Will the Spanish government alter their strategy for fixing the banks? Well, probably not. Yesterday, Minister De Guindos presented a financial reform package that does not improve on the plan that Zapatero and his government offered. Guindos version makes two small changes by ensuring that provisions are bigger and implemented more quickly.
Lenders will have to come up with 25 billion euros in certain deposits, elevating capital buffers by 15 billion for real-estate and other risky assets, plus another 10 billion for non-toxic assets. With these provisions, banks hope to cover 80% of real estate assets, 65% of projects under development and 35% of finished housing assets.
Guindos announced that his reforms will boost confidence in Spanish banks and, therefore, access to credit markets. Didn't the last Minister say the same thing? Banks that cannot abide by the provisioning process will have to merge with other banks at which point they will have two years to find provisions even if they must turn to the Frob for funds. In short, this reform will not let a single lender fail.
The reform plans are insufficient, and Guindos is gambling with various classes of risk. To discriminate between healthy and unhealthy banks, the reform does not look at the banks' revenue generating potential and, thus, ability to recuperate losses. So the system will continue to be plagued by banks that are realistically hopeless, but kept alive by crafty plans based on creative accounting. Relying on mergers and state-funded aid, banks will see their problems increase and will dedicate more resources to managing ratios than to providing credit. Housing prices will plummet, but few will be able to get loans to buy a home.