Spain has just announced it will be asking for €100 bn in European aid to recapitalize its banks. This was coming for some time now. The only problem was that the dithering and incompetent Madrid team felt it would hurt national pride too much if, in exchange for aid, there were conditions attached. So now we get aid to Spanish banks, not to Spain. Note that this follows the familiar European pattern of announcing great-sounding initiatives, without much of the nitty-gritty clear at all. Neither the EFSF nor the ESM can actually recapitalize banks at the moment. So instead of clarifying things, this will actually cause more anxiety and uncertainty. Second, the aid will be in the form of loans to Spain, via FROB, the Spanish government's recapitalization vehicle. The success of the Paulson plan (beautifully analysed by Veronesi and Zingales) seems to suggest that one should instead go for direct equity injections, with European shareholders having real oversight.
The Spanish regulators - mainly the Bank of Spain - will remain in charge, and therein lies the problem: The idea that the same clown show that gave us Bankia, Catalunya Caixa and CAM is now receive a cool €100 bn in European money without real oversight is sickening. What's worse is the absence of any discussion WHY these banks should be rescued at all. If Bankia, for example, was wound up, the depositors would still be paid. Would the country suffer? The only reason to do bank rescues is to protect "intermediation capital", a mythical property said to reside in the heads of certain bankers - the ability to say, yes, this is a good borrower and I will lend to him, based on past experience, intimate knowledge of an area, clientele, or industry. The fact that Bankia and CAM are now effectively bankrupt tells you that there was no intermediation capital there in the first place, just a lot of venal rent-seeking. Surely the best thing would be to put the financial institutions that are below a sensible equity threshold into bankruptcy, with depositors paid out and the financial firm shut down. That way, the better banks like BBVA and Santander would pick up the slack, win customers and make money; the incompetent bankers could go and join the long queues of unemployed. Ideally, this should have been done with all the small, bust cajas, instead of merging them into things like Bankia - in the US, small banks fail all the time, and nobody panics.
The Spanish regulators - mainly the Bank of Spain - will remain in charge, and therein lies the problem: The idea that the same clown show that gave us Bankia, Catalunya Caixa and CAM is now receive a cool €100 bn in European money without real oversight is sickening. What's worse is the absence of any discussion WHY these banks should be rescued at all. If Bankia, for example, was wound up, the depositors would still be paid. Would the country suffer? The only reason to do bank rescues is to protect "intermediation capital", a mythical property said to reside in the heads of certain bankers - the ability to say, yes, this is a good borrower and I will lend to him, based on past experience, intimate knowledge of an area, clientele, or industry. The fact that Bankia and CAM are now effectively bankrupt tells you that there was no intermediation capital there in the first place, just a lot of venal rent-seeking. Surely the best thing would be to put the financial institutions that are below a sensible equity threshold into bankruptcy, with depositors paid out and the financial firm shut down. That way, the better banks like BBVA and Santander would pick up the slack, win customers and make money; the incompetent bankers could go and join the long queues of unemployed. Ideally, this should have been done with all the small, bust cajas, instead of merging them into things like Bankia - in the US, small banks fail all the time, and nobody panics.
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