1. NATURE OF BANK DEPOSITS IN SPAIN
(Project towards partial fulfillment of the assessment in the subject of Principles and Practice of
Banking)
Date: 7th February 2013
SUBMITTED TO: SUBMITTED BY:
DR. RITUPARNA DAS ADITYA SINGH
ASSOCIATE PROFESSOR 765 – UG VI SEMESTER
FACULTY OF MANAGEMENT STUDIES B.B.A. (H.) LL.B. (H.)
NATIONAL LAW UNIVERSITY, JODHPUR
WINTER SESSION (JANUARY – MAY 2013)

2. INTRODUCTION
The latest available statistics on bank deposits show that €50 billion euros have left Spain since
last year. This was announced as the German news agency DPA reported that almost €900
million was withdrawn by Greek savers on May 14 alone.
According to data compiled by Thomson Reuters, Greek banks have lost around €72 billion (30
percent) in deposits since 2010. In Belgium, France and Italy, depositors have also taken flight
from banks.
There are growing fears in Spain that the withdrawal of €50 billion (2.9 per cent of Spain’s
deposits) will cause a bank run when customers who have lost confidence in their banks rush to
take out their savings. The real magnitude of the current outflow of cash is unknown, as the data
only includes the changes in deposit as of March of this year—the last month of published
statistics.
Last week, Moody’s lowered its ratings on 16 Spanish banks, with a three-notch downgrade for
the three major Spanish lenders, Santander, CaixaBank and BBVA, motivated by the
deteriorating economic situation and the reduced creditworthiness of the government. This
comes two weeks after Bankia was nationalized, when the Spanish government converted its
stake in the company to equity in an effort to shore up its position.
The bank was formed in 2010 through an amalgamation of seven cajas (savings banks or credit
unions) with high levels of toxic assets on their books as a result of the collapse of the property
market since 2008.
It is estimated that Bankia possess €30 billion euros worth of debts to failed developers and those
whose land has been repossessed.
Last week the Spanish newspaper El Mundo reported that customers had withdrawn €1 billion
since the nationalization the week before. The next day Bankia lost 28 percent of its market
value, forcing the economic minister, Fernando Jimenez Latorre, to claim that it is “not true that
there was an exit of deposits.”
Bankia Chairman Jose Ignacio Gorigolzarri also came out in defence of the bank, stating that its
“clients can be absolutely calm about the security of the savings they have deposited.”
These statements have helped the bank’s shares rise, closing up 23.49 percent at €1.756 euros
last Friday. But this still represents a 53 percent decrease from its listing price of €3.75 euros.
Bankia declined to comment on the reports of deposits leaving the bank. The €1 billion figure
would be less than one percent of the bank’s total deposit base, but still reflects growing concern
over its solvency.

3. The €1 billion exodus from Bankia, Moody’s downgrading and the news that Spanish banks’ bad
loans have hit their highest level since 1994 at 147.968 billion euros are already affecting
Santander. In Britain, where Santander has more than 25 million customers and 1,400 branches
and holds millions of mortgages, loans and overdrafts, there is growing concern that Santander
UK could be used to prop up its parent company in Spain, Banco Santander. It would also affect
the financial institutions that have lent Santander UK on the interbank market.
Santander has tried to reassure its customers by setting aside €2.9 billion to cover bad loans, but
these assurances are not enough. Customers remember the images of people queuing outside
Northern Rock’s UK branches to get out their cash in 2007.
In Spain, the latest statistics published by the Bank of Spain show that bank deposits at the end
of March were up 0.7 percent from the previous month at €1.16 trillion. However, this figure is
down four percent compared with last year.
Until recently, the outflow of cash was confined to wealthy depositors and institutional investors.
Now, there are signs that ordinary savers are withdrawing more money than normal. If this
became the norm, it could cause a genuine domestic bank run.
One video uploaded to YouTube reflects what is happening in Spain. A woman, alongside
dozens of journalists, waits for Minister of Finance and Public Administrations Cristobal
Montoro to arrive in his official car to the ministerial building. When the minister leaves the car,
accompanied by some of his aides and bodyguards, the woman goes to the minister, shakes his
hand and says, “I am a citizen who was passing by. I am worried, my money is in Bankia. Do
you think I should go to the bank and take it all out?”
“No,” answers Montoro.
“Are you sure?” explains the woman. “Yes, yes,” responds Montoro.
“I have been working all my life, and if someone takes my money, I will kill someone,” replies
the anonymous woman.
The biggest fear in Europe immediately is over the Greek banking system. If a bank run occurs,
every bank in the world would be affected—even seemingly healthy ones. The first to be
affected by concerns over Greek solvency would be so-called “peripheral” countries like Spain.
According to Expansion newspaper, US investment bank Goldman Sachs has been tasked with
providing an independent assessment of the banks’ financial problems.
Tristan Cooper, sovereign debt analyst at Fidelity Worldwide Investment, has called for a rapid
intervention by the European Central Bank (ECB). He told Dow Jones, “Once a bank run begins,
it is very hard to stop without a credible deposit guarantee… Given the fragile fiscal position of
Spain, the European Central Bank is under increasing pressure to step in to calm depositors'
nerves.”

