An urgently needed merger

For some time now, given the pressure of the financial crisis, the Spanish cajas de ahorros (publicly administered regional savings banks) have been in a process of privatization and consolidation, the prevailing doctrine being that they are too small and too dispersed — and too dependent on local political considerations — to survive in modern conditions.

The acquisition by Caixabank of Banca Cívica, the group of cajas formed by Caja Navarra, Caja Sol, Caja Canarias and Caja Burgos, indicates very clearly where the financial reform sponsored by the Rajoy government now stands, and also the distance that still has to be covered to consolidate the remaining part of the system. There are no major objections to the operation. The Banca Cívica group needed a merger, since it was facing difficulties in meeting the government’s new provisioning requirements for real estate assets, a type of asset that figured too heavily on the balance sheets of Caja Sol.

Besides, the co-presidency formula was not exactly the most adequate one. Co-presidencies do not work; they only generate weakness in the medium term, and investors were aware of this.

But though the operation is an appropriate one, some observations are in order concerning the government’s financial policy. It is likely that, were it not for the new provisioning requirements, notably superior to those of the previous government, Banca Cívica would not have faced insurmountable problems. The acceleration of the ongoing restructuring of balance sheets in the cajas has put this particular bank in a tight spot.

Meanwhile, the government has been developing an unreasonable obsession with increasing the sheer size of banking groups. Not all of a bank’s problems can be solved by possessing a high volume of assets. Caixabank and Banca Cívica will form the Spanish banking group with the highest volume of assets (340 billion euros) but it faces the complicated task of scaling down its number of branches, and another, no less disquieting task of absorbing toxic real estate assets.

Moreover, uncontrolled mergers produce banks that are larger, but may have more problems; and even the most justified unions generate a systemic problem. The resulting banks become too big to be allowed to go bankrupt, and constitute a crippling burden in the case of major convulsions in the banking system, as has become apparent in the United States and in Europe during the present crisis.

The “Banca Cívica case” having been resolved, the government and the Bank of Spain must now face the real pending problems of banking consolidation. The names of these problems are Bankia, in the first place, and then Nova Caixa Galicia and Catalunya Caixa. Beyond all doubt, these banks were the main objectives of the financial reform planned by the last government of Zapatero, and now by the government of Rajoy. Both of these problematic groups, but especially Bankia, urgently require a plan for consolidation.