A New Cunning Plan to Allay Banking Jitters is Hatched in Spain

But there’s a problem with the plan.

By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.

The Spanish Government has a brand new cunning plan to fortify the country’s banking system, which was rocked last year by the collapse of the sixth biggest bank, Banco Popular. It wants the country’s Deposit Guarantee Fund (DGF) to insure the entire bank deposits of large companies, even if those deposits exceed the current limit of €100,000, so that if a bank begins to wobble, its corporate customers don’t take their money out en masse.

The government hopes that the plan will be included in the new banking resolution rules being drawn up by EU banking authorities in the aftermath of Banco Popular’s quickfire resolution last year, the financial daily Cinco Dias reports.

If the law is passed, it would mean that corporate deposits of any amounts would be guaranteed in case of a bank’s resolution. The proposal apparently enjoys the enthusiastic support of Spain’s major banks, large companies, and the president of Spain’s Fund for Orderly Bank Restructuring (FROB), Jaime Ponce. The government also wants the deposits of large public institutions to be covered without limit, as well as those of small and medium size enterprises (SMEs).

The new law would help prevent large scale deposit flight, which became endemic during Spain’s banking crisis and was also instrumental in the collapse of Popular. According to Ponce, if the government’s newly proposed measure had been in force between May and June last year, the frantic run on the bank’s deposits from Popular would never have happened.

In its final days, Popular was bleeding funds at an average rate of €2 billion a day. Much of the money was being withdrawn by institutional clients, including global mega-fund BlackRock, Spain’s Social Security fund, Spanish government agencies, and city and regional councils, prompting accusations that Spain’s government was using insider knowledge to withdraw large amounts of public funds, which of course hastened Popular’s demise.

Between the end of March and its last day of trading, Popular shed €18 billion of deposits, roughly a quarter of the total. In the end, Europe’s Single Supervisory Mechanism decided that the bank could no longer cover its collateral. Popular, warts and all, was sold for €1 to Banco Santander, which had to raise €13 billion of fresh capital to digest the deal. At least part of those funds will be returned to Santander through tax credits.

If Popular’s institutional clients hadn’t been quite so worried about the safety of their deposits, Popular’s day of reckoning might have been postponed long enough to find a suitable partner willing to pay more than €1 to take over the bank. And Popular’s shareholders and junior bondholders wouldn’t have been so badly burned.

But there’s a problem with the plan. Spain’s Deposit Guarantee Fund (DGF) doesn’t have nearly enough funds in its coffers to cover large institutional deposits. Like many other EU countries, Spain has not put enough into the fund to provide genuine coverage for bank deposits.

All EU bank deposits are guaranteed up to €100,000 per account holder, but in many countries the funds backing that guarantee are derisory. Under rules passed in 2014, EU member states need to have funds in deposit guarantee schemes equivalent to at least 0.8% of the covered deposits. Data provided by the European Banking Authority (EBA) show that at the end of 2016 Italy, Ireland and the Netherlands had guarantee funds equivalent to just 0.1% of covered deposits. In Spain the figure was around 0.2%, while in France and Germany it was 0.3%.

Some countries were already well above the 0.8% minimum target at the end of 2016, including Norway, Sweden, Finland, Czech Republic, Poland and Romania. As for those that aren’t, they have been given another seven years to meet any shortfalls, which is usually done by raising levies from banks. The hope, it seems, is that nothing untoward happens in the interim.

It’s not clear exactly how much money Spain’s DGF has in its coffers today. According to El Mundo, at the end of 2016, its total accumulated balance was €1.6 billion — far short of the €6.4 billion it’s supposed to have by 2024. In the last year, however, the fund has had to pay Banc de Sabadell some €900 million in guarantees on toxic real estate assets it sold at a significant loss. The assets previously belonged to CAM, a collapsed savings bank Sabadell took over in 2011. The DGF could have to shell out even more in guarantees on toxic real estate assets that hit the market over the course of this year.

In other words, there’s a good chance the DGF has even less money today than it had at the end of 2016. How is it supposed to guarantee the deposits of larger (but still not officially “too-big-to-fail”) institutions like BBVA and Caixabank? The simple answer is that it can’t. But that hasn’t stopped the Spanish government from proposing to massively extend the fund’s coverage of large corporate and institutional bank accounts, and in the case these funds are needed, they will likely be extracted from the taxpayer. By Don Quijones.

Doubts emerge as to who is saving whom. Read…  After Years of Crisis in Spain, Pensioners Next to Feel the Pain

Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.

  22 comments for “A New Cunning Plan to Allay Banking Jitters is Hatched in Spain

  1. FDR Liberal says:

    By raising the deposit guarantee it will only cause the money velocity in Spain to decrease if enacted.

    A .8% minimum insurance coverage ratio only covers 80 cents on $100.00.

  2. cdr says:

    Here’s a NEW great idea.

    Private Deposit Insurance.

    It works like life insurance or car insurance. You buy it from the insurance company and pay for it yourself. You buy it in amounts you choose.

    The insurance company games the risk and sets premiums accordingly.

    If someone can’t afford the premium, this means the bank is best avoided.

