BRUSSELS (Reuters) - Spain may need to wind down one of its bailed-out savings banks, the European Union’s competition chief said on Wednesday, warning liquidation of a bank may be preferable if the costs of rescuing it are too high for taxpayers.
Under state-aid rules, the European Commission is allowed to refuse a request to rescue a bank if it considers the lender too costly to save - effectively forcing it to be wound up.
Spain is awaiting final approval from the European Commission for the restructuring plan for three banks rescued by the state: NCG Banco, Catalunya Caixa and Banco de Valencia.
“If I am not wrong, one of the three, according to the intentions of the Spanish authorities, is oriented towards a liquidation and not to maintain them after restructuring as a going concern,” Joaquin Almunia told Reuters in an interview.
He did not identify the lenders.
Euro zone countries have agreed to extend up to 100 billion euros ($126 billion) of aid to the euro zone’s fourth-largest economy to recapitalize its weak lenders.
Unlike the aid programs in Greece, Portugal or Ireland, however, the conditions that will be attached to assistance will require reform of the country’s banks rather than the national budget.
Almunia, whose department has gathered extensive expertise in banking during the European debt crisis, will play a central role, ensuring that money for banks is given according to strict state-aid rules.
NCG Banco, commonly known as NovaCaixaGalicia, and Catalunya Caixa denied they would be closed. Banco de Valencia said it was not aware of any such plan. Bankia has yet to formally request approval for a recapitalization plan.
Economy Secretary Fernando Jimenez Latorre said earlier on Wednesday that closing banks as part of the rescue was unlikely.
Almunia, the EU’s competition chief, is one of the most powerful officials in its executive as he has the final say on the restructuring or closure of a bank under rules designed to prevent the distortion of market competition.
Crippled by bad debts from a burst real estate bubble, Spain’s savings banks have turned to the country’s rescue fund FROB for help. Seven out of 10 banks have received state support.
“In every analysis of a financial institution, we always try to estimate the alternative cost of a liquidation,” said Almunia.
“If the liquidation costs are lower for the taxpayers than the rescue and restructuring of an institution we opt for a liquidation. We opt for an orderly winding down of the entity.”
Almunia, who has ordered the closure of more than 10 banks in the crisis, said regulators had learned how to wind down problem lenders without risking a repeat of the panic that followed the collapse of Lehman Brothers.
“Since Lehman Brothers, we know much better than before what the word systemic means,” said Almunia.
“If it is negotiated, and discussed and decided in an orderly way, I think in most of the cases this will not represent risks for the financial stability,” said the Spanish commissioner, referring to the closure of banks.
“One case in Germany, WestLB, is in winding down process and this has not represented a risk for the financial stability in Germany.”
EU sources told Reuters last week that antitrust regulators could force some weak banks in Greece, Spain and Portugal to shut down.
The International Monetary Fund in its report last week said the most troubled former savings banks, accounting for about 22 percent of the Spanish financial system, faced the biggest challenge due to their high property exposure.
Capital flight from Spanish banks has reached euro lifetime record levels, with a net outflow of 66 billion euros in March, the most recent month for which figures are available.
That was before the government’s sudden, fumbled nationalization of teetering lender Bankia.
For a link to Almunia's interview on Insider TV, please click on r.reuters.com/qej78s
Additional reporting by Sonya Dowsett, Jesus Aguado, Tomas Gonzalez and Feliciano Tisera in Madrid; Editing by David Hulmes