Radical bank restructuring

A radical restructuring of the Spanish financial system, jacking up the standards of solvency for banks and, in particular, for the cajas de ahorro (publicly administered regional savings banks), was announced on Monday by Economy Minister Elena Salgado. The aim is for savings entities to be heavily recapitalized, more rapidly and intensely than demanded by the international timetable (the Basel III accords), by appealing to private investors. If the attempt fails, they will be temporarily and partially nationalized in the fall.

Salgado emphasized that her plan "is also the plan of the Bank of Spain," and that in its details it is not inconsistent with the recently negotiated reform of the cajas, which may choose among the four options featured in the reform - although their conversion into commercial banks is preferred. Those that decide on other alternatives, such as retaining the caja formula, will need to further increase their capital.

The plan is a demanding one, aimed at calming the financial markets, worried about the solvency of peripheral European banks since the Irish crisis discredited an earlier round of stress tests. It demands that "quality" capital account for 8 percent of assets, and brings forward to 2011 a set of demands that for foreign competitors will enter into effect only between 2013 and 2019. Most of the Spanish banks and cajas must increase their capital in an adverse international financial environment.

It is reasonable to ask whether such dispatch and such demands may not be excessive in a country facing skeptical markets and a still-feeble growth rate. Yet the Spanish financial system has shown its ability (particularly during the banking crisis of around 1990) of rising to stiff demands.

We may also ask whether this extreme rigor might have been tempered had it been applied more promptly - by the government and the Bank of Spain, but above all by the cajas themselves. But this is now an academic question, the importance of which fades amid the extreme urgency of equipping the Spanish financial system with a strength and transparency that will immunize it against the vicissitudes of the markets.

The total amount of recapitalization proposed is substantial, but modest compared with certain publicized exaggerations: some 20 billion euros, overall, according to Salgado. This challenge ought to be manageable for all the institutions, each with its assigned quota, easily coverable by the FROB restructuring fund. The decision to place this fund in a subsidiary position, after an appeal to the markets and private investors, again shows the central bank's, and the government's, preference for one option - the conversion of cajas into regular banks, which might have called for further debate had needs not been so pressing.

This option, of preferring banks to cajas, is at least explicable in terms of their greater visibility, which facilitates the process of an appeal to the markets. But it requires additional explanations, in that it involves a thorough recasting, in a short time, of a formula that has existed for more than a century, and has served the country well.