Publicador de contenidos

Back to La banca española va bien

Eduardo Martínez Abascal, Professor, IESE, University of Navarra

Spanish banking is doing well

Wed, 17 Feb 2010 08:22:22 +0000 Published in Expansion (Madrid)

Opinions continue to be published in the Anglo-Saxon press, especially in the English press, on the very bleak prospects for Spanish banks. Once again, these opinions are well-reasoned, even reasonable, but without data. I will try to give here some data so that the reader can form his or her own opinion.

When talking about banks, I am referring to banks and savings banks as a whole. The data are from June 2009 and the source the Bank of Spain. I start with the big numbers. The total amount of credit granted by Spanish banks is 1,900 billion (billions) euros. Of these, 5% are in default, i.e., they are assumed to be uncollectible. The most negative outlook says that the default rate will increase by 5 points, reaching 9% or 10%. Will this be the collapse of banking in Spain? Will the Government have to bail it out as the governments of the USA and Great Britain have done?

First, this already happened between 1993 and 1995, when delinquencies reached almost 10%. And the banks recovered. We have experience of past crises. In that crisis, 90% of the non-performing mortgage loans and more than 50% of the other non-mortgage loans were recovered. It is a question of working well and having a legal system that facilitates recovery (Anglo-Saxon banks do not have one, at least as far as mortgages are concerned).

If defaults increase by 5 points, this is about 5 x 1,900 = 95 billion of potential losses. Of these, let us say, half can be recovered in the long term, i.e., about 45 billion are recovered and 50 billion are lost. In fact, more is recovered, because in Spain there is a lot of mortgage credit . Okay, we lose 50 billion in the most negative scenario. Is this a lot? Well, look, Spanish banks in 2009 had an operating profit (before provisions) close to 40 billion. Therefore, the possible losses in the most negative scenario, in the worst economic crisis in recent history, are offset by the profits of one year and one quarter.

When we talk about banking or any sector doing badly, it is always in relation to others. We have said that the possible losses of Spanish banks would be 50 billion. Well, Citibank alone has received 45 billion dollars in aid from the U.S. government. Royal Bank of Scotland has received 20 billion pounds from the British Government. With these precedents in your own house, it is a bit bold to talk about your neighbors. It sounds to me like seeing the speck in someone else's eye and not seeing the plank in your own.