4. Paul Krugman stated in Der Spiegel that more liquidity injections from the ECB are necessary.
He added that the ECB should cut interest rates and give unlimited money to banks and
governments.
Krugman believes that there should be an “unlimited intervention of the ECB” to save Spain and
Italy, and said that an exit of Greece from the euro zone would cause a flight of capital in
countries of the periphery and a bank run.
The immediate problem is that many banks in crisis-hit countries such as Spain and Italy have
few assets to give to the ECB as collateral for the loans.
But a policy of handing billions to the banks, like the €1 trillion the ECB auctioned in December
and February, will only benefit major bank stockholders, hedge fund managers and financial
speculators. It would strengthen the hand of the very same financial elite that is demanding the
implementation of drastic austerity measures across Europe.
The crux of the "pain for Spain" was exposed, when the world learned that despite all attempts to
the contrary, Spanish banks are no longer perceived as safe by the locals, and the result was a
record 5% deposit outflow from local banks: cash that was promptly redeposited elsewhere in
the Eurozone. And as money flow theorists know all too well, if cash is exiting the Spanish
banking system - i.e., if the confidence is just not there, not only is growth impossible, not only
are any austerity plans or otherwise to push GDP higher futile, but all attempts to save the local
banking system - which is now reliant on the ECB for funding to the tune of a record €412
billion, and which means the country has already been bailed out by the ECB - are futile and
merely sunk, literally, costs. In short: the deposit outflows continued, and while not at the record
July 5% pace, a whopping €17 billion, or 1.1% of total, deposits left the country for good and is
unlikely to come back.
From Reuters:
Consumers and firms continued to pull their money out of Spanish banks in August but at a
slower speed than in July, with private sector deposits falling slightly more than 1 percent as
Spain was sucked into the centre of the euro zone debt crisis.
Private-sector deposits at Spanish banks fell to 1.492 trillion euros at end-August from 1.509
trillion euros in the previous month, hitting their lowest point since April 2008.
Which also means that if the continued Spanish government cash decline persisted into August
after plunging from March to July (as we reported before), then at this point not even a long-
overdue bailout request by Rajoy will do anything more than push up Spanish bonds for a week
or two before the Spanish house of cards finally comes tumbling down.

5. But back to Spain's deposits, or lack thereof, in today's scary chart of the day:
Naturally, the above chart means that with the ECB needed to step in Spanish banks, the entire
country has already been effectively bailed out.

