The Bank of Spain’s announcement on Monday that Roland Berger and Oliver Wyman had been hired to evaluate the strength of Spanish banks was welcomed in many quarters as A Good Thing. Three more auditors are on the way. Bringing in third parties to take a proper, independent look at the banks is something that is desperately needed if there is to be any clarity on the state of Spain’s troubled lenders.
But the applause comes with a caveat. Unless it comes up with a pretty big number, the exercise may simply be a source of more frustration for international investors.
Spain’s failure to address properly worries about the country’s banks was already becoming increasingly embarrassing. The new government has engaged in some grand talk about restoring confidence to the banking sector. But the piecemeal approach it has taken has been unimpressive.
The two Royal Decree Laws it has put out this year — increasing the amount of provisions that Spain’s banks have to put aside — have failed to deliver the goal of restoring confidence.
The first, which called for banks to set aside around €50bn of capital and provisioning against troubled lending to property developers, was not sufficient to reassure investors that it would cover potential losses on those assets. More recently, a further €30bn of provisioning on the same loans has been only grudgingly accepted as an improvement.
But nothing has been done to address potential losses on residential mortgage and small business lending. With the economy back in recession, and unemployment pushing 25%, the worry is that the non performing loan rates in this area will escalate. The poor state of disclosure in areas like loan to value ratios (see separate story here) doesn''t help.
The drip-feed of measures makes it look as though the Spanish government is unwilling to address the problem decisively — putting the odd dent in the can before hoofing it down the road again.
With the market increasingly running its own analyses on the size of the problem, the pressure is on to comprehensively address the issue. Softly, softly might sometimes be the sensitive — and sensible — approach. But when hard truths are what is required, it is the wrong way to go.