The President of the Spanish Banking Association (AEB), Miguel Martín, stated today that “Spanish banks only demand transparency and competitive equality within and beyond our borders” and in this regard expressed his confidence that “the National Authorities will not allow competitive inequality to extend to the Spanish domestic market nor will they adopt measures in Spain that generate unjustified comparative advantages in our domestic market.”
During the conference he delivered at the seminar on “The changing situation in the global economy,” organized by the Center for Public Policy and Government Studies under the University of Alcalá, Miguel Martín expressed his concern about the measures adopted last October by the European Council to limit the effects of the financial crisis. In his opinion, the liquidity measures and public guarantees for debt issuances create competitive distortions that may be “tolerable”; however, he noted that “the greatest difficulty lies in bank capitalization aid, since capital is the cornerstone of the banking business and competition among institutions.”
“Injecting capital into an institution at a time when the market is practically closed for everyone or at a prohibitive price incompatible with the foreseeable profitability of the business, is placing it in an advantageous position compared to any other that does not receive a similar injection. This advantage is of incalculable value for those institutions with very high CDS or whose stock price has fallen well below their book value,” Martín explained.
For the President of the AEB, “the only possibility of offsetting this advantage is by recognizing the institution’s inability to continue operating normally without the necessary capital increase. That is, admitting that the institution needs a restructuring of its activities and business.”
“That was exactly the criterion of the European Commission in its Communication of October 12, 2008,” Martín specified, drawing attention to how ECOFIN agreed almost two months later “exactly the opposite and has pressured the Commission to change its criterion, so that now any capital injection can be justified by generic and self-justifying objectives such as contributing to financial stability or credit growth.”
All of this leads him to state that “between the objective of stability and that of competition and integration of the European financial market, ECOFIN has opted for the former.” “It is possible that the decision is inevitable but, at least, ECOFIN could acknowledge the irreversible damage to the second objective and act with greater transparency,” he added in this regard.
The President of the AEB emphasized that “Spain is among the few countries that have not opted for the capitalization of their credit institutions, so they will have to bear their competitive disadvantage or, in other words, the competitive advantage of their European competitors, which can be glaring when they also operate in the Spanish market.”
Despite everything, Miguel Martín understands that “Spanish institutions are confident in the good faith of the European Authorities and therefore trust absolutely that they will know how to adopt the precise measures to minimize the negative effects of the situation created.” Spanish banks also trust that “the National Authorities will not allow competitive inequality to extend to the Spanish domestic market nor will they adopt measures in Spain that generate new comparative advantages in our domestic market.” In short, “the rules of the game that have worked with great effectiveness in Spain must be preserved and maintained,” he stated.
He also expressed his concern about “a purported opinion of analysts and investors that banking institutions need to increase their capital levels in a generalized and indiscriminate manner.” Added to this is that the Authorities, faced with the risk of global collapse, are now urgently demanding capital increases. “There can be no greater procyclicality in demand, nor less transparency because as it has been manifested it may appear to be directed at all institutions and not, as is to be expected, at those most in need due to losses incurred.” Or affected by the following factors: exposure to securitization activities, liquidity support to off-balance-sheet vehicles, trading portfolio risks, risk concentration, or quality of hybrid capital instruments. “None of these factors significantly affect Spanish institutions,” Martín stated.
The President of the AEB explained that the European Authorities put forward an additional reason to demand a generalized increase in bank capital: the advisability, even the necessity, that credit to the real economy flow abundantly to avoid the worsening of the ongoing economic recession. The idea of the European Authorities is that “lacking capital, excessively leveraged, and punished for it by the markets, banks would proceed to reduce their leverage by reducing their assets and, therefore, credit. And since capital is not available in the market, Governments must provide it.”
In his view, this argument would be impeccable, were it not for the fact that “not all institutions are the same. Not all lack capital nor to the same extent. And above all, not all have contributed in the same way to generating the financial crisis through misguided risk management of the activities they carried out and the products they distributed or invested in. And, of course, not all have profited from it.”
He also understands that “in the specific case of the eurozone, with a single currency and monetary policy, talking about ‘national’ credit growth objectives lacks the most basic sense.”
Added to this is that “all estimates made by international organizations, including the ECB, project negative credit growth for 2009” and in this context “making people believe that credit will increase miraculously and immediately if banks obtain more capital is pure demagoguery.”
Miguel Martín considers that in Spain institutions neither lack capital nor have received any capital injection and the asset purchases carried out or future Treasury guarantees merely substitute inefficiently for markets closed first by the financial crisis and now, additionally, by the way of solving it.”
He stated in this regard that “the Spanish banking system is highly competitive, so it is difficult for a solvent credit application to go unattended due to the whim of one institution or a group of institutions.” “It is striking that certain quarters have gone from proclaiming that the Spanish banking system was the best and most efficient in the world to now accusing it of wanting to suffocate families and businesses out of pure malice,” he added.
In short, Martín demanded for Spanish banks “transparency and competitive equality within and beyond our borders. If the rules of the game on capital or liquidity levels are changed, let it be done officially, openly and transparently, equally for all.” If these conditions are met, the President of the AEB assured that Spanish banks “will know how to face their responsibility to manage, in the part that concerns them, that is, credit granting, the deep recession of the Spanish economy. And they will do so by allocating available resources effectively, that is, choosing the best borrowers, and efficiently, that is, at the lowest possible cost.”
