Bailed out Banks continue giving risky Loans

One of the main causes of the financial crisis is still ongoing despite promises to end it.


The banks that were bailed out during the crisis (2008-2010) maintained risky practices in their lending operations, the same ones that helped deepen the financial crisis. This is the conclusion of the latest quarterly report from the Bank for International Settlements (BIS). The bank of central banks wonders “whether the bailouts undertaken during the financial crisis, reduced the level of risk assumed by banks in their lending operations.”

To answer the question, the BIS, based in the Swiss city of Basel, analyzed the balance sheets and formal loans of 87 large internationally active banks, of which half received public financial support during the crisis. These banks cover bank assets worth 54 billion dollars (41 billion euros), according to official numbers, which correspond to 52% of global banking assets.

Of these 87 banks, 40 institutions received recapitalization monies from publicly funded programs between the third quarter of 2008 and the second in 2010. These recapitalizations stood at $350 billion dollars (267.175 billion euros) between 2008 and 2010. Most of the funds were injected in the fourth quarter of 2008 and the first quarter of 2009 mainly in the U.S., France, Germany, Netherlands and the UK.

The recapitalization of banks with public funds in G10 countries plus Austria, Australia, Spain, was of about $500 billion (381,680 million euros) in 2007-2010. The report says that the banks had returned to 50% of the capital injections in September 2010, something that many financial analysts question. The banks that allegedly returned that money are located in France and the U.S.. The BIS concludes that “the rescued banks did not reduce the level of risk of their new loan portfolios significantly more than the banks that did not receive public assistance.”

The rescued banks continued formalizing risky loans, as reflected in their participation in the leveraged loan segment the relaxed overview of the conditions attached to those operations. The rescued banks continued adding formalizations leveraged loans in total and also increased the average maturity and Libor spreads of their new loans, said the BIS.

The rescued banks had taken more risks than non rescued ones in these dimensions before the crisis. The BIS analyzes the international market for syndicated loans, representing 18% of total bank loans. Syndicated loans have been one of the major sources of corporate financing with about $ 7 billion (5.3 billion euros) of new operations formalized in 2007.

The report states that those banks that are still carrying risky loans most likely believe that there will be more free money from central banking institutions coming to them, especially at the national level. That is, banks that continue to issue risky loans believe that more rescues will occur just as they did before the collapse of 2008. “Indeed, it is consistent with the literature on the effect
of (actual or expected) state support on bank risk,” says the report in its conclusions.

Read the report issues by the Bank of International Settlements here.



Spain readies ‘nationalization’ of Cajas

The Spanish government is preparing a plan to outsource the control of the people’s banks by demanding larger reserves in a short period of time.  The result?  Banks will probably not make it and the government will ask foreign investors to take control of the Cajas.

March 6, 2011

Spain’s ailing regional savings banks are scrambling to raise billions of euros of fresh funds to meet strict new capital requirements by a Thursday deadline.

The country’s 17 savings banks, known as “cajas,” are weighed down by loans that turned sour after the collapse of a housing bubble in 2008 and are at the heart of fears the country could need an Irish-style international rescue.

Last month the government approved stricter rules on the amount of rock-solid core capital that banks must hold on their balance sheets, seeking to shore up confidence in the battered economy.

Under the new rules, savings banks must raise the proportion of core capital they hold to 8.0 percent of total assets from the current six percent, or 10.0 percent if they are unlisted.

The Bank of Spain will determine Thursday which savings banks have met the new core capital requirements and in the case of those that have fallen short, how much capital they need to raise to meet the new requirements.

Up to 11 of Spain’s 17 regional savings banks will need additional capital to reach the levels of solvency set by the government, the ratings agency Standard & Poor’s said last month.

The government estimates that all the savings banks will need to raise 20 billion euros to meet the new requirements, a figure many analysts describe as too low.

The state is threatening to take temporary stakes — a form of nationalisation — in those lenders that fail to abide by the new rules by September.

Credit rating agency Moody’s put a 50-billion-euro price tag Monday on the recapitalising of Spanish banks hit by the property market collapse.

“The government is trying to attract foreign investors for the cajas, so it is logical that it attempt to downplay the amount to make it more attractive,” said Gonzalo Gomez Bengoechea, a researcher at Madrid’s IESE Business School.

The government is encouraging the savings banks to recapitalize using private funds which gives them several options:

– selling assets;

– opening their capital to investors;

– listing on the bourse, which would require they become fully fledged banks.

Under pressure from the government, many of the savings banks merged last year, reducing their numbers from 45 to 17, to improve their efficiency.

Ten of these new savings bank groups have decided to transform themselves into banks, or are thinking of doing so, and of these five plan to list on the stock market.

Foreign investment funds — about a dozen according to Spanish media reports — as well as Spanish banks have shown interest in investing in the cajas.

BBVA, Spain’s second largest bank, has said it wants to “take advantage of opportunities” and “enter the game”.

Two regional Spanish savings bank groups, Caja Duero-Espana and Banco Mare Nostrum, are mulling a merger, Spanish media reported last week.

“Every move that can strengthen our project is welcome,” the spokesman for Caixa Penedes, one of the four banks that make up Banco Mare Nostrum, Alberto Puig, said when asked about the reports.

“Among the cajas, everyone is talking to everyone,” he added.

Another four savings bank groups have sold assets to raise their capital.

The Bank of Spain will allow cajas on a case-by-case basis until December to close stake sales to private investors and will give them until March 2012 to hold intial public offerings.