Going, going... gone

The decision one week ago by the Bank of Spain to take over the Banco de Valencia was the final blow for the Mediterranean region's finances. In July, the central bank was forced to intervene in savings bank Caja de Ahorros del Mediterráneo (CAM). The pair will now be put up for auction.

The Bank of Spain said in a statement that it will inject up to one billion euros in capital and will grant a credit line of up to two billion euros to Banco de Valencia, which has a market value of 364.5 million euros, representing less than one percent of the Spanish banking system.

Faced with declining profits and rising bad loans, the small lender with 24 billion euros in assets has been unable to cover a shortfall of up to 800 million euros in loan-loss reserves. At the end of June, Banco de Valencia had a core capital ratio of 7.36 percent, while bad loans were up to 6.99 percent of the total from 6.33 percent at the end of March.

Spain's Orderly Bank Restructuring Fund, or FROB, which is controlled by the central bank, will replace the Valencia lender's management and seek to clean up its finances. Banco de Valencia was partly owned by Spain's Banco Financiero y de Ahorros (BFA), the product of a merger of seven regional savings banks including Caja Madrid and Bancaja, which owned 27 percent of Banco de Valencia. Earlier this year, BFA moved most of its banking assets into Bankia SA, which was then listed on the Spanish stock exchange.

BFA's vice chairman, José Luis Olivas, who also sits on the board of Bankia, tendered his resignation for both positions last Monday, Bankia said in a regulatory filing. Olivas was until recently chairman of Banco de Valencia.

The rise and fall of Valencia's banks is intricately linked to the Popular Party's control of the region. By 2009, Bancaja and CAM were the country's third- and fourth-largest savings banks; Banco de Valencia's profits were 150 million euros, and its shares traded at 35 euros.

In 1995, after winning the regional elections there, the Popular Party began taking control of Valencia's finances. First it changed the law to allow politically appointed members to make up to 50 percent of the boards of the region's banks.

By 1998, the PP had appointed its men to most of the senior positions in CAM, Bancaja and Banco de Valencia, and by 2001, exercised complete control over the three institutions.

In the meantime, the regional government had taken over the Valencia Institute of Finances, which was supposed to act as an independent financial supervisor, to pressure the three banks to invest in a range of high-profile government-initiated projects such as the failed Terra Mítica theme park. The banks were also persuaded to part with land they owned at low cost to investors linked to regional politicians. In 2003, Francisco Camps took over as head of the regional government, and continued the policies of his PP predecessors in using Valencia's savings banks to finance construction projects.

But when the property market crashed in 2008, the Bank of Spain issued an ultimatum to the country's troubled savings banks that they must either merge, look for buyers or face takeover. CAM went through the motions of negotiating a merger with Caja Madrid and other entities, while behind the scenes, Francisco Camps was determined that no such merger would go ahead, and that a buyer would emerge. At the same time, Camps found himself increasingly mired in the Gürtel kickbacks-for-contracts scandal, which affected PP officials in several regions, including Madrid and Valencia. By March this year, events were out of control. Facing trial, Camps was forced to stand down as head of the regional government in July. By now, the decisions about the future of the region's three main financial institutions were being taken in Madrid.

The board of CAM is now being investigated by the High Court after the Bank of Spain took over in July. The board is accused of arranging lucrative pension and compensation contracts ahead of the bank's winding up, as well as falsifying quarterly accounts.

Spain's banking industry is undergoing deep restructuring after one of Europe's largest housing bubbles burst in 2008. A wave of mergers and acquisitions has reduced the total number of institutions by nearly a third, while the Spanish government has provided around a dozen banks with nearly ¤18 billion to shore up their capital bases. Banks based along Spain's Mediterranean coast, ground zero of the country's housing collapse, had been big lenders to local developers. The Bank of Spain has seized several banks since the collapse of the country's once-mighty real estate sector, among them Cajasur and Caja Castilla La Mancha, as well as CAM.