The banking sector in Spain is right back in the spotlight, causing concern throughout Europe. 16 banks have been downgraded; the government has effectively nationalised Bankia and m
The banking sector in Spain is right back in the spotlight, causing concern throughout Europe. 16 banks have been downgraded; the government has effectively nationalised Bankia and many banks have been left with large portfolios of repossessed or unsold property after Spain?s property bubble burst.
According to the Bank of Spain, more than half of Spain?s ?348 billion commercial real estate loans are either in foreclosure or in serious doubt of collection.
Bankia, Spain?s fourth largest bank, has the biggest exposure to bad property debt. It was formed in 2010 from seven weak savings banks and now holds more than 10% of deposits in Spain's banking system. It has a ?32 billion exposure to Spain?s commercial real estate loans.
On 7th May it was disclosed that the finance ministry was preparing to refinance the bank and introduce legislation to protect other banks? balance sheets. In a reversal of policy, the Prime Minister said he no longer ruled out using taxpayers? money to support ailing banks to avert a crisis and restore confidence.
The Bank of Spain converted its ?4.5 billion interest in Bankia, obtained through bailout loans in 2010 and 2011, to shares ? thereby acquiring a 45% controlling stake in the troubled bank. It is understood that it is also injecting billions of Euros into it.
On 11th May the government introduced new rules obliging Spanish banks to set aside an extra ?30 billion in 2012 in case property sector loans go bad. This is on top of the ?53.8 billion they were asked to set aside in February. Between them, Spain?s top four banks will create a ?11.3 billion cushion against bad loans.
The government will also audit banks? exposure to the property sector and has said it would force banks to move seized property assets from their balance sheets and place them in separate agencies.
On 17th May credit ratings agency Moody?s downgraded 16 Spanish banks. It cited adverse operating conditions (the real estate crisis, recession and high unemployment); asset-quality deterioration; restricted market funding access and the reduced ability of the Spanish government to provide support to the sector.
It also downgraded Santander UK, though not as low as parent bank Banco Santander. It highlighted that the UK bank has no direct exposure to the Spanish government.
Fears had already spread beyond Spain. In the UK some British councils have reportedly withdrawn millions of pounds out of British Santander branches, having been previously caught out when Icelandic banks collapsed in 2008. Santander UK has pointed out that its ownership structure protects UK savers as it operates under a subsidiary model whereby Santander UK plc is completely autonomous from its Spanish parent company. Its ?firewall? approach to borrowing and lending means that money raised in the UK stays in the UK.
Individual savers have greater protections than large institutions. In the UK, under the Financial Service Compensation Scheme (FSCS) depositors have the first ?85,000 of their savings with any one bank protected. Since Santander UK is a subsidiary, individuals? deposits are covered by the UK?s FSCS.
Here in Spain, as the rest of the EU, the bank deposit guarantee is ?100,000. This is per depositor per each credit institution. If a bank collapses the local scheme ? the Fondos de Garantia de Depositos (FDG) in Spain ? will refund your savings up to the limit. If your savings exceed ?100,000 you will continue as an ordinary creditor of the institution for the amount not recovered from the FGD. How much you receive and when would depend how the institution is wound up and its debts settled.
Bank deposits in the Channel Islands or Isle of Man are not covered by the UK FSCS or EU rules, even if they are divisions of UK banks, and have their local guarantee schemes.
The compensation limit in the Isle of Man, Jersey and Guernsey is ?50,000. They have an overall ?cap? on the amount they need to pay out. The maximum Jersey and Guernsey will pay out is ?100 million in any five year period. If claims exceed this, compensation will be reduced pro rata. The Isle of Man?s cap is ?200 million.
Jersey and Guernsey will aim to pay compensation within three months, while the Isle of Man has no time limit for payment – how much you receive and when would depend on the size of the failed bank and the amount of funding contributed to the Depositors? Compensation Scheme.
For peace of mind, you should establish what protection your savings and investments have in the event of institutional failure, whatever the type and wherever they are held. It can vary considerably.
Since the 2008 credit crunch many savers have spread their deposits over more than one banking group. Others have moved capital into alternate arrangements that provide a higher level of protection.
For example Luxembourg offers the maximum possible investor protection available to life insurance policyholders through a state sponsored investor protection regime known as ?The Triangle of Security?. If you have an investment bond issued by a Luxembourg regulated insurance company, your investment assets are completely protected should the insurance company fail. The regime offers complete segregation of clients? assets from either the creditors of the insurance company or any of its custodian banks.
Talk to a wealth management adviser like Blevins Franks to see if there are steps you can take to increase your investor protection, in line with your particular circumstances.
By Bill Blevins, Blevins Franks Financial Correspondent
18 May 2012
All information contained in this document is based on our understanding of legislation and practice, in the UK and overseas at the time of writing; this may change in the future.