Cajas: Reform At Last

Following concerns surrounding the financial system, Spain has decided to inject its banks with billions of dollars. The lingering problems with the financial problem have been attributed to the cajas, saving banks, which have struggled in the eye of the financial crisis and the collapse of the housing bubble. Spain attempted to rescue these banks last year, but the attempt to recapitalize and restructure these banks was thwarted by a lack of widespread reform and a desire by the banks to maintain the status quo. A year later, Spain has found itself under scrutiny for its increasing debt issues as well as its struggling economy. This time, Spain has responded with a more proactive plan. Injecting cash into the financial sector to recapitalize these banks has been well received, but the new reform measures have been the key to the positive response since they address the underlying issues which plagued last year’s rescue attempt.

The Spanish financial system is being monitored with a watchful eye by other European countries. Greece and Ireland have already accepted bailouts from the European central bank, so the worry is that, with its growing debts and struggling financial sector, Spain will be the next country to need a bailout. The deficits have hurt investor confidence in Spain, making debt hard to finance. Spain is already estimated to borrow €125 billion this year “just to finance its deficit and roll over maturing debt.” This new infusion of cash financed through debt poses risks and adds stress to an already taxed economy. However, it is a necessary move because the cajas are an important part of Spain’s financial and economic well-being.

The cajas are integral to the interests of Spain because of the large role they play in driving Spain’s economy. The cajas account for €1.3 trillion in assets, which accounts for 42%% of the total bank assets in Spain. The problems with the cajas are two fold. First, they have had trouble raising capital because there is lack of investor confidence. Second, the lack of regulation combined with the complex structures and histories of these banks are part of why these banks are in such dire situations. For example, because of the lack of regulation in lending practices, these banks, like many others around the world, funded a housing boom that went bust, crippled by “bad loans and heavy losses.” The housing spiral has played a huge role in depleting the banks’ funds.

Mortgage or other real estate loans account for nearly half of the cajas assets, therefore the burst of the housing bubble had a considerable effect on these institutions. As the defaults in the housing market began, the cajas were forced to foreclose on the assets and attempt to sell them to recoup the funds. The new influx of real estate for sale further plummeted housing prices, making the underlying assets worth less than the value of the loans. The result was a housing spiral that has seen the cajas suffer great losses. The easy response to fix the depleted capital at these banks is to provide them with more funds. It is not enough just to hand these banks some money; reform measures are necessary to prevent another financial crisis from happening in the future and to satisfy investors.

The idea to inject new funds into these banks is not a new one; Spain injected €11 billion into these banks last year through the Fund for Orderly Bank Restructuring (FORB). While the government had said that that amount put into the fund could rise to €99 billion, the country did not make more money available. A requirement of that rescue attempt was forcing the mergers amongst different cajas, reducing their number from 45 to 17. However, the mergers resulted in “confusing, unwieldy structures” which “scared off investors.” What is more is that they did little to provide transparency in these banks. The politicians who control the cajas used the FORB to create “virtual mergers,” allowing “the banks to keep their own brands, governing bodies and local retail operations while combining treasury and risk-management functions.” This is symptomatic of the political and social issues that go with forcing reform on these banks.
Part of the problem with the cajas is intrinsic with their history and their roots. These banks have “close ties to provincial governments,” which can be traced to the cajas rurales. These rural banks were affiliated with syndicalist, co-operative movements and the Catholic church. While they were absorbed by the savings banks, their ties to political and social interests remained. Because of this, the cajas “face pressure to back projects that may not be profitable.” For example, Bancaja and Caja Granada invested in a theme park, Terra Mitica, in Benidorm, which “went bankrupt in 2004” and” has struggled since reopening in 2006.” Additionally, another bank, CajaSur, which is operated by the Roman Catholic church in Cordoba, mysteriously refused to merge with Unicaja. It exemplified an instance where “politics often trumps rationality” in Spain. As a result, the Bank of Spain had to seize control of it. For Spain to make a real impact on these banks, widespread reform is necessary to usurp these special interests.

The overriding sentiment for reform seems to be that the cajas need to become more “centralized” and “transparent entites,” but in a country with Spain’s history, it might be difficult challenge to overcome. The Franco regime was extremely divisive, and though Spain has done much to repair these division, cultural and lingual values still prevail. For instance, the idea of centralized banks may not resonate well with Basques or Catalans, who were marginalized by the strong, centralized, Madrid-based government of Franco. In instituting this new reform, the hope here would be that the country is far enough removed to accept a decision that affects the health of the overall economy. A strong Spanish economy is beneficial for everyone and reforming the cajas would go a long way in repairing financial uncertainty. These political and social differences which have affected the effectiveness of past attempts to reform the cajas serve as evidence why the new reform has been positively received.

The new plan has shown investors how Spain has learned from previous misgivings and how the country is going to take a more proactive approach towards fixing the caja problem. Last year’s rescue attempt was focused on providing capital for the banks by holding them to lax restrictions. However, the banks took advantage of this through “virtual mergers,” providing access to the capital, but not making the desired changes. This time, Spain is not only providing capital, but also forcing “them to be more open about their lending practices.” By “simplifying their complex structures” and “making them more like traditional banks,” Spain is taking significant steps to usurping the “influence” of “local politicians, union members, clients,” and “Catholic priests” who were “reluctant to relinquish their influence” in the past. With all of these changes, it is easy to see why investors have reacted positively to the announcement.

Under the new plan, the cajas will no longer be complex, enigmatic institutions, but rather more like other banks in Spain. Spain wants to “transform” the cajas into “centralized, transparent entities” that “resemble traditional banks by placing all of their assets into a central holding company and streamlining management.” it is easy to see why the country wants the cajas to be more like traditional banks because Spain’s traditional banks, like Santander and BBVA, are strong. The plan already seems to be shaping the cajas. Cajastur, which merged with three other lenders, has said that it would be “pooling 100% of its assets.” However, the government is going to wait to see the “results of detailed disclosures” before giving an “ultimatum” to the cajas. This should allow the government to assess how bad the situation really is and allow the banks to restructure themselves before necessitating government intervention.

Improving the health of the Spanish economy should be a strong first step towards addressing concerns about Spain’s debt problems. Once these banks are recapitalized and restructured, they can get back to providing loans, stimulating economic growth, and creating new jobs. It should eventually ease the stress on the government, increasing the number of people contributing taxes and reducing the strain of social welfare programs. Spain has been plagued with issues relating to investor confidence because of the cajas for some time; resolving the caja problem should go a long way to addressing these issues.