Spain Moves to Bail Out Regional Savings Bank

By THOMAS CATAN and JONATHAN HOUSE MADRID -- Spain's central bank will bail out struggling regional savings bank Caja de Ahorros Castilla La Mancha, marking the first time a Spanish financial institution has been rescued since the current financial crisis began. The Spanish government said on Sunday that the Bank of Spain will take over management of the troubled lender, known as CCM, and inject liquidity to keep it afloat, backed by government loan guarantees of up to €9 billion ($12 billion). However, Spanish Finance Minister Pedro Solbes said he hoped the final bill would be a fraction of that. He also played down fears that this could be the first of a rash of bank bailouts in Spain, as bad loans soar following the collapse of the country's housing market. "The Spanish banking system is extremely healthy," Mr. Solbes said, calling the CCM bailout an "isolated incident." He added that CCM holds less than 1% of the assets of the Spanish financial system. Spanish banks have so far weathered the global financial turmoil well, aided by regulation that forced them to build up unusually large provisions to cover bad loans during an economic downturn. Spain's banking regulator has also helped banks avoid the off-balance-sheet vehicles and toxic financial instruments that got many other countries' banks into trouble. Unlike many other banks in the U.S. and Europe, Spanish banks haven't yet needed capital injections from the government, though it has provided them with financing and guaranteed their debt issues. Nevertheless, almost half of Spain's lending business is in the hands of so-called cajas de ahorro such as CCM -- unlisted savings banks largely controlled by regional governments. This sector is seen by analysts as more vulnerable because of its relatively large exposure to real-estate investments. The decision to take over CCM came after negotiations broke down for it to be taken over by a larger rival, Unicaja-Caja del Sol. Several Spanish savings banks are in talks to merge with other competitors, though political rivalries have complicated the process. Mr. Solbes dismissed concerns that the savings banks were facing imminent problems, but said that no one was immune from the global financial crisis. "I feel pretty relaxed about the savings banks," he said. "Are they totally immune in the long term? If we keep having the liquidity problems we are seeing now I don't think anyone can say that." CCM, based in Spain's southeastern province of Cuenca, suffered a rapid increase in bad debt as the result of its high exposure to Spain's ailing housing market. At the end of the first half of 2008, its ratio of impaired loans to the total stood at 3.1%, according to the latest available data from the bank. CCM -- which has around €25 billion in assets under management and is Spain's 12th largest savings bank, will continue to operate under the administration of the Bank of Spain. Mr. Solbes said that the institution remains solvent but has run into liquidity problems because interbank lending markets have dried up. He said CCM likely won't need the entire €9 billion set aside for it. The Bank of Spain estimates it will initially need only around €2 billion to €3 billion of financing, he said. Because of their strong ties to local communities and businesses, savings banks have borne the brunt of the collapse in Spain's construction sector over the past year. Savings banks had delinquent loans equivalent to 3.79% of the total at the end of 2008, up from 0.89% at the end of 2007. By contrast, listed Spanish banks had a delinquency rate of 2.8% at the end of 2008, up from 0.77%. Analysts expect nonperforming loans for the overall banking system to reach 9% this year -- a level last seen during the 1992-93 recession in Spain. That number is expected to be higher for many savings banks. —Christopher Bjork contributed to this article. Write to Jonathan House at jonathan.house@dowjones.com