SAVINGS BANKS The reform of the Spanish cajas: From savings banks to banks and foundations The crisis hit Spain’s cajas (savings banks) particularly hard and, in part, led to the introduction of regulation that significantly reformed the savings banks segment. As a result, this segment has become more concentrated and undergone a legal transformation from savings banks to banks and foundations, with significant implications for these entities’ ownership and corporate governance structure. Ángel Berges and Fernando Rojas Abstract: Coupled with an extraordinary represented half of the Spanish banking system contraction in the number of entities, the most prior to the crisis. However, the financial profound change in the Spanish financial crisis hit the savings banks particularly hard, system during the last decade has taken place thereby resulting in the adoption of a series in the savings banks segment. This segment of new regulations that led to the sector’s was characterised by a large number of entities, reorganisation and reform. Specifically, this had no shareholders, entrenched local roots, involved a contraction in the absolute number a commitment to giving back to society and of entities and a change in their legal form 25 −from savings banks or cajas to banks and the decade as their savings bank counterparts foundations− with clear implications for embarked on a significant expansion (Exhibit 1). their ownership and management structures (corporate governance). One reason for this disparate performance relates to the strategies adopted by the large The savings banks during the banks in the second half of the 1990s. Immersed pre-crisis growth years in their respective mergers, they prioritised It is impossible to understand the transformation their international expansion strategies. At of the savings banks as a result of the crisis the same time, based on their belief that the without a brief look back at their performance banking market in Spain was saturated, they during the boom years in Spain, the decade deployed ‘retreat’ tactics in their home market, before the crisis. closing branches in areas where there was geographic overlap between the merged banks. During that period, the banks and cajas took divergent paths with the former closing The gaps left by those branch closures were branches and reducing headcount for much of rapidly filled by the savings banks which, in Exhibit 1 Employees and branches at banks versus savings banks (Employees) 160,000 140,000 131,933 120,000 100,000 117,559 80,000 60,000 40,000 20,000 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Banks Saving Banks (Branches) 30,000 24,591 25,000 20,000 15,542 15,000 10,000 5,000 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Banks Saving Banks Source: Bank of Spain, Afi and authors’ own elaboration. 26 Funcas SEFO Vol. 7, No. 4_July 2018 The reform of the Spanish cajas: From savings banks to banks and foundations The opening of new branches held the key to savings banks gaining “ market share in Spain, where the retail banking business sustained one of the highest growth rates in the world between 1997 and 2007. ” contrast to the banks, presented two unique savings banks was unquestionably the fact traits: (i) their smaller size prevented them from that it primarily took place outside of the pursuing aggressive international expansion savings banks’ traditional areas of influence. strategies; and, (ii) their strategic commitment Of the 5,000 branches which the savings to the Spanish market, particularly the businesses banks added to their networks from the mid- related to the real estate and mortgage markets, 90s on −whether new branches or branches was far more resolute than that of the banks. acquired from banks− 75% were located outside the region of origin of the respective As a result, they focused their growth strategies savings banks. around targeting new urban settlements, with new branch openings as their main strategic weapon. Judging by Exhibit 2, which In addition to the perception of bank correlates branch openings with business saturation in Spain, it is worth highlighting growth, it can be said that the opening of new the fact that the Spanish economy entered the branches held the key to gaining market share financial crisis in a highly vulnerable in a country whose retail banking business position on account of its overexposure sustained one of the highest rates of growth in to the real estate sector and its high the world between 1997 and 2007. dependence on external borrowings. These two factors were closely related insofar as However, the most noteworthy aspect of this a growth model based on the construction period of intense branch openings by the sector consumed large sums of credit, Exhibit 2 Relationship between growth in branches and business volumes (1997-2007) (Percentage) 45 40 35 30 25 20 15 Business growth 10 5 0 0 2 4 6 8 10 12 14 16 Branch growth Note: The size of the bubbles represent the relative size of the savings banks shown in the exhibit. Source: CECA, Afi and authors’ own elaboration. 