June 5, 2012 / 10:42 PM / 6 years ago

Spain banking audit key to European bailout talks

* Three different assessments of Spain’s banks due

* Spain pushing for direct European aid to its banks

* But aid could still come with heavy conditions on Spain

By Sonya Dowsett and Julien Toyer

MADRID, June 6 (Reuters) - Spain, Germany and EU policymakers are in intense discussions on how to help Madrid recapitalise its troubled banks, but no decisions can be made until the first phase of an independent banking audit is completed this month, sources said.

A series of reforms to Spain’s financial system have failed to persuade investors that huge losses from a 2008 property market crash have been fully addressed, and doubts about the cost of a final rescue have deepened the euro zone debt crisis.

European mechanisms should be used to recapitalize Spanish banks, although the amount needed is not astronomical, Treasury Ministry Cristobal Montoro said on Tuesday, breaking with the government’s line up to now that it could handle the bill alone.

Spain is pushing for changes to European rules to be able to get aid for the banks without too much stigma or conditions attached, but it is not clear how much flexibility it will get from Germany which has said any bailout must be requested by the government.

An external audit of Spain’s banking system expected before the end of June, which is likely to reveal additional capital needs of 30-70 billion euros, is key to discussions.

“We are waiting for the results of the audit ... from which we will be able to determine Spain’s recapitalisation needs, and from there we will be able to assess the situation,” said an EU official.

Several other sources concurred.

One option being discussed in some euro zone capitals was for money to be handed to the Spanish bank rescue fund FROB to avoid the government having the humiliation of asking for aid, an EU source said.


Three different assessments of Spanish banks are due in the coming days and months.

First, the International Monetary Fund is due to issue its complete report on Spain’s banks next week, which will include how much capital the financial system needs to weather a severe economic downturn.

Second, the government has hired consultancies Oliver Wyman and Roland Berger to carry out audits before the end of June which will assess the capital needs for the system as a whole.

Each consultancy will use Bank of Spain data to run the same stress test using the methodology of similar tests carried out in Europe last year by the European Banking Authority, said one banking source.

Five different sources said that in a bid to increase confidence in the result the two auditors will run their data independently, without consulting each other, and could come up with different final numbers.

Another audit, to be completed by August or September, will be conducted by the ‘Big Four’ accountants - KPMG, Deloitte, Ernst & Young and Price Waterhouse Coopers.

This will involve an inspection of each bank, two banking sources and one legal source said, valuing assets and how the lenders are complying with the demands of two banking reforms which demand recognition of heavy losses on real estate assets.

The second audit will also assess banks’ risk control processes.

Sources said all of this information, but most crucially the Wyman and Berger audit, must be in hand before any decision can be made on a possible European bailout.

“It’s hard to imagine how you could draft any plan before knowing the results of the ongoing independent assessments of the Spanish banking sector,” said a European Commission spokesman.

Another source said that no firm decisions had been taken but that an “awful lot” was being discussed.


Spain already meets the conditions to apply for aid that it would use for its banks, under the regulations of the existing European bailout fund, the EFSF. The regulations demand a complete audit of the banks, and if the situation is urgent, a two-phase audit could be used.

However, EFSF aid would come with stringent conditions making it politically unsavoury for the government which is why Spain is pressing for modifications to the rules of Europe’s bigger bailout fund, the ESM, which comes into effect in July, allowing it to give direct aid to banks.

Legal experts disagree over whether that is possible and Berlin remains opposed, although it might consider giving money to the FROB banking fund tantamount to lending to the state.

EU sources said that even if direct aid for the banks can be negotiated, conditions could still be attached and Spain’s government would have to ask for it and sign a memorandum of understanding that carries the stigma of a rescue for the state.

The external auditors are expected to uncover more losses in the financial system under stressed scenarios but Spain hopes the IMF figure and the figures from the different audits will be roughly in line and provide credibility.

Analysts expect the system to need an extra 30-70 billion euros over and above the 84 billion euros already identified related to real estate losses and potential losses.

Spanish officials are optimistic that the number will be at the lower end of the range and hope it will even surprise markets by being lower than expected.

Prominent Spanish Banker Emilio Botin, Chairman of Santander , the euro zone’s biggest bank, said on Monday he expected the figure to be 40 billion euros, though it was not clear whether he was referring to all banks in the system.

Government sources said they do not believe the audit will reveal system-wide losses as deep as the ones recently revealed at Bankia, Spain’s fourth-biggest lender which is being nationalised by the government in a rescue estimated at some 23.5 billion euros.

A Spanish business newspaper reported on Wednesday that the government is working on a new banking reform, the third one this year, to make sure banks have enough capital to deal with losses on mortgages as well as on loans to businesses and consumer credit. (Additional reporting by Robin Emmott, Barbara Lewis, Annika Breidthardt, Jan Strupczewski, Luke Baker and Andreas Rinke, editing by Mike Peacock)

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