When it became obvious last year that Spain’s savings banks were wobbling, the government set up its Fund for Orderly Bank Restructuring, or FROB, complete with the ability to raise as much as Eu99bn to sort out the cajas.
The FROB came as other governments in the Western world were heaping money on systemically important assets in a desperate attempt to keep the wheels of the economy spinning. The cajas were a prime target. They had grown their dependence on international markets, as opposed to deposits, for their senior funds, yet were unable to raise core or tier one capital this way. Their costs were elevated through their plethora of local branches. And their exposure to the bursting construction bubble was a concern.
The FROB intervened earlier this year to rescue the tiny southern savings bank Cajasur from going under, leading the media to coin the phrase “too small to fail” in the process. The thinking went that if Cajasur, which is now up for sale, were to go bust, the ramifications would be far worse than the relatively small amount of money needed to help it out first.
The rescue propelled other cajas around the country to hurry into mergers alliances, halving the number of entities in operation.
While many observers see the restructuring as overall positive, the concern remains that three small, shaky cajas do not together make a single, stable caja. Rather, they form a larger, but still shaky entity.
Their loan books are of particular concern. CreditSights this week estimated that caja-originated mortgages have had higher delinquency rates than the country’s other banks over the past four years — the 90 day delinquency rate for caja originated mortgages was over 4% a year ago, twice that for bank originated mortgages. And as Spanish government austerity measures put pressure on household incomes, non-performing consumer loans will only increase.
So far, Spanish government assistance to the cajas has reached around Eu15bn, or 1.5% of GDP. As the restructuring progresses and the austerity package kicks in, it may be that the government will have to dip further into the Eu99bn FROB pool it pledged.