Mariano Rajoy's government approved on Friday its third financial reform. The EU designed the program, which will finally undertake some aspects that until now were considered taboo: liquidating some banks or creating a bad bank. The law seems to respond to what's needed at a time when Spain can't afford any more delays in creating lasting solutions.
Yesterday Bankia emphasized this need. The firm publicized its second quarter results, posting 4.45 billion euros in losses and, in addition, 2.09 billion from its holding company BFA, because of its required provisions. Without waiting for backing from the EU, Spain did not think it was important to cover up the news of banking reforms and publicized Bankia's urgent need for recapitalization funds from the Frob.
The fear is that the firm would experience a situation similar to what happened when it was nationalized in May. A memo from the Frob, which the Eurogroup quickly backed, reported on Bankia's immediate capitalization. It looks like coordination with the EU is starting to work.
The new legislation achieves several objectives: It anticipates demands on solvency levels that will be imposed on euro zone banks when financial sector unity is mandated, it gives banks a chance to liquidize, it establishes for the first time a balanced debt load among investors, it trims executive salaries, it gives shareholders the same treatment that they receive in other parts of the euro zone and, due to a lack of real estate development, it creates a bad bank where toxic assets can be channeled. It's not critical that Bankia unveiled its need for capital yesterday provided that it can finally stand on its own two feet.
