By Daniel Griffith, Carnegie Mellon University
Following the failed merger of three major “cajas” this past week, the Spanish government is exploring the option of a national buyout of these regional savings banks to stabilize an uncertain financial situation.
For those who are unfamiliar with Spanish "caja" institutions, here’s a short primer:
The "caja" banks were begun in the late 1830s as a way to promote saving among the lower classes in the region. The banks are primarily savings banks, issuing certificates of deposit and loans. Banks were established regionally but over time decided internally to create unions between themselves to promote long-term stability. These regional banks were, and continue to be, known as “cajas.” Since 2009, the Spanish government has been promoting the consolidation of cajas in order to make the banking system more stable.
Since the global financial crisis hit in late 2008, banks around the world have been tested with numerous bank failures and government interventions both in the U.S. and abroad. In Spain, the government established the “Fondo de Reestructuración Ordenada Bancaria” (FROB, translated as “Fund for Orderly Bank Restructuring”) in 2009 to oversee any possible banking threats and deal with them appropriately. To date, the FROB has invested €11.56 billion in Spanish savings banks and has €4.5 billion left in its coffers. The FROB has arranged for up to €99 billion of government backed financing, should the banking situation deteriorate and the need arise.
This past week, in an attempt to stabilze these regional banks, the Bank of Spain tried to encourage a merger of three “cajas,” among them the "Caja de Ahorros del Mediterraneo" (CAHM.MC), known as CAM. The merger failed late Wednesday as the banks could not raise enough private capital to make a merger feasible and the smaller banks refused to take on the additional risk of CAM. Cajas have been under increasing scrutiny in the past few months, as the financial state of Portugal continues to deteriorate and contagion becomes a possibility. In an effort to combat this, the Bank of Spain raised minimum capital requirements in February. The Spanish government agreed to take equity stakes in any banks that would not be able to reach the new minimum requirements (Spain estimated €15.15 billion), however, independent analysts predicted the cajas would require €40-50 billion as a realistic bailout. This gross underestimation stemmed further skepticism as to Spain’s banking industry stability. On March 24, 2011, Moody’s downgraded the credit rating on RMBS notes issued by CAM in late 2005, quantifying the decreasing investor confidence.
Other cajas have experienced the same difficulties in recent months, as they cannot raise the private capital required to maintain operations. However, one of the largest tests of Spanish banking stability will be the IPO of Bankia, currently the largest caja with €344.5 billion in assets. Bankia is the first nationwide Spanish bank after the consolidation of seven regional cajas in 2010. The firm’s IPO is scheduled for this coming summer and, pending its reception, could provide a positive outlook for Spain.
The implications of the caja problem are a growing concern for both Spanish and the European Central Bank (ECB) officials. Combined with the deteriorating financial conditions in Portugal and the continuing uncertainty surrounding the banking industry in Ireland and Greece, the cajas could be just another problem to add to the list. While the problem is not global yet, it has potential to adversely affect Euro strength, and if the underestimates are as extreme as global analysts expect, could lead to another crisis the ECB will have to face.
