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Germán López Espinosa, Professor of the School of CC. Economics and Business Administration, University of Navarra

Doubtful assets and the FROB

Tue, 16 Mar 2010 10:45:29 +0000 Published in Cinco Días (Madrid)

On February 18, 2009, the Bank of Spain published data for December 2009 on doubtful loans. These data are of special relevance as they inform us about the status of the financial system in our country. Table 1 summarizes the status in terms of doubtful assets and provisions for impairment made by banks, savings banks, cooperatives and other subject of financial institutions over the total loans available to each of them.

Table 1. Nonperforming loans and allowances for impairment


It can be clearly seen that the provisions for impairment do not reach the volume of doubtful assets existing in each of the four types of financial institutions; only the cooperatives at credit have a level of coverage that is adequate for the level of doubtful assets they hold. If we look at the evolution over time of the coverage of doubtful assets in the case of banks, we can see that they are the ones that have undergone the greatest change, going from having provisions 6.26 times greater than the level of doubtful assets in 2003 to having provisions that do not cover doubtful assets in 2008 and 2009. However, when analyzing the evolution over time, it should be taken into account that the adoption of the international accounting rules and regulations led to a significant release of provisions in 2005.

If we look at the data at a global level, not only taking into account the 4 types of institutions mentioned above, published by the Bank of Spain in its bulletin, it can be seen that the sector has a level of credits of 1.84 billion euros, being classified as doubtful 93,305 million euros, of which 64,669 million euros would be provisioned. Therefore, the country would have an overall delinquency rate of 5.08% and a level of non-provisioned doubtful loans of 28,636 million euros. If we take into account that financial institutions have used all subject of financial engineering (refinancing, swaps, etc.) to reduce the level of non-performing loans and that the unemployment rate continues to rise steeply, the imbalance could be very worrying. The reader should bear in mind that for every point that the level of doubtful assets is higher than that disclosed in the bank supervisory statements, we would have an additional hole in the financial system of 18,370 million euros not provided for.

With all this, it seems very opportune to recall the need for the Fund for Orderly Bank Restructuring to be a useful tool to strengthen our financial system, restructuring those entities with excessive levels of indebtedness, low levels of coverage of doubtful loans and high weighted risk of their assets, regardless of their geographical location and corporate form. We must allow the Bank of Spain to act independently and to avoid the everlasting political and regional barriers, because in order to overcome the economic crisis we will need a solid financial system, and for this a global pact led by the Bank of Spain is essential. We cannot continue to defer the solution by not recognizing that we have a good issue of entities with serious financial problems.