6. And a detailed breakdown:

7. Today, however, it is not Spanish banks that will dominate the newsflow, but the resumption of
Spanish riots as Rajoy announces shortly the details of his plan to promote futher austerity, even
as more and more insolvent regions demand that the insolvent government bail them out. From
the FT:
As protesters descended on Spain’s parliament for a second night on Wednesday, Mr Rajoy
called on Spaniards to ignore “short-term interests”. His government is also preparing to unveil a
new reform programme and the results of a banking stress test.
There was more trouble for Mr Rajoy in the regions when Castilla La Mancha, run by his centre-
right Popular party, requested a €800m bailout from the central government. Castilla La Mancha
is the fifth of Spain’s heavily indebted regional administrations to request financial assistance
from Madrid.
The political turmoil continued to put pressure on Spanish stocks, with the Ibex share index
falling 0.6 per cent on Thursday morning. On Wednesday, events in Spain triggered a sell-off of
European shares as investor concerns mounted about the eurozone’s fourth-largest economy.
The financial pressures on Mr Rajoy’s government have been intensified by a constitutional
crisis brewing over the Catalonia region, which called snap elections this week that could hasten
a move toward independence.
“Spain is increasingly slipping from his hands,” said Alfredo Pérez Rubalcaba, the leader of the
country’s opposition socialist party. “There are very clear fractures in Spain, and the one I am
most worried about is social fracture.”

8. Click to enlarge:

9. Reuters – Money flies out of Spain, regions pressured
Spaniards alarmed by the dire state of their banks are squirreling money abroad at the fastest rate since
records began, figures showed on Thursday, and the credit ratings of eight regions were cut. Spain is the
next country in the firing line of the euro zone’s debt crisis, with spendthrift regions and shaky banks
threatening to blow a hole in state finances and pushing funding costs towards levels that signal the
need for a bailout. The European Commission gave new help on Wednesday, offering direct aid from a
euro zone rescue fund to recapitalize Spanish banks and more time for Madrid to reduce its budget
deficit. That helped lower the risk premium investors demand to hold Spanish 10-year debt rather than
the German benchmark on Thursday, but it remained close to the euro-era record, at 520 basis points.
Bank of Spain data showed a net 66.2 billion euros ($82.0 billion) was sent abroad last month, the most
since records began in 1990. The figure compares to a 5.4 billion net entry of funds during the same
month one year ago.
The Financial Times – Spain reveals €100bn capital flight
Madrid was dealt a double blow on Thursday after it emerged that almost €100bn in capital had left the
country in the first three months of the year and the head of the European Central Bank lambasted its

10. handling of Bankia, the troubled Spanish lender. Data published by Spain’s central bank showed €97bn
had been pulled out in the first quarter – around a 10th of the country’s GDP – as concerns mounted
over Madrid’s ability to contain its twin economic and financial crises, which have forced government
borrowing costs to euro-era highs.
The Independent (UK) – Spain told to get a grip of bank crisis as bailout looms large
ECB chief launches broadside at indecisive government as panic takes hold in Madrid and Rome
Last week the Spanish government announced plans to inject a further $19bn into Bankia, the country’s
fourth largest lender, which has been crippled by bad loans to the nation’s collapsed property sector. An
independent audit of Spain’s banks, which are estimated by some analysts to be stuffed with more than
€100bn of bad loans, is underway and will report next month. The audit is widely expected to announce
that many of Spain’s other lenders need significant capital injections too. The fear of investors is that the
Spanish government will be unable to afford to rescue its banks, forcing the country to apply for help
from the €500bn European bailout fund and the IMF. Earlier this week Spain floated a plan to shore up
Bankia by issuing the bank directly with its own sovereign bonds, which would allow the lender to swap
these securities for euro loans at the ECB. But the ECB said earlier this week that it had not been
consulted on any such plan. Analysts have also pointed out that this would merely make Spain’s banks
more vulnerable by tying their fate even more closely with a Spanish government that is in danger of
being frozen out of the capital markets.
The Economist – The euro crisis: How to save Spain
The focus should be on fixing the banks, not on cutting the deficit
GREEK politics may determine the euro’s short-term future, but it is Spain that poses the single
currency’s most difficult problem. The euro zone’s fourth-biggest economy is caught in an increasingly
desperate spiral of deepening recession, drowning banks and soaring borrowing costs. Spanish firms and
banks are all but cut off from foreign funds. On May 30th yields on ten-year sovereign bonds rose above
6.6%, close to the level at which Greece, Ireland and Portugal had to seek a bail-out. After the
government’s botched nationalisation of Bankia, a troubled savings bank, Spanish depositors are jittery
(see article). A bank run is all too plausible—especially if Greece, which is bracing itself for a fresh
election on June 17th, is forced out of the euro soon. Even if that calamity is avoided, Spain’s slump will
drag the country inexorably towards insolvency.
The Economist – Spain’s banking system: Teetering
Spain has avoided facing up to its banking problems. Now it has no choice
The burning question is whether the scale of Bankia’s hole provides clues about the state of other weak
lenders. True, Bankia had the biggest property exposure in Spain, not least in Valencia on the
Mediterranean coast. That region is home to CAM, a failed savings bank dubbed “the worst of the
worst” by Miguel Ángel Fernández Ordóñez, who this week brought forward his exit from the post of
Spain’s central-bank governor. Bankia also made risky loans to low-income immigrants. And at least €6.6
billion of the cleanup relates to industrial stakes and tax assets. But Bankia’s assumptions on the rate of
non-performing loans in areas such as residential mortgages and corporate loans set a disturbing new
benchmark for other lenders. It seems highly likely that an external review of Spanish banks by two
consultancies, whose initial findings are due later this month, will find more holes.

