Who would own a Spanish savings bank? Well, soon most Europeans will. Once the Spanish government’s bailout of the country’s failing Cajas and smaller banks is transferred to the European Stability Mechanism, all European taxpayers will have their own small stake in one of Europe’s more intractable financial disasters.
When the Swedish banking system crashed in 1992, the government faced an identical problem. Yet in the end, Sweden’s taxpayers came very well out of their experience of bank ownership. How was this achieved, and what lessons can be learnt for Madrid and the EU’s new bank resolution policy?
First, move fast. Spain and bankers have been in denial about the scale of bad lending for too long. The Rajoy government rightly came to office this year on a promise to force banks to write down bad loans. The situation has predictably turned out to be much worse than assumed, but their policy is the right one. Painful as it is, transparency on the scale of bad debt is vital for the market to be confident that it understands risk and uncertainty in Spain and can therefore price it properly.