    • cdr says:

      In the Eurozone, I’m sure the ECB would happily buy the debt to capitalize it and keep the plate spinning. Like peas in a pod.

    • Wolf Richter says:

      And who insures the insurance company so it doesn’t collapse when the claims come in?

      There is a simple and better solution: turn all depositors into secured creditors ahead of all other liabilities (and while at it, put executive compensation plans, golden parachutes, and pension plans at the very bottom as unsecured creditors just ahead of preferred stockholders).

      So if a bank collapses, depositors are first to get paid, executives last. That’ll solve a lot of problems.

      Pushing depositors all the way up the capital structure completely eliminates the need for deposit insurance. But Wall Street and the bond market would have a cow, and bank lobbyists would kill it on sight.

      • cdr says:

        My satire flag was a little obscure?

        I saw it as a way for the ECB and QE to keep the plate spinning while trying to look legitimate a while longer.

        The EU will never use real money if printed money or borrowed money will work. This is the fundamental basis supporting ECB QE and the existence of the EU. Kick the can forever. Everything else is nonsense that people seem to believe for reasons I will never understand.

        If real money need to be spent, those with the lease recourse and support will be put at the front of the line.

        Using private deposit insurance supported by ECB debt purchases is perhaps a thought experiment, but should not be dismissed outright.

      • Javert Chip says:


        The current EU bank system was designed to inspire post-WWII confidence in banks; its has simply taught depositor’s to ignore bank safety & depend on deposit insurance.

        No one in their right mind believes EU bank financials (remember Monte Peschi?), and several show bad debt running 10-45% (anything over 8% eats into depositor balances). Significantly increasing EU deposit insurance is simply another way of saying “taxpayer pays”.

    • so you’re suggesting self-insurance? they’ve been talking about this in the auto insurance business for years. then the insurance company sues the bank, right? Sort of like Goldman Sachs and AIG?

  3. Are there limits to outside investment? You remove all limits on insurance then hot money will come looking for a good place to hide. Deposits grow exponentially, and no way to loan money out to pay them? I keep imagining the Fed running headlong into a macro S&L crisis by raising rates on deposits while lending goes flatline. So far it hasn’t happened.

  4. Javert Chip says:

    The the cause of the real problem is stupid beyond belief bank management (regulators, too).

    In the past, once a bank gets into trouble, stupid managers & regulators pull out all the tricks (well, everything except actually fixing the bank) to put more lipstick on the pig. This creates a bigger mess, and eventually depositors notice, withdraw their money & bank are forced to correct or go bust.

    In the future, so this fairy tale goes, depositor funds will stay in the bad bank, stupid managers and regulators will continue to make the bank horrendously worse (aka gobs more bad debt) and consume their capital (note deposits ARE NOT THE SAME AS CAPITAL) and never have the ability to continue lending. Eventually, this consumes 100% of “deposit insurance” without even attempting to fix the bank. Now you’re left with very huge, dead banks, run by very stupid managers (and a huge taxpayer restructuring bill).

    Moral to this fairy tale: you want bad bank to fail sooner rather than later.

  5. Realist says:

    I wonder what the ECB has to say about this scheme ? Draghi or not, but there’s a certain German gentleman at BuBa waiting in the shadows and his mere being there might cause Draghi to reconsider a thing or two …

  6. Nick Kelly says:

    Sounds like the ECB will be getting a phone call.

    • cdr says:

      Agree, only it will be marketed as a larger than life great new idea to insure deposits and support the EU economy using new wave economics. People will sing songs about it.

      But, if you strip away the fluff and false premise, it will only be a plan to monetize deposit insurance. Perhaps the CDO scheme mentioned a few weeks ago will be incorporated into it … tranching and selling deposit obligations, and probably monetize the interest paid on it.

  7. RepubAnon says:

    Who knew Blackadder’s henchman Baldrick was in charge of Spanish banking?

  8. Vinman says:

    21 st century Glass Steagall act needed in America and Europe

  9. John Henderson says:

    Why do auditors not inform shareholders where a company banks?

  10. Steve Bull says:

    Continued privatization of profits and socialization of losses. Who says we don’t have ‘representative democracy’ in the world? I suppose it’s a matter of who the political class ‘represents’ that is at issue…

  11. John M says:


    I read this over at ZH a while back..


    that the ECB is already pulling the plug on depositor protection? Or am I mis-informed?

    • Wolf Richter says:

      I think the ZH headline is misleading. Each country has its own deposit insurance. So the ECB cannot decide to end it anyway. Here is the original document that ZH linked…


      It’s 69 pages and covers all kinds of things. Deposit insurance is just a small part. It’s a discussion of suggestions for the member countries.

      Use the search box and search for “deposit” This will take you to all the places were deposits are discussed. There is no discussion of ending “deposit protection.” On the contrary. It does propose some guidelines on when to give access to insured deposits (how many days after a failure, withdrawal limits, etc. until liquidity is restored), and what to watch out for in order to NOT lose the confidence of depositors.

  12. John M says:


    Here’s the link to the ECB telling everyone that they don’t need depositor protection!


Comments are closed.