From independence, freedom and truth


Bad banks and worse banks (I)

Fernando del Pino Calvo Sotelo

June 7, 2012

The best Spanish banker of the last half century was a most extraordinary character. He led a bank brilliantly from 1966 to 1990, raising it to achieve the title of most profitable in the world (in terms of ROE), keeping an extremely robust balance sheet along the way. He never confused size with strength, as a great businessman friend of mine is prone to say. In addition to his undoubted professional success, he had vast humanist interests, was widely considered a man of virtue and possessed a deep spirituality. I am talking about Rafael Termes, who passed away in 2005. A few years before his death, at the ripe old age of 78, full of wisdom and freedom and with the genrosity of sharing both, he stated in an interview the qualities an ideal banker should have (source: and He said the most important trait should be prudence,” whereby a banker should ensure, up to his human limitations, the recovery of the principal and the effective collection of interest”; those who dared to get into “adventurous investments” would put this principle in jeopardy. Secondly, and in relation to clients, the ideal banker should “respect people’s freedom by informing them in a precise and understandable way (of all terms & conditions when dealing with the bank) without abusing captive clients”. Also, he should “abstain from squandering funds in order to promote his own image, control the media or use lobbies with the aim of manipulating the information about the bank”.  Yet another virtue of the ideal banker should be truthfulness, which would prevent “any accounting trick to show fictitious profits and would oblige him to inform shareholders with clarity, accuracy and promptness about the situation of the bank and its financial results”. Finally, Termes stated that prudence should be garnished with “austerity, sobriety, discretion and modesty”.

These concepts sound like they belong to antiquity, right? Maybe this feeling is just the mirror image of the sad loss of values of our Society. It would not be fair to judge our bankers under the light of a stricter moral code than the one chosen for the rest of us. But it is essential to understand that there is indeed another way of doing things as showed by the differences between the ideal banker and the nearly unanimous behavior (with few exceptions) of our financial sector. This “other way of doing things” refuses imprudent lending, retail client abuse through predatory branch selling of the banks’ own issues, be it convertibles or IPOs a few months prior to government bailouts, or the habit of turning run-of-the-mill bankers into myths thanks to endless image promotion at the expense of their own shareholders.

But in the Great Debt Crisis we are currently suffering, banks are not the only ones to blame. The cajas, the 19th century style regional savings & loans so ineptly and carelessly managed by local politicians and Unions, Inc., are to blame as well; you know, those who financed, for instance, the construction of huge airports in the middle of nowhere (such as Ciudad Real airport, closed after one year of operation, 35000 passengers and a 1.1 billion euros investment). Central bankers (in our case, the Bank of Spain and the ECB), relaxed and complacent supervisors, created, promoted and cheered, with their usual arrogance and delusion of control, the credit orgy that now threatens to engulf us. Politicians at the national level, understanding nothing, first claimed enthusiastically that Spain was going just fine, later that there was no crisis and finally that they saw green shoots (right after smoking them, I suppose). And also, in truth, this crisis would have not been possible without the participation of the borrower, that is, of all those who either in their own name or in the name of their company, got into debt freely and voluntarily. The old excuse of “she gave me of the tree and I ate” is not valid in the Adult World.

How did we choose in Spain to respond to this offspring of the Great Debt Crisis called the banking crisis? Well, we did it in the wrong way, basing the response on two deadly pillars: hiding and postponing. To put it bluntly, our response was to lie about the real asset value of banks and postpone the inevitable waiting for a miracle that would never occur. This alone has brought us to the total loss of credibility we are suffering these days. The deficit figure confusion and the growing international awareness of the ruinous regional governments’ structure have done the rest. It does not seem serious to talk about the largely unknown “Spain” brand having an image issue, complain about conspiracies by the anglo-saxon media or cry about market “attacks” (those evil markets, particularly when they keep on falling). This is puerile language. It’s not about image or perception; it’s about a very real underlying problem. Thus, the mistrust is totally legitimate. It is weird, to say the least, that Spain has suffered the largest real estate bubble in the world and a) real estate prices have fallen percentagewise by half of those in the US and b) the financial sector which funded it does not find itself in deep trouble, meaning a true solvency issue. Our banks and cajas have been increasing their balance sheets, making profits and distributing dividends as if nothing had really happened. Their toxic assets have been selectively refinanced (larger clients were welcome to extend; smaller ones, please pay now) and collateral repossessions have been valued at fantasyland prices. Their provisions have been understated and no losses have been recognized so far. Of course, NPL provisions are considered to be an exercise of caution whereas taking losses is a direct recognition of obvious management mistakes (to be avoided at all costs, of course). It seems relevant that neither the banks’ top management nor their most significant shareholders have been massively buying stock at these apparently low prices; moreover, when they have been able to choose whether to collect dividends in stock or cash, they have chosen to take them in cash.

The blind merger of cajas has been another great mistake. Termes himself complained back in 1997 about the politicians’ obsession with the sheer size of financial institutions: “I ignore the political reasons that may advise the government to recommend the merger of Spanish banks; what I do know pretty well, however, is that there are no economic or financial grounds on which to base it”. He added that “both empirical observation and academic doctrine agree on the small economies of scale advantages to be found in M&A activity in the banking industry, which translate into the exact opposite as soon as any one bank reaches a relatively modest size”. Termes ended up saying that “it doesn’t seem appropriate to promote bigger and bigger banks”. Tony Blair said “we might not be the biggest, and probably not the most powerful either, but can be the best”. Is it really that difficult to grasp this simple concept?

If one of the problems we are facing is the existence of institutions “too big to let fail”, why have politicians pushed for massive, hurried mergers of the cajas, void of any serious financial analysis, if not for bastard political interests? After the Bankia case, for goodness’ sake, why do they keep doing just that? Instead of clearly identifying, ring-fencing and isolating the sources of infection, these mergers hide them, dilute them and spread the pollution.

Hiding and postponing has been a terrible policy mistake, but now we have the latest chance to correct it. There’s no way you can go around this thorny issue. In the second part of this article I will show which solutions were given by countries deemed exemplary by the way they dealt with banking crises in the past. I’m sure you will be able to tell the difference between them and our performance in Spain so far.


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