The EU Smiled While Spain’s Banks Cooked the Books – Bloomberg
Only a few years ago, Spain’s banks were seen in some policy-making circles as a model for the rest of the world. This may be hard to fathom now, considering that Spain is seeking $125 billion to bail out its ailing lenders.
But back in 2008 and early 2009, Spanish regulators were riding high after their country’s banks seemed to have dodged the financial crisis with minimal losses. A big reason for their success, the regulators said, was an accounting technique called dynamic provisioning.
By this, they meant that Spain’s banks had set aside rainy- day loan-loss reserves on their books during boom years. The purpose, they said, was to build up a buffer in good times for use in bad times.
This isn’t the way accounting standards usually work. Normally the rules say companies can record losses, or provisions, only when bad loans are specifically identified. Spanish regulators said they were trying to be countercyclical, so that any declines in lending and the broader economy would be less severe.
What’s now obvious is that Spain’s banks weren’t reporting all of their losses when they should have, dynamically or otherwise. One of the catalysts for last weekend’s bailout request was the decision last month by the Bankia BKIA group, Spain’s third-largest lender, to restate its 2011 results to show a 3.3 billion-euro ($4.2 billion) loss rather than a 40.9 million-euro profit. Looking back, we probably should have known Spain’s banks would end up this way, and that their reported financial results bore no relation to reality.
Strange Random Bank Quote:
“The banks do create money. They have been doing it for a long time, but they didn’t realise it, and they did not admit it. Very few did. You will find it in all sorts of documents, financial textbooks, etc. But in the intervening years, and we must be perfectly frank about these things, there has been a development of thought, until today I doubt very much whether you would get many prominent bankers to attempt to deny that banks create it.” – H W White, Chairman of the Associated Banks of New Zealand, to the New Zealand Monetary Commission, 1955.
- Moody’s cuts Spain credit rating (bbc.co.uk)
- “The Walking Dead” Part 2: Zombie borrowers threaten bailed-out Spanish banks (confoundedinterest.wordpress.com)
- Why the Bailout in Spain Won’t Work (dealbook.nytimes.com)
- Europe Has Done Nothing So Far Except Weaken Itself (businessinsider.com)
- Spain’s Bank Yenta On What Went Wrong (npr.org)
- Spanish Banks Need $46 Billion to Stave Off More Trouble, I.M.F. Says (nytimes.com)
- Spain could need bigger bailout (guardian.co.uk)
- Spain borrowing cost crisis: Rate at euro-era high (kansascity.com)
- Spain borrowing rates soar after Moody’s downgrade (news.yahoo.com)
Posted on June 15, 2012, in Article and tagged $125 billion, Bailout, Bank, Bankia, European Financial Stability Facility, European Union, Government of Spain, Loan, Mariano Rajoy, Moody, Spain, Spanish Banks. Bookmark the permalink. Leave a comment.