How the mighty have fallen

The European Union has sealed the fate of Spain’s savings banks. As part of the conditions attached to the country’s euro 100-billion bailout, the Euro zone wants the cajas to cede control of their commercial banking arms. The purge will be good for the financial system, and for corporate Spain.

Cajas do not have shareholders, but are controlled by depositors, employees and local politicians. In the past, they operated like banks with large social charities, funded with earnings from their banking operations. But politically-influenced lending meant they made many dubious loans as they expanded beyond their region of influence.

Until recently, cajas were formidable competitors, expanding from 20 per cent of Spanish bank assets in the 1980s to 40 per cent in 2010, according to the International Monetary Fund. Over the last four years, however, they have fallen spectacularly from grace. Spain’s property bust left them short of capital, forcing many to spin off their banking arms. Bankia, for example, was created out of the commercial banking operations of seven cajas, which retained stakes in the lender. Following Bankia’s bailout the cajas have been wiped out.

Now the EU wants even healthy cajas to reduce their ownership of commercial banks to below 50 per cent. In addition, directors of cajas won’t be able to simultaneously sit on bank boards. Those lenders that receive state aid will also have to sell industrial shareholdings, reducing their influence further. Banks currently hold Spanish corporate stakes worth euro 22 billion, equivalent to about nine per cent of the IBEX 35 index, according to UBS. Of this, 14 billion is owned by the cajas.

The changes will affect even La Caixa, Spain’s largest caja, which owns 61 per cent of listed Caixabank. Spain’s recent bank audit showed it would not need to raise fresh capital in an adverse scenario, which would allow it to hold onto its large stakes in Repsol and Telefonica. Even so, it isn’t wedded to them.

The shake-up will allow commercial banks to recover some market share. But it would be premature to write off the influence of the cajas altogether. As La Caixa knows well, it’s possible to control a company with less than 50 per cent of the shares. But Caixa is now in the minority. Ultimately, that’s good for Spain’s financial system, and its corporations.