What's wrong with Spanish Banks (final part)

In truth, it is the cajas that have the biggest problem due to their over exposure to both developers and consumers and last month the government had to rescue Caja Castilla La Mancha. It is not expected to be the last and similar rescues are expected in the coming months. At the same time, in May Moody’s, a leading credit rating agency, announced that it is studying the potential downgrade of 32 Spanish banks and cajas due to their deteriorating balance sheets and high levels of bad debt.

With all the international focus on the mismanagement of banks it is interesting to consider why Spain’s caja’s, who have traditionally been the mainstays of their local communities, find themselves in such a position.

The first is the de-regulation several years ago which allowed them to expand into other regions – previously they could only operate in their home “region”. This has led to a massive geographic expansion by many cajas and vastly increased competition between themselves and the banks for customers.

The second is their ownership/management structure. The caja’s are mutual, non profit organisations whose primary role was to support the local community. As such, under their statutes their governing bodies are predominantly made up of local politicians who are not known for their banking or management skills!

Thirdly, rapid expansion, and an increase in competitiveness, along with the range and complexity of products, has stretched management capabilities and exposed poor risk management policies, systems and processes.

In summary, Spain’s banking system is not as safe as houses - as the sea withdraws the rocks are being exposed. Having said that, it most economic and political commentators agree that it is inconceivable that the government will allow any leading bank or caja to fail - not just because of the domestic consequences but also because their much lauded regulatory system will be seen to have failed.

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