How the Regulated Now Get to Eat the Deregulated
Why is Spanish bank Santander on such a spending spree right now? Today they’re on the verge of buying up more of Philadelphia thrift Sovereign, of which they already own 25%. They bagged Abbey National last November, the Alliance and Leicester a couple of months back, and a £20bn chunk of Bradford and Bingley last week. And they had the luxury of waiting for the stock price of Sovereign to fall further, after mooting a deal in February.
To understand why they’re flourishing while others suffer, you need to look at Spanish law, which has been keeping domestic banks on a tight leash for decades, so they don’t go around sniffing at dodgy derivatives. After a wonky deregulated 1970s that ended with 26.4% inflation in 1977, post-Franco Spain got tough and sold off 17 underperforming banks to their bigger rivals, with the near-€4m deficit shouldered by the Banco De Espana. Since that slate-cleaning period there’s been the occasional hiccup like when Banesto was losing 13bn pesetas per quarter, but Spanish banks like Santander have stayed on course recently thanks to, according to the VP of the Banco De Espana, “tough criteria applied to the credit risk transfer mechanism” and its “heavy reliance on deposits to finance credit”.
According to the Banco De Espana’s “Basic Regulatory Structure“, “Institutions are required to hold a sufficient amount of eligible own funds to cover the sum of the requirements arising from each type of risk incurred in the pursuit of their business” – these amounts are much higher than international accounting laws require. This discourages speculative investment of large pots of cash in derivatives or structured investment vehicles.
The result is that they’ve shied away from investment banking and concentrated on retail, only spending money they know they’ve got or can absolutely guarantee the Spanish people.
That’s not to say Spain is out of the woods yet. Of Santander and fellow Spanish banking giant BBVA, the FT says: ”Their robustness is atypical. Half of Spain’s financial system consists of 45 unlisted mutuals owned by local governments, called cajas. They are entirely domestically focused, therefore highly exposed to property, and also – because they cannot raise equity – potentially short of capital”. Inflation is at 5%, and Spain has the highest unemployment in Europe. While the banks are OK, the crisis is far from over.