Behind deposit outflows in Spain: don’t believe the hype about distrust

By Carlos Díaz Guell, in Madrid | The volume of deposits of households and non-financial corporations suffered outflows of €120 billion in 2011 in Spain and Italy, adding even more pressure on both countries’ banks. The data come from the last quarterly report of the Bank for International Settlements (BIS), which analyses European banks’ response to higher capital requirements that the European Banking Authority (EBA) set in October last year with a mid-2012 deadline. EBA calculated then that there was a total capital deficit of €84.7 billion in 31 entities and gave them a period of three quarters to cover it.

It seems that for both Spain and Italy, the re-orientation of investment strategies of households and businesses towards alternative financial assets would justify to a great extent this correction. In Spain, investment in bank promissory notes (€16billion) and the autonomous regions’ so-called patriotic bonds (worth €10.5 billion) may be an explanation of how those missing funds were actually used.

In any case, the number handled out by the BIS does not correspond to those offered by Bank of Spain or the European Central Bank (ECB), according to which there was an output of €24 billion in Spain and €6 billion in Italy. In fact, in order to understand the figures provided by the BIS one would have to add non-monetary financial institutions, whose performance’s interpretation in Spain is somehow complicated because it should include securitisation’s counterbalances.

Therefore, it is safe to note that the behaviour of deposits in Spain responds more to economic factors and supply that distrust.

Interestingly, when this situation occurred, with fully closed wholesale markets and valuations of financial institutions to a minimum, it was recommended that institutions deleverage through recapitalisation. Only an entity conducted a capital expansion operation, with a very negative impact on its price, which discouraged the rest.

Most institutions preferred to cut down the distribution of profits or non-core asset sales. Capital-deficient institutions have also restricted further its policy of granting credit, especially in operations with high risk such as new project finance.

The situation reflected by the BIS is a clear example of the risk of disorderly deleveraging resulting from new financial regulations that were imposed too quickly. Although the BIS notes that private investors have acted as substitutes for financial institutions, SMEs have difficulties to seek other financing alternatives. That is why the long-term liquidity provided by the ECB plays an important role in our bank finance dependent economies.