By Gillian Tett
Copyright The
Financial Times Limited 2008
Published: January 31 2008 18:31 |
Last updated: February 1 2008 13:43
Twice a year I travel down to Spain
to visit my relatives – and almost always return feeling worried about
financial risk. For nobody can fly over the Spanish coastline these days
without noticing that the country has recently been in the grip of a
construction boom.
And that, unsurprisingly, has led to
an explosion in the balance sheet of banks, with a corresponding boom in the
Spanish residential mortgage bond securitisation (RMBS) market.
It is a fair bet that this credit
party will produce plenty of hangovers in the coming years. Indeed, where my
relatives live in southern Spain, house prices are already tumbling and flats
stand empty (albeit, on a scale that still looks modest compared with the
subprime-scarred areas of Los Angeles, say.)
Spanish lenders are now furtively
turning their mortgage loans into privately placed bonds to use these as
collateral to get access to liquidity from the European Central Bank. Meanwhile,
the cost of buying insurance against default for medium Spanish lenders, via
the credit default swap market, has recently soared, amid rumours that hedge
funds can smell blood.
Yet even while these signs of stress
pile up, there is something else that is striking about this Spanish picture:
namely that the largest Spanish banks hitherto appear to have weathered the
global credit turmoil relatively well, so far – at least compared with the
dismal record of some of their European counterparts.
Unlike UBS, say, no Spanish bank has
yet blown up dramatically on a subprime bet. Nor has any revealed a rotten,
structured investment vehicle or two, as in the case of Germany’s IKB. Indeed,
when you compare Spanish banks with their Dutch rivals, say, they appear to
have been surprisingly coy about creating off-balance sheet vehicles in which
to place all their piles of mortgage loans.
Why? One intriguing explanation was
recently offered by Guillermo Ortiz, Mexico’s central bank governor, who has
been closely studying the Madrid experience.
According to Mr Ortiz, several years
ago a clutch of Spanish banks discretely approached the Spanish central bank and
asked permission to do what other international banks were doing at the time –
namely set up networks of SIVs.
However, Madrid took a dim view of
this and demanded that Spanish banks post an 8 per cent capital charge against
SIV assets. That essentially killled the business stone dead by removing
incentives to create these creatures.
At the time, this stance provoked
predictable grumbles from Spanish financiers. After all, back then almost every
other Western regulator was encouraging its banks to get their assets off the
balance sheet as fast as you can say “Basel I”.
But now Madrid looks smart. For it
seems the Bank of Spain never believed that a SIV was as detached from the
banks as they claimed. It also seems to have been more sensitive to liquidity
risk than other non-central bank supervisors, such as Germany’s BaFin. Or as Mr
Ortiz says, admiringly: “Spanish banks simply did not get into this business.”
There are two important lessons
here. Firstly, this tale shows – yet again – the wisdom of coordinating bank
supervision and central banking to some degree. Secondly, however, it also
provides a hint about where regulatory trends may head next.
In the past decade, a bizarre
dichotomy has sprung up in the global financial system, with a heavily regulated
core (ie, on-balance sheet banking activity) and unregulated hinterland (such
as off-balance sheet SIVs).
To some extent, the incoming Basel
II capital adequacy rules should narrow this gap by making it less attractive,
say, to create SIVs. But most senior Western regulators and central banks now
appear determined to close this gap ever further in the coming years. The days
when banks, in other words, could simply chuck risks into black holes, with
minimal accountability, may be numbered.
So it is time, I suspect, for us all
to take a few Spanish lessons – at least in terms of how regulators have
handled the SIVs. Just don’t be tempted to purchase any Spanish property yet,
however sensible these regulators might now look.