Executive Summary

• Spain: after tens of €billions in bailouts, its banks still need more
• Germany: its largest banks are ridiculously levered
• France: its banks are deteriorating fast with the sinking French economy
• UK: bail-ins are now on the table

If you have not yet read Part I: Europe's Precarious Banks Will Determine the Future available free to all readers, please click here to read it first.

Spain and Bankia

The true state of the Spanish economy (i.e., it is in depression) should be uppermost in our minds when we consider recent developments at Bankia, the Spanish mortgage bank formed only thirty months ago out of the wreckage of Spain’s regional mortgage banks. Bankia underwent a subsequent bail-out only a year ago and has been a continuing disaster, as shown by the share price in the chart below.

Having fallen from an adjusted €106 to only 68 cents as recently as last November, the share price tells us that Bankia is simply bust. The new G20 bail-in rules cannot have helped Bankia hold on to its deposits; the only deposits left should be those of the small depositors prepared to rely on government insurance.

The Cyprus bail-in precedent has undoubtedly made Bankia’s position worse than it would otherwise be. At March 31^st Bankia had “customer deposits and funding via clearing houses” totaling €117bn, and this was before the implications of the Cyprus crisis in mid-March had time to sink in. Despite Bankia’s own optimism (it declared a profit for the first three months of the current year, a clean balance sheet, and improved liquidity position!), it will be lucky to be around much after its shareholder’s Annual General Meeting this month.

Bankia has already absorbed €23.5bn in bail-outs. There appears little doubt that yet another failure of Bankia will occur in the coming months, throwing the whole Spanish problem up in the air again, and potentially leading to a new wave of deposit flight from the weak Eurozone banks. The ability of the ECB to come to the rescue will be hampered by the German Constitutional Court’s deliberations and political considerations ahead of Germany’s elections in September.

Germany and Her Banks

It is now the run-up to Germany’s federal election on 22^nd September.