Recent history shows that sovereigns don’t get many chances to save their banking sector. The most recent example is Ireland. In September last year, the government announced what it thought was a far-reaching bank recapitilisation programme, aimed at restoring health to the sector. One of the measures was to get the banks to increase their core tier one ratio to 8% by the end of 2010, another was for them to have a 7% equity ratio.
The plan failed — it was soon very clear that getting banks to that level was not enough. In December, only after the bailout was agreed, was it finally decided that banks’ core tier one capital ratios should be at least 12%.
The Spanish government appears to be making the same mistake by pushing its own banks to get to an 8% core tier one capital ratio and that an additional Eu20bn will be needed to recapitilise the system. But the market thinks differently. Estimations vary but analysts believe the amount needed by the sector is anything between Eu32bn (in a benign economic environment) and Eu90bn (under a stressed scenario).
Ireland shows that markets take a dim view of unsubstantial proposals and will simply step away from the sector if they feel that there is weakness there. Spain is lucky it can heed Ireland’s lesson. But it needs to act fast.