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Despite a wave of forced mergers and compulsory provisions some of Spain’s savings banks still pose a threat to financial stability and must strengthen their balance sheets, according to an International Monetary Fund report.
While the country’s largest banks were found by the IMF to be sufficiently capitalised to withstand further shocks, two of the part-nationalised savings banks, or cajas, were judged to be a continuing systemic risk with several others considered vulnerable.
This year Spain’s banks have been forced to raise €50bn in new provisions against bad property loans after they incurred enormous losses for business done during the country’s decade-long property bubble.
Without naming the institutions, the IMF report, part of an assessment made approximately every five years, said that a group of 10 Spanish banks, most of which have received state support, continued to be at risk.
“To preserve financial stability, it is critical that these banks, especially the largest one, take swift and decisive measures to strengthen their balance sheets and improve management and governance practices,” the report said.
Bankia, run by Rodrigo Rato, the former managing director of the IMF, is the largest of these institutions to have received state aid.
The Spanish banking sector has undergone sweeping reforms both under the previous socialist government and the present centre-right rule of Mariano Rajoy’s Popular Party, reducing the number of privately held savings banks from 45 to 11 and injecting new capital from the Frob, a specialised state bank rescue fund.
The new government has been right to focus on banking reform as a means to economic recovery, the IMF report says, and that dealing with legacy assets by possibly placing them into private asset management shells should be “the priority of the next stage of the financial reform strategy”.
The IMF praises the professionalism and experience of the Bank of Spain, which regulates the country’s banking sector and has intervened in some troubled savings banks, but also calls for reforms. Spanish regulators should be given greater authority to intervene and prevent risks building up in the financial system, and should have greater independence, the report says, without specifying where existing problems lie.
The sanctioning regime in Spain’s banking supervision should also be strengthened, the IMF recommends.
The report also said that Spanish banks may require greater reliance on public money, instead of drawing resources from Spain’s industry funded bank deposit guarantee scheme, which has provided asset protection funding for lenders that have purchased their bailed out rivals.
The Spanish government in February capped the pay of executives at bailed-out banks, in some cases lopping off as much as three-quarters of their salaries.
The chairmen and chief executives of banks that had received state aid will not be allowed to earn more than €600,000 a year, including pension benefits, with bonuses also prohibited. In banks completely taken over by the state, with top executives allowed to earn no more than €300,000.
As executive chairman of Bankia, Mr Rato will see his pay drop by at least 74 per cent for this year, down from a fixed salary including bonuses of €2.34m last year.