How vulnerable are
Spanish banks?
Spanish Property prices falls and slowing GPD could have significant effects on Spanish banks. Over the last decade, the share of property loans has risen from 40% of total private non-financial sector loans to 60%, equating to a staggering €1 trillion, around 100% of GDP and a third of banks’ total assets.
If GDP falls as
Capital Economics predicts, bad debts could treble, but it does not expect this to cause major problems for the banking sector. While the figures initially look serious for banks, the quality of their assets suggests things may not be quite as bad:
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Spanish banks have generally not been involved in the type of sub-prime lending that crippled the US.
- The
average loan-to-value ratio (LTV) does not appear to be worryingly high, and unless house prices fall very sharply negative equity should not be widespread.
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The Bank of Spain has prevented banks using off-balance sheet vehicles.
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20 percent of Spanish banks’ lending is abroad and regarded as having a low default risk.
- 80% of banking lending is still financed by retail deposits (compared to Northern Rock’s 30pc in spring 2007).
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If the downturn is more major than predicted this will cause problems. A combination of slowing economic activity, falling Spanish house prices and rising unemployment could result in a considerable increase in bad debts.