FRANKFURT (MNI) – The following is a partial text of the Bank of
Spain’s assessment of the Spanish banking system:

Spanish institutions strove in 2008 in 2009 to restructure their
balance sheets and strengthen their capital, and they have the capacity
to generate recurring income For each credit institution, the capacity
to absorb hypothetical impairment losses expressed in the stressed
scenario ultimately determines the projected impact on capital.

– Spanish institutions made very substantial write-downs during the
last two years of the economic and financial crisis (2008 and 2009).
This, and the strict Banco de Espaa regulations on asset valuation and
the setting aside of the attendant coverage, enabled them to build up a
stock of specific provisions which, combined with the stock of general
provisions still available in December 2009, absorb 34% of the gross
impairment for the banking system as a whole (29% for savings banks).
This is a substantial percentage since the provisions are calibrated to
withstand expected business losses, and not hypothetical impairment
losses in highly unlikely stressed scenarios.

– The capacity to absorb hypothetical losses through net operating
income and capital gains verified by the supervisory authority is 48% of
hypothetical impairment losses for all institutions (23% for savings
banks). Spanish institutions business model, based on traditional
retail banking, generates a more stable and predictable income flow than
other banking models, in which the weight of income arising on more
volatile market trading and investment banking activities is greater.
However, for the purposes of the stress tests, the average net operating
income for the period has been stressed, which in the case of the
savings banks has meant that a 40% decline has been assumed in relation
to the figure recorded in 2009. This figure, moreover, does not envisage
the positive effects of the reduction in costs already embarked upon by
institutions in the past two years. In historical terms, this means that
the ratio of net operating income to total assets would be 37% lower
than the average ratio recorded in the last 20 years. Note that in the
US stress tests, a net operating income ratio 15% lower than the average
ratio of the past 20 years was considered.

– During 2008 and 2009, institutions also strengthened their capital (by
issuing equity and capitalising profits). As regards savings banks,
their restructuring has taken place through integration processes. This
eases the need for additional capital that might arise since, given the
design of the processes, the outcome is that the excess capital at
certain institutions relative to the minimum required levels offsets the
greater capital shortfalls that other institutions might have.

The results show the soundness of the Spanish banking sector The
comparison of hypothetical impairment losses with resources available to
absorb them determines the additional capital in order to meet, as
defined by CEBS, a Tier 1 ratio of 6%.

– No private bank needs more capital to reach a Tier 1 ratio of 6% in
the adverse and unlikely scenario.

– The Banco de Espaa has undertaken an intensive savings bank
restructuringprocess over the past year. This reorganisation, which has
completely changed the landscape of the savings bank sector, has been by
means of integration processes that provide the resulting groups of
savings banks with greater size and efficiency, while reducing the
system’s capacity. So that the process may unfold in an orderly
fashion, when support has been requested from the FROB, specific and
verifiable integration plans of the institutions involved have been
required, while it has committed resources in the form of capital for an
amount of E10,583 million.

– The total capital needed for savings banks amounts to E16,193 million.
Of this figure, E14,358 million (adding E3,775 million from the Deposit
Guarantee Fund to the E10,583 million provided by the FROB) were
committed and approved by the authorities before the stress tests.

– Accordingly, to comply with the Ecofin resolution that no bank subject
to the stress tests be left with a Tier 1 ratio of less than 6% in the
hypothetical adverse scenario, E1,835 million have been added at four
institutions. The additional needs for capital arise at four groups of
savings banks, although their capital ratios currently exceed the Tier 1
ratio of 6% comfortably.

The recapitalisation of those savings banks that have required it during
the sectoral restructuring process does not entail a non-returnable cost
for the public coffers

The cost in terms of public funds, through the FROB, of the
recapitalisation undertaken in the savings bank sector has committed
392 million for Cajasur and 10,191 million in the form of convertible
preference shares. This amount accounts for 1% of GDP and is not
non-returnable; rather, institutions that have received funds from the
FROB in the form of preference shares will have to return them within a
period of five years at a cost for these institutions of 7.75% (APR
8.05%).

Also, looking ahead, the new savings bank legislation allows these
institutions to raise core capital on the market. Hence, if in future
savings banks needed more capital, they could recapitalise by resorting,
as banks have done, to the market.

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