Bankia did the right thing by going big on its potential losses. The bank’s new head, José Ignacio Goirigolzarri, took advantage of his arrival to make a fresh start on the accounts. If he had continued the piecemeal approach seen so far, international investors would have continued to worry where the bottom of lending losses was.
But by asking for €19bn in fresh cash, he has cleared most worries about the real amount of capital needed at the recently listed amalgamation of savings banks.
So far, so good. But the Frob’s decision to become a bail-out fund — a big change from its original purpose as a crutch for restructuring — and provide the capital is wrong-headed. Now it must work out where to get the €19bn. And not only that, but sooner or later the rest of the cash that other lenders will need to properly provision against their dodgy lending.
The Frob’s move is the wrong one for many reasons. For a start, finding €19bn for a failed bank undoes a lot of the effort that has been put in to contain Spain’s debt and reduce its deficit. As the government makes increasingly harsh efforts to save cash, young Spaniards are migrating offshore in search of work. Those that are left behind are struggling to make ends meet as their salaries shrink and costs go up. They are rightly riled up by the idea that their austerity is paying for the bad decisions of some savings banks.
Second, it suggests that all the discussion at the European level around bail-in and bank resolution amount to nothing but another noxious cause of global warming. The irony here is that the European Commission’s draft bank crisis management legislation was due a year ago. But because the EC did not want to spook delicate markets with talk of resolution and bail-in, the draft got pushed back. Now, it is the implications of one bank — and potentially others — being saved that are worrying markets.
Which leads to the sharpest reason of all that Bankia should not be rescued: Spain simply cannot afford it. That has been effectively admitted, with the suggestion that Bankia may be able to repo Frob debt with the ECB. The idea is a ludicrous one: absent another three year LTRO, the plan would involve Bankia tapping the ECB for cash every three months. Quite how that could be counted as loss absorbing capital is difficult to understand. One dreads to imagine what the Basel Committee on Banking Supervision, having spent years looking at how to make banks more resilient, must make of it all.
To be sure, where Bankia goes, others are likely to follow. But that should not be a reason to bail out the bank. Rather, it is even more of a reason for Spain to use its scarce cash to capitalise a wind-down vehicle for Bankia’s loans while it auctions off the branch network to the highest bidder — after having written off the bank’s creditors, of course.