Spanish bank shares plunge

by on March 31, 2009 at 7:19 am in Economics | Permalink

Have you seen that Spanish banking is in trouble?  Less than one year ago this country was touted as a model of banking regulation, in part because it did not allow full securitization of bank assets.

One lesson is that securitization is not necessarily the villain it has been made out to be.

Second, Spanish unemployment is already over fifteen percent (and rising) and this was the case even before Spanish banks started reporting their recent troubles.  There is so much talk about how banks amplify risk but don't toss out the classical model altogether.  Banks also share in risk.  If your banks are less risky, often something else is more risky, and vice versa.  Today many countries are learning this lesson.

1 Geoffrey March 31, 2009 at 8:06 am

Conversely, last year there was a lot of talk (on this blog among others) about how hedge funds were doing so much better than regular banks. Any updates there?

2 Troy March 31, 2009 at 10:09 am

OK, but isn’t the companion point to your argument here that if everyone, or at least everyone big enough to matter, had regulated their banks, hedge funds, insurance companies, etc. like Spain did, then the overall risk in the system could have been reduced?

I’m not an economist, but my guess is that part of the definition of a “bubble” is that it’s a time when risks in the overall global financial system are higher. It doesn’t seem inevitable to me that global Depression-inducing risk is ALWAYS an inevitable part of the system. Barring, of course, acts of God.

I might be missing the point of the post here.

3 Anon March 31, 2009 at 3:48 pm

Geoffrey: My inside man at Renaissance tells me that their Medallion fund made 90% in 2008. Not bad.

4 The Snob March 31, 2009 at 8:34 pm

Mr. Econotarian:

Defining solvency down will only help if (i) the banks are actually solvent on a cash-flow basis and (ii) regulatory forebearance will not reduce confidence further.

At this point, I think Frank-Waters may be the most effective technique for determining bank solvency: You propose to senior management that their application for bailout funds will be accepted, provided that you allow either Barney Frank or Maxine Waters to audit your payroll on live TV.

So far, that seems to be the only thing that’s caused any potential recipients to back away from the trough.

5 Diversity April 1, 2009 at 7:44 am

Going back to Spain, Spanish bank shares actually fell less than other European bank shares on the day in question.

The Spanish banks and savings banks are badly over-lent on over-valued property; but they have been saved by a central bank that did not go to sleep when supposed to be on watch. The Spanish banks were forced to make provisions in advance against a property price collapse. They were told the if they wanted to create off-balance sheet vehicles, that would cost them just as much capital as keeping the debt on balance sheet. Finally, they were made to keep some risk on the loans they securitised.

6 徵信 August 16, 2009 at 10:47 pm

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