12. Alvaro Saavedra Lopez, a senior executive for I.B.M. in Spain, says many of his corporate
counterparts across the country are similarly looking for safer havens by transferring their spare
cash to stronger euro zone countries like Germany “on a daily basis.”
It is only a trickle so far, and not nearly enough to constitute a classic bank run. But these
growing transfers of deposits out of troubled Spanish banks reflect a broader fear that the
country’s problems could make it hard for Spaniards to get to their money if banks fail and
cannot be supported by the government. In a worst case, some even worry their money will be
worth substantially less if Spain is forced to leave the euro currency zone and re-adopt its old
currency, the peseta.
Money already has been pouring out of banks in Greece, where many citizens believe it is
increasingly likely that their country will be forced to leave the euro zone. But for European
policy makers and economists, the possibility of mini-runs on banks spreading from Greece to
other, bigger countries like Spain — with 1 trillion euros, or $1.25 trillion, in bank deposits —
poses a much more serious risk. Indeed, the outflow of money from Spanish banks could
increase if the ratings agency Standard & Poor’s, as expected, downgrades Spanish banks, in
effect saying that their weakened state makes them riskier.
The havoc that a stampede might cause to the Continent’s financial system would greatly
complicate efforts by European Union officials to fashion a longer-term plan to ease the debt
crisis and revive Europe’s economy, because authorities would have to cope with the staggering
added costs of shoring up banks.
“A bank run can happen very quickly,” said Matt King, an expert on international fund flows in
London for Citigroup. “You are fine the night before, but on the morning after it’s too late.” It
was a similar liquidity crisis on Wall Street in September 2008 — which started with nervous
investors pulling money from troubled institutions, then quickly from healthier ones — that set
off the financial crisis.
In Greece, more than two years into its financial crisis, nearly one-third of the country’s bank
deposits have already left the country.
There has been no such exodus in Spain so far, where over the last year about 4.3 percent of
bank deposits, or 41 billion euros, the equivalent of about $51 billion, has been transferred out of
the country. But that amount is in addition to a decline of 140 billion euros in foreign-owned
financial assets in the last year, like the sale by foreigners of Spanish government bonds.
The trend worries European officials. At an informal meeting of European Union leaders on
Wednesday in Brussels, Italy and some other countries began pushing a proposal to increase
confidence in banks — and stem withdrawals — by creating a regionwide deposit insurance
system to buffer account holders against banking collapses, similar to Federal Deposit Insurance
Corporation in the United States. It is especially a concern for Spain, where the national deposit
insurance fund is virtually bankrupt.

