Bank fund lures investors with 'caja' reform plan

Faced with new, tougher European stress tests and international concerns over their exposure to the property bust, Spain's savings banks, or cajas, are facing the threat of partial nationalization. Although Economy Minister Elena Salgado has asserted that last year's caja reform and financial assistance through the Orderly Bank Restructuring Fund (FROB) would be sufficient, the prime minister's La Moncloa office and the Bank of Spain believe they must be converted into regular banks and recapitalized.

With this goal in mind, the executive has opened contacts with sector leaders, and is telling the markets that "new legal reforms" are on their way in an effort to reassure wary investors.

Sources knowledgeable about Bank of Spain policy said that the decision is already made: before the month is over, the government will approve a decree with the changes. There will also be a second round of recapitalization to assuage the markets, which have no interest in investing in lenders with poor quality assets.

Although Spain's commercial banks are seen as robust, the smaller cajas are considered suspicious due to their higher exposure to bad loans and the opacity of their accounts and internal structure.

"The fate of all cajas is to become banks," said a La Moncloa spokesman decisively. The president of the savings banks association, Isidro Fainé, said this week that the cajas refused to accept tougher reforms that would lead to their de facto disappearance. A recent FROB presentation to investors stated that "if necessary, the FROB can offer temporary help to help lenders raise funds from private investors," meaning that the fund would hold a stake in the caja "on a temporary basis."

On Thursday, analysts at Bank of America Merrill Lynch published a report backing the view that Spanish savings banks are in need of a massive capital injection. According to the report, the cajas need 42.8 billion euros in capital reserves to survive a difficult economic situation with a high degree of solvency.

The report considers that all of Spain's cajas, except for the tiny Caixa Pollença, need additional funds in the event of a downturn. In this scenario, the two lenders with greater funding needs are, on one hand, the group formed by Caja Madrid, Bancaja and five smaller savings banks, and on the other, La Caixa.

The financial institution's global research department conducted its own stress tests on the savings banks, under tougher conditions than those faced by lenders in last year's European banking tests. Most significantly, the solvency cut-off rate was established at 8.5 percent of Tier 1 capital, rather than the six percent established by Brussels - a figure under which lenders failed the test.

The hypothetical economic downturn also envisaged a 40-percent drop in the price of new homes, 60 percent for those still under construction, and a 75-percent contraction in the price of land ? considerably higher than the 28 percent, 50 percent and 61 percent falls from the European stress tests.

Concerns over the regional lenders' excessive exposure to bad mortgage loans prompted the government to force a flurry of mergers last year, reducing the number of cajas from 45 to 17. The FROB also poured 14.2 billion euros into them. Besides urging increased access to liquidity, the report recommends greater intervention by the Bank of Spain to clear up the "opacity" surrounding their ownership and prevent them from being run according to political criteria.