Expectations for Spanish banks in the Economic Crisis

An article in El Pais today analyses how Spain’s banks are faring as the international economic crisis gets worse. Even though the Spanish government has not yet had to intervene to save a bank, many people in Spain will be asking themselves whether their savings are safe or not and whether any Spanish banks or building societies are likely to face similar problems to American, British, French or Belgian financial institutions.

According to the Spanish president, José Luis Rodríguez Zapatero and the Minister for the Economy, Pedro Solbes, all money held by Spanish Banks and building societies is safe.

However, nobody can be 100% sure how long the current international financial crisis will last. The length of the crisis is crucial to how long many banks can remain financially viable. The fact that banks depend on the money from their clients and international stock markets to stay in business is an important factor in deciding how long they will be able to resist the crisis. If the current situation goes on for many months their funds are likely to run out according to some financial experts.

However, experts say there is no need to panic in Spain given that the reason that some financial institutions in America, Britain, France and Belgium have fallen is that some of their investments were worthless (subprime mortgages etc).

The advantages of the Spanish banking system is that it is not based on worthless mortgages, they have more capital at their disposal, the rate of defaulting on loans is relatively low compared to other European countries and they are based on a model of commercial banking.

The first thing that clients should be aware of is that the first 20,000 euros held in any European bank account is safe. Furthermore, the strength of the Spanish banking system is partly due to strict supervision imposed after the Banesto banking crisis of 1993. The bank of Spain then decided that all banks should have a contingency fund to be available in times of crisis. According to the bank of Spain last July this fund was estimated to be worth at least 30,000 million euros.

Another strength of Spanish banks is that their level of capital is higher than their foreign rivals (8% compared to 6%).

In fact in an article published in the Financial Times, yesterday – an unlikely source of praise for the Spanish banking system – this newspaper said that readers should take note of the Spanish banking system for its rigorous supervision of what goes on inside its financial institutions. It also affirmed that Spain would be able to ‘ride out the storm’ and that it was likely to remain undamaged by the current international financial crisis.

Spanish banks are also strong because of the levels of deposits they receive. Between August 2007 and August 2008 Spanish banks received more than 90,000 million and accumulated 388,000 million euros. While many banks have fallen into ruin due to investments which depend on larger clients and the state of the stock markets Spanish banks have many investments with smaller clients. Therefore any losses are likely to be much smaller.

Apart from international loans which must be repaid (20,000 million remains to be paid back this year and 80,000 million euros next year) another weakness of the Spanish banking system is the amount of credit it has invested in the construction industry. Around 315,000 million euros of credit has been conceded to property promoters and another 155,000 million euros to construction companies. The problems with this are that a crash in the housing market could still happen. Lastly, non payment of loans, although low in Spain is increasing. Rising levels of unemployment could affect this figure significantly.

The strength of the Spanish banking system has been reflected in the stock market The biggest banks Santander and BBVA have fallen less than their competitors although smaller banks have been severely affected. However, Spanish building societies are likely to find themselves in a more difficult position due to the slump in the housing market. Nevertheless they have the option of merging if the going gets really tough.

Lastly, for those who still want to invest the best option appears to be Letras del Tesoro (treasury bonds). These investments do not carry any risk and they are more profitable than many other investments.