Banks looking at up to 250bn in losses

In February 2011, the Bank of Spain official José María Roldán told investors and analysts in London that if land were to be assigned zero value in Spain, he would personally buy it all up. Now, one of two reports by independent auditors commissioned by the Bank of Spain predict that in a severely adverse scenario, some of the credit that is financing land faces losses of 100 percent — that is to say, zero value. With models that envision such extreme scenarios, the losses for the Spanish banking sector could reach up to 270 billion euros, or over 25 percent of the country's GDP.

The stress tests performed by the auditing firms Oliver Wyman of the United States and Roland Berger of Germany offer similar results, but the way each of them reached the final figure varies tremendously.

The tests estimate potential losses in lenders' credit portfolios (through defaults) and real estate portfolios (through declining prices), then establish the capital, provision and profit-generating buffers that are necessary to cover those losses.

Roland Berger expects losses of 119 billion euros in the base scenario and 170 billion in the adverse scenario, while Oliver Wyman aims higher and estimates the losses to range between 170 and 190 billion euros in the base scenario and 250 to 270 billion in an adverse situation.

The difference stems partly from the fact that the German firm did not include losses from non-performing loans and real estate that were already identified by the close of 2011. Oliver Wyman was also stricter in its estimate of losses from loans to real estate developers. The biggest problems for banks are their real estate assets — which face declines of 45 to 55 percent in the base scenario and 55 to 65 percent in the adverse case, according to the US firm — and their loans to developers, with losses in the 28 to 32 percent range in the base scenario and 42 to 48 percent in the more negative situation, again according to Oliver Wyman.

Another major difference between both studies lies in home mortgage loans. The US firm expects default rates to remain low and estimates the losses at 2 percent in the base scenario and around 4 percent in the adverse scenario, for maximum losses of 22 to 25 billion euros. Roland Berger, meanwhile, expects twice these losses in this segment, or more than 45 billion euros in the adverse scenario.

The stress scenarios were defined by a steering committee under the leadership of the Economy Ministry. In the base scenario, the economy is expected to decline by 0.3 percent in 2013, which contradicts the official forecast of 0.2 percent growth for next year.