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Daiwa: Spanish bank stress tests show EUR53.7bn shortfall

October 2, 2012
Spain’s banks currently require €53.7bn in capital according to the results of the (hopefully) definitive bottom-up stress test exercise carried out by the external consultant Oliver Wyman. As expected, of the fourteen groups assessed a cluster of banks already under government control accounted for the bulk of the capital shortfall – Bankia-BFA was alone responsible for almost half, while seven institutions were given a clean bill of health.

Source: Oliver Wyman

It is important to remember that €53.7bn is not the amount of aid Spain will request under the up-to-€100bn EFSF/ESM financial assistance package. This will be somewhat less, perhaps closer to €40bn, and will be finalised after taking into account certain asset disposals, mandatory haircuts on subordinated liabilities, transfers of assets to the bad bank and the efforts of one or two banks to raise capital independently.

With the sector-wide shortfall within the €51-€62bn range determined by the initial top-down assessment in June, and in line with very recent guidance from Spanish officials, the announcement of the bank-by-bank results is unlikely to have a significant impact on market sentiment.

At the end of the day, the hard work begins now. Over the coming months, restructuring plans will need to be finished-off and approved, the architecture of the bad bank finalised, and the delicate task of haircutting subordinated creditors – many of which are retail investors – carried out.

But ultimately, following Tuesday evening’s joint statement by the finance ministers of Germany, Finland and the Netherlands, which seems to have ruled out any chance of Spain transferring liability for the bank bailout to the ESM in the near future, a more important catalyst for markets will be the timing of the Spanish government’s inevitable request for broader support from the EFSF/ESM and the ECB’s OMT programme.