Monday, September 20

Public banking accounts for half of the best scores in the European stress tests

Last March, the last remaining public-owned bank in Spain was shelved. Bankia was absorbed by CaixaBank and the State stopped having 61% of that entity to have 16% of the main group in the country. With this, the debate on whether or not there should be a public bank was definitely put on hold, especially with an increasingly concentrated sector. However, this model reviled by many in Spain is more common than is thought at the European level. And there are not a few countries that have a medium or large entity with these characteristics.

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Some of these public banks also receive support from supervisors. At the end of last month the European Banking Authority (EBA), responsible for the supervision of the sector at the community level, presented its famous stress tests or residency tests to the banking sector of the old continent. This extensive analysis exposed more than fifty significant institutions at the European level to a hypothesis in which the economic crisis caused by the pandemic would extend until 2023. Half of the best marks in this test were obtained by public banks. If cooperative models are also added, only five of the fifteen best-valued entities were private.

Although when speaking of these tests one speaks of ‘notes’, it is in the strict sense of the solvency of a bank. The EBA pools the bank’s capital with its risk-weighted assets. From there, a percentage is extracted —the CET1 ratio— and, the higher it is, the higher the note of said entity. One of the arguments that are usually made against public banks is that a public service outside the market can become an entity with problems. However, seven of the fifteen best notes are from public banks, which account for three of the groups most resistant to a prolonged crisis.

While it is true that the EBA analysis includes multiple examples of banks, not all with retail banking business models, the public sector plays a large role. In the Netherlands, Belgium, France, Denmark or Portugal, there are public banks that, in addition to having a significant size in their respective markets, stand out for their solvency and resistance in the most pessimistic scenarios that are drawn in this type of examinations.

In the test carried out over the last few months, the best unemployed has been a publicly owned Dutch bank, NWB Bank. It is an entity that is controlled mainly by the regional water authorities and the State and the provinces participate. It obtained a ratio of 37.8%, compared to the European average of 10.5%. Its clients are basically public authorities and it finances water infrastructure projects, social housing, university hospitals or vocational training institutions. Despite being basically focused on the public sector, it has more than 100,000 million in assets, a size similar in Spain to that of Bankinter or the new Unicaja after absorbing Liberbank.

The second public bank in the ranking prepared by the EBA appears in the third position, the BNG Bank, also Dutch. In this case, half is in the hands of the State and the rest is owned by the provinces and different public bodies. His grade was 23%. Like NWB. its main clients are the public administrations themselves, to which it offers financing “on favorable terms”. Add 160,000 million in assets. The Danish DNB occupies the fourth position of the list. Although it is listed on the Stock Exchange, its first shareholder, with 34% of the capital, is the State, which gives it a very prominent position compared to other investors, including the largest investment banks in the world. It has 250,000 million in assets, a level similar to Sabadell.

In Portugal, the Caixa Geral de Depositos operates, which occupies the ninth position in the ranking with 15%. This commercial bank, which a couple of years ago sold its business in Spain to Abanca, is owned by the Portuguese State. The group is somewhat smaller than the previous ones, with 91,000 million in assets. The Polish PKO, whose first shareholder with a third of the capital is the State, appears in the eleventh position of the list, with the same score as the Portuguese. Two other public banks close the list of the 15 best marks in the exam: Belgian Belfius and Dutch ABN Amro. Both are controlled by their respective states after the bailouts during the last financial crisis. They had more than 13.5%.

The seven public banks are joined by two other entities with models similar to credit cooperatives: the Swedish Länsförsäkringar and the Danish Nykredit. In addition, the also Swedish Swedbank, tenth on the list, has as its first shareholder a group of regional savings banks in the Scandinavian country. Thus, there are only five private banks, strictly speaking, those that appear in this list: SEB and Handelsbanken (Sweden), Volkswagen Bank (Germany), Pekao (Poland) and KBC (Belgium).

Therefore, with different business models and with very different motivations, either by economic policy decision or by inheritance from the 2008 bailout, it is not unusual to find examples of public banking in countries such as France, Germany, Poland or the Netherlands. In Spain, the only remaining banking group with state participation, CaixaBank (16%), did not participate in these tests carried out by the EBA precisely because it was fully absorbed by Bankia.

Spaniards in the queue

The Spanish banks that did participate (Santander, BBVA, Bankinter and Sabadell) obtained discreet results, although they all passed the tests. Only Bankinter was able to position itself in the very negative hypothesis put forward by the EBA above the European average. In addition, Sabadell obtained the third worst result, only beating Mote dei Paschi and HSBC. The Spanish average, 8.95%, was significantly below the Community average, only surpassing Germany, Italy and Ireland.

Even in the case of the baseline scenario drawn by the EBA in its examination of the European banking sector, similar to the international projections made of the economy, Spanish banks appear at the bottom of Europe in terms of grade. Specifically, the average of the four banks analyzed was 14.10%, only surpassing Ireland. The community average stands at 15.79%. In this case, no Spanish entity reaches that average on the continent, with Banco Santander being the best positioned with 14.94%.