WSJ: Spain Pushes Local Banking Reforms

Despite complaints from Spain's ailing savings banks that reform efforts are moving too swiftly, the Spanish government is standing firm in its push to quickly convert the local institutions into traditional banks, according to people familiar with the matter.

The government's new solvency decree will firm up a set of ambitious reforms announced by Spanish Finance Minister Elena Salgado last month. It represents Spain's latest effort to confront the structural problems of the euro zone's fourth-largest economy, which has been badly damaged by the implosion of its once-mighty real estate sector.

(This story and related background material will be available on The Wall Street Journal website, WSJ.com.)

The new rules will likely result in the end of the savings banks, known as cajas, whose archaic business structures are misunderstood and mistrusted by investors. The decree will establish a time frame for the restructuring of ailing financial institutions in need of fresh capital, and define how much cash they will need to raise if they want to prevent partial nationalization.

The cajas are furiously preparing stock market listings and sounding out private investors ahead of a government-set September deadline, in an attempt to avoid last-resort measures, such as capital injections from taxpayers. Senior caja executives complain that the September deadline may imperil listings, and could increase the number of partial nationalizations, because it would leave just a small window to sell shares before the summer holidays. So far, four institutions have disclosed plans for IPOs.

The government isn't bending much in the face of such complaints, however, according to a person familiar with the content of the decree. The September deadline won't be moved, however there will be some flexibility for lenders that have a strong business plan and have their capital-raising plans far advanced when the deadline passes.

"There simply isn't market appetite for all the cajas to go public at once," said David Franco, a partner at Freshfields Bruckhaus Deringer in Madrid. He sees further room for another consolidation round before the summer, with the most solvent cajas absorbing the weakest links.

Spain recently announced higher capital requirements for all its banks, part of a wider effort to shore up investor confidence in the country's financial system, particularly the cajas, whose weakness had become a flashpoint for investors around the globe. Spain's borrowing costs surged after Ireland was bailed out in November, but funding pressures diminished in recent weeks as the government focused on key pension and financial sector reforms. Banking stocks have also surged over the past month, indicating that investor appetite for Spanish lenders may be gradually returning, analysts say.

In a preliminary estimate, the government said banks will need to raise around 20 billion euros in new capital, although that is about half the amount estimated by most private-sector analysts.

Last year, Spain's central bank forced through a number of shotgun mergers among the cajas, reducing the number of entities to 17 from 45. Analysts say that Spain's banking market remains quite fragmented, with excess capacity in a system in dire need of restructuring.

The cajas will also focus on the fine print of the new capital requirements to calculate how much extra cash they will need to raise. Finance Minister Salgado sent a letter to banking associations last week indicating that the weakest unlisted lenders will be required raise their capital cushions--the buffers banks must keep against potential losses--above 10% of their assets. Healthier banks will also face higher solvency requirements, a core capital ratio of 8%, still below the buffer set for the weak cajas.

The new regulations, set to be approved at the government's weekly Cabinet meeting, come as investors have been sounding out the cajas for potential bargains. Hedge fund executives, mutual fund managers and sovereign wealth funds have flocked to Spain to meet with senior cajas executives and look for potential deals in Spain's battered financial system, according to people familiar with the situation.

The race to find private capital may also open the door to global banking giants. In an unusual invitation earlier this month, top executives from the two biggest lenders in the country, Banco Santander SA (STD, SAN.MC) and Banco Bilbao Vizcaya Argentaria SA (BBVA, BBVA.MC) said they would welcome the arrival of foreign banks to Spain because that would help "professionalize" the sector.

Listed Spanish banks would like to see foreign banks buy up smaller local rivals to avoid government intervention in the sector, which they say would give state-supported banks an unfair advantage.

The big Spanish banks are also expected to look for caja deals. BBVA, for example, said earlier this month that it wants to boost its market share in Spain by 50% over the next three years and that it may end up buying some caja assets.

The Spanish government believes these reform efforts, plus its progress in lowering its budget deficit, will shore up investor confidence, and ensure it can raise the approximately EUR170 billion in financing it needs from markets this year.

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