projects remain, the proposed reform will carry an important shift in the legal status of cajas, since from now on cajas will be able to invest in capital markets. Savings banks amount to about half of the total assets of the Spanish financial sector.

Zapatero said that the reform in the securities system will allow private investment in savings banks, which will now be endowed with political rights in direct proportion to their shares in caja's total capital.

As for the professional management of these institutions, Zapatero said that a political presence in savings banks will be reduced given "the incompatibility of those elected as members of the ruling bodies in cajas."

The new LORCA law will also be supported by the FROB scheme, the national regulating body set up to oversee the overhaul of the financial sector and the mergers among cajas. The FROB scheme was originally allocated with 9 billion euros, but it is expected that its real needs will be much greater.

The collapse of the real-estate bubble in Spain has forced banks and cajas to absorb some 60 billion euros in ceased property assets. To ease the recovery of the financial sector, the FROB has been legally authorized to incur in debts of up to 90 billion euros by seeking additional funding in financial markets.


On the other hand, the Committee of European Banking Supervisors announced on Wednesday that it will carry out stress-tests on 91 financial institutions across Europe. The results of the tests will be revealed on July 23 in a bank by bank breakdown.

The goal of the tests is to evaluate the resistance of Europe's banking sector and the capacity of these firms to absorb further credit shocks and market risks, among them those caused by sovereign debt, as well as the sector's future reliance on public aid packages.

In the case of Spain, the stress-tests will be applied to all banks and savings banks, which together amount for 95 percent of the country's financial sector. This is in stark contrast to other European countries like Germany, where the stress-tests will only apply to the bigger banks.

The announcement of the stress-tests occurs at a sensitive time for Spain's financial system, and not just because of market turbulence or the recent restructuring of its financial sector.

An important effect of the current sovereign debt crisis is that banks and savings banks have increased their investment in Treasury bonds by a considerable margin.

Since May, the net cost of the Treasury bonds in the hands of Spanish financial institutions -- the difference between the purchase of new bonds minus recoveries -- increased by 5.8 billion euros, reaching a historic total of 153.3 billion euros, whilst the total balance increased by 6.87 billion, mounting to 468.121 billion euros.

In other words, Spanish firms covered 84 percent of the country's debt allocations during that month, while foreign investment in Spanish debt experienced a slight reduction.

This will take place shortly before the Treasury's 24 billion euro redemption in sovereign debt and when the country's risk premium is situated around 200 basis points. Given the success of the last auctions, however, there is little fear of greater problems ahead.

This was evident in the performance of the Spanish stock market, which closed its best week since November 2008 on Friday. The benchmark index Ibex-35 rose by 9.48 percent in the last five sessions, reaching 10.127 points. (1 euro = 1.266 U.S. dollars)

[Source: Xinhua, Madrid, 13Jul10]

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