27 leading to borrowing rates above internal business environment during that decade was savings capacity. marked by sharp growth in business volumes, which presumably permitted them to run The Spanish economy’s dependence on the their businesses free from the consolidation construction industry was even more obvious in pressures the crisis would later bring on. the Spanish banking sector and, specifically, That entity map (Exhibit 3) was marked by in the retail banking segment. By the end of significant fragmentation: just three savings banks had assets in excess of 100 billion euros, 2009, total exposure to the construction and whereas 36 had less than 35 billion euros. real estate sector for the banking sector as a whole accounted for 19% of overall outstanding credit, 15% on average in the case of the banks This map would be turned upside down in versus 23% in the case of the savings banks. mid-2010, when the capitalisation of the However, there were major differences entity- Fund for Orderly Bank Restructuring (FROB in its Spanish acronym), whose bailout wise in each segment, such that the savings funding required consolidation in order to banks could not be solely blamed for that reduce capacity, triggered an unprecedented overexposure, as was later highlighted by the wave of mergers. Specifically, the framework resolution of Banco Popular, whose relative sparked a total of 12 consolidation processes exposure at the time was similar to that of the through conventional mergers, the creation of most exposed cajas. institutional protection schemes (IPSs) or the acquisition of previously intervened entities, Regardless, over two years after the start of which involved the vast majority of savings the international financial crisis, the map banks. Of those 12 processes, nine took the of entities in the savings banks segment form of applications for funding from the FROB remained intact at 45, a number which (the other three were undertaken without had hardly moved in nearly a decade. The applying for public funds). In the processes Exhibit 3 Ranking of savings banks in 2009 (pre-consolidation process) 300,000 250,000 200,000 150,000 Milions € 100,000 50,000 0 RIOJA MURCIA LA CAIXA CAJASOL BANCAJA NAVARRA LAIETANA IBERCAJA MANRESA ASTURIAS SABADELL CAIXANOVA ONTINYENT CATALUNYA TARRAGONA CAJA DUERO CAJA CAJA ESPAÑA GUADALAJARA BURGOS MPAL. EXTREMADURA BURGOS C.C.O. BURGOS INSULAR CANARIAS GENERAL CANARIAS Note: Not all savings banks are represented. Source: CECA, Afi and authors’ own elaboration. 28 Funcas SEFO Vol. 7, No. 4_July 2018 The reform of the Spanish cajas: From savings banks to banks and foundations The map of savings banks entities pre consolidation was marked by “ significant fragmentation: just three savings banks had assets in excess of 100 billion euros, whereas 36 had less than 35 billion euros. ” that resorted to public funding, the Faced with this staggered requirement, Spain incremental cost of the funds received (very went ahead and implemented a new capital high and escalating coupons) was supposed to requirements framework for its financial act as an incentive to produce synergies and institutions that was far more demanding reduce capacity and costs. than the international standards introduced under Basel III. It included a higher capital However, the economy deteriorated far more requirement (8%) and an extraordinarily tight than was anticipated, undercutting the scenarios timeframe (six months) for full compliance. contemplated in the merger plans and reducing the value of the banking sector’s assets. In addition to the stringent new capital requirements introduced in Spain and of the associated implementation timeline, it is That downturn would be amplified by the worth noting the discrimination implied by the vicious circle of the deterioration of bank establishment of an even higher requirement asset quality and macroeconomic conditions, for entities not traded on the stock exchange, which in turn put growing pressure on without significant shareholders and reliant vulnerable public finances, sparking doubts –to a significant degree (over 20%)– on the over the sustainability of Spain’s sovereign wholesale funding markets. For those entities, debt. These doubts were particularly intense essentially the savings banks, the core capital throughout 2011, when the spread between requirement was set at 10%, i.e., 2 percentage the sovereign bonds of the so-called peripheral points higher than for the listed banks. This issuers, including Spain, and those of discriminatory and aggressive (timewise) capital the core issuers, widened significantly and the requirement may have prompted some of the primary markets all but shut down, making it entities created as a result of the merger of savings difficult for the Treasuries to issue the bonds banks (Bankia or Banca Cívica) to rush their IPO they needed.