Two Spanish regional savings banks have already reached a preliminary merger deal - Unicaja, based in Spain’s southern Andalucia region, and the smaller Caja Castilla La Mancha (CCM), located in the central-southern province of the same name - following talks which were carefully brokered by the Bank of Spain. Clearly this merger willl need to be followed by a capital injection from Spain’s Deposit Guarantee Fund to help them clean up the “troubled assets” which will naturally be found in the combined accounts of the new bank which emerges.
Today we learn that the merger is off. It is off for the simple reason that Caja Castilla La Mancha is about to cease to be an independent, autonomous entity. It has been "intervened" by the Bank of Spain. This is the first, it will not, of course, be the last.
According to Noticias Cuatro:
The governing council of the Bank of Spain has taken the decision to intervene in the operation of the Caja after carrying out an analysis of its financial position, thus taking as read that the negotiations which might have lead to its merger with the Andalucian 'Unicaja' have not been able to reach a successful conclusion.
The "intevention in Caja Castilla La Mancha will mean in the first place that the Bank of Spain will now manage the Caja directly via the management commission it is about to establish. Sources at the central bank have given an assurance that all the banks clients' savings are guaranteed. The Bank of Spain will now negotiate with the government urgent measures to guarantee the liquidity of the Caja, and its normal functioning.
In the second place, the Bank of Spain will be responsible for making an immediate detailed evaluation of all the Caja's assets and liabilities. In addition the central bank intervention implies the immediate replacement of the entire previous bank Administrative Council.
The last time the Bank of Spain intervened in a Spanish bank was in 1993, when the central bank too over control of Banesto. The necessary decisions will be taken in the next few hours since all other potential solutions have been discarded, including the assimilation of the Caja with Caja Madrid.
The Spanish newspaper El Pais reports that the Spanish cabinet (the Consejo de Ministros) are holding an extraordinary meeting at 18:00 this afternoon to discuss a proposed Decree Law to inject capital into the bank.
According to Finanzas.com, the "hole" in Caja Castilla La Mancha could be something in the order of 3 billion euros. This money could be paid from the bank funded Deposit Guarantee Fund (FGD), however, and as I said on Friday:
the (FGD) insurance fund holds only 7.2 billion euros in bank contributions, and since this is orders of magnitude less than the size of the problem it is obvious the government will end up having to putting money into the recapitalisation process, and especially into the Savings Bank sector, since the Spanish press has been reporting that 20 of Spain's 45 savings banks are now considering mergers. And it is obviously only a matter of time before one of the mid-sized Spanish banks like Popular, Sabadell or Banesto joins the consolidation process.
So it is not clear at this point how the capital injection process will be financed, nor is it completely clear what will happen to those deposits of over 100,000 euros, the maximum presently guaranteed under the FGD insurance system.
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