13. What is more, the condition of Spanish banks is expected to worsen over the next year as
commercial real estate and mortgage losses, a big source of the nation’s bank troubles, continue
to mount.
On Friday, Bankia, the ailing Spanish lender, requested an additional 19 billion euros in rescue
funds, at the same time that its credit rating and that of two other Spanish banks were cut to junk
by Standard & Poor’s.
So far there is little sign that specific plans for a Europe-wide deposit fund are imminent. But
officials in Brussels say the idea, along with the more controversial question of issuing euro
bonds backed by the credit of all euro zone members, will be discussed in more detail next
month when the European Union leaders hold their next formal meeting.
The idea of euro zone-wide deposit insurance has been around for a long time, but it faces the
obvious political hurdle of German taxpayer resistance to backing 2.8 trillion euros worth of
deposits in risky countries like Spain and Italy, as well as those that have already been bailed out
— Greece, Ireland and Portugal.
In a recent report, Mr. King, the Citigroup analyst, highlighted how the flight of money held by
foreigners presaged broader bank crises in Ireland and Greece before those countries required
European bailouts. Italy, too, is now nervous about the sudden exodus of 220 billion euros in
foreign money over the last year.
Such hot-money flows are not unusual and do not always signify a similar migration of domestic
money. But Mr. King pointed out that if these foreign runs began to approach the levels reached
in Ireland and Greece, where more than half of foreign bank deposits and a third of bond
holdings exited those countries before they were bailed out, Spain and Italy could have their own
banking tailspins.
At their essence, bank runs are a fear-driven phenomenon. Once they start, they are difficult to
stem.
The less damaging versions occur when money stays in the country, but moves from weaker
institutions to stronger ones. This was the case in Britain in 2007, when many depositors who
feared losing their money at the regional bank Northern Rock moved their funds to the
international giant HSBC, hastening Northern Rock’s need to be bailed out by the government.
Such deposit migration is now happening in Spain as people move money from weak savings
banks, called cajas, to stronger institutions with international reach, like Santander.
More devastating to an economy is when cash leaves the country en masse, as occurred in
Argentina in 2001. The government imposed capital controls, making it illegal to transfer money
abroad. Mass money emigration is now taking place in Greece, where, under euro zone rules, it
would be illegal to impose capital controls.
One indicator of money flow trends is what happens to corporate banking deposits. Corporate
deposits tend to be much smaller than consumer bank savings. But because company treasurers

14. tend to be more sophisticated when it comes to assessing financial risk, they tend to withdraw
money more quickly when they perceive a bank might be troubled than individual depositors do.
In Greece, for example, corporate deposits have been fleeing much faster — by 27 percent over
the last 12 months, compared to 15 percent for consumer deposits.
By this measure, the professional money is fleeing Spain, too, at a much faster pace compared
with consumer funds. The country’s 721 billion euros in individual deposits is down only 1.4
percent for the year. But corporate deposits have existed at a rate of 14 percent, shrinking to 190
billion euros during that period, according to Goldman Sachs.
While many Spanish consumers may still be trusting the government to protect their money —
perhaps not realizing that the country’s Deposit Guarantee Fund has been depleted and now
exists mainly in name only — the in-the-know money is heading for the border at an increasingly
brisk pace.
“If confidence in the Spanish banking sector falls any further, the possibility of panic and a bank
run becomes very real,” said Mr. Saavedra of I.B.M., who leads the banking risk management
practice at the software group in Spain.
Analysts sound a further note of caution. Because the official deposit data for Spain is current
only through March, the figures do not reflect anxieties about the deepening political crisis in
Greece since the May 6 elections.
Nor do the deposit data yet track what has happened since the Spanish government nationalized
Bankia, the country’s largest property lender, in the following days. Cleaning up Bankia’s
mortgage mess will cost at least 9 billion euros, Luis de Guindos, Spain’s economy minister,
warned Wednesday.
And clearly, some consumers are now picking up on the warning signals. Mr. de la Peña, the
civil servant in Madrid, said that he had recently transferred 80,000 euros, essentially his life
savings, from Ibercaja, one of Spain’s savings banks, to Santander.
But now, with daily news reports on the prospect of Greece’s possible departure from the euro
currency union, he is seriously considering converting his nest egg to British pounds.
“I’m exasperated because the situation changes every day,” he said. “But what is certain is that if
Greece now leaves, it’s going to be one huge and bloody chaos.”