Plans to force mergers in Spanish banks might backfire

A Spanish flag flutters near the dome of the Bank of Spain in central Madrid

[UPDATE] By Juan Pedro Marín Arrese, in Spain | The Spanish government will disclose on Friday its plans for a massive clean-up in mortgage-backed bad loans from banking balance sheets. This move is indeed highly welcome so long this overhaul doesn’t push too far eating all resources at hand. Once a €50 billion adjustment has been announced, markets will only settle for a substantially higher figure. In many cases, meeting such a stringent target would take a decade, devoting all benefits to perform the task. And prospects look bleaker as recession creeps in.

So the trick lies in luring banks to merge, using both carrot and stick. Making full use of all kind of reserves and capital gains to fill the gap, should they melt together, could prove a powerful incentive. When it comes to strong arguments, is there any tougher one than the menace of being taxed for voluntary  provisions, currently exempted? Take the recent annual results of one top credit institution. You can easily deduct it roughly pays the Treasury only 12% on its net margin. A light corporate taxation by any standard.

Will forcing healthy credit institutions to buy lame ducks square the circle, at no cost to taxpayers? It seems highly unlikely. Any grocer knows that trying to save losses by concealing rotten apples in a basket of healthy ones will only lead to ruin the business. Banks in this respect are much alike grocers. When it comes to solvency, investors will downgrade those filling their balance with inherited rotten assets. A bad loan, in the same way as energy, does not disappear by switching it from one place to the other. The hole remains untouched.

* Juan Pedro Marín Arrese is an economist.

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