Five lessons from the Spanish cajas debacle for a new euro-wide supervisor | vox - 0 views
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just the three most problematic Spanish cajas (Bankia, CatalunyaCaixa and Novagalicia) have had capital deficits (to be covered partly or fully by the taxpayer) of €54 billion – over 5% of Spanish GDP, a larger amount than what Spain will have to request from the European rescue funds.
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governance played a critical role in the development of the Spanish crisis. In the Spanish case, the supervisor, confronted with powerful and well connected ex-politicians decided to look the other way in the face of obvious building trouble.
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There is no intimation by anyone of outright corruption in the Banco de España supervisory role, and given the professionalism of the institution it is unlikely that there was any.
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not surprisingly, Banco de España supervisors had little interest in discovering that Spain’s vaunted regulator had in fact missed the largest financial crisis in the history of the country
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Unfortunately, often supervisors in charge of the failing entity in the years of the debt run up were the ones charged with uncovering the problems.
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Spain was the leader in the introduction of a dynamic provision – a provisioning tool that forces banks to increase provisions without reference to any specific loan. The intention of this tool was twofold: to mitigate the bad times, and to cool the booms in the good times (Holmstrom and Tirole 1997). Dynamic provisions were endorsed as part of the Basel III standards in December 2010, in part on the strength of Spain’s experience. And indeed the existing evidence (Jiménez et al. 2012) shows that the tool worked as intended, dampening the credit boom and softening somewhat the credit crunch. However, it is clear by now that their level was not nearly enough, as their size – 3% of GDP at their highest point (2004) – was simply not of a magnitude commensurate with the credit losses.
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Without the provisions, the reality of the cajas' accounts would have become much faster a concern, and would have imposed itself on the regulator
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Had the Banco de España ordered an audit of the system after uncovering numerous irregularities in CCM, it would have not been able to deal with the capital shortfalls uncovered as there was no appropriate resolution regime in Spain at the time
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Already the first entity that was intervened (CCM) as far back as March 2009, showed that the real NPL levels post intervention (17.6%) were more than twice as large as the reported ones. This should have been the point for the Banco de España to get ahead of the curve by ordering an audit of the whole sector
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More systematic evidence of the role played by these governance issues is provided in a 2009 paper (Cuñat and Garicano 2009b) where we showed that cajas with chief executives who had no previous banking experience (!), no graduate education, and were politically connected did substantially worse in the run up to the crisis (granting more real estate developer loan, up to half of the entire loan book in some instances) and during the crisis (with higher NPLs).
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Even more important was the role of these political connections in diluting the role of the supervisor after the crisis started, in what was meant to be the crisis resolution stage but which was in fact a crisis cover up stage.
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Third, dynamic provisioning is a good idea, but the supervisor must be mindful it may delay decision making in problem cases