Spain Bankers Point to ‘Fudges’ After Regulator Tells Them to Add Capital

Spanish bankers said lenders in other European countries benefit from looser standards after regulators found the country’s banks had a 26.2 billion-euro ($37 billion) capital shortfall.

Banco Santander SA (SAN) Chief Executive Officer Alfredo Saenz pointed to “fudges beyond our frontiers” as he highlighted the differences between the rules used to calculate capital ratios on his bank’s balance sheet and those in Switzerland. Jacobo Gonzalez-Robatto, chief financial officer of Banco Popular Espanol SA (POP), complained to analysts about the “stark and massive” differences in regulation for computing capital ratios.

By comparing the treatment of risk-weighted assets across Europe, Spanish bankers are re-igniting an argument about how lenders calculate measures of their financial strength that has become shriller as the European Banking Authority instructed firms to increase capital by 106 billion euros by mid-2012.

The Spanish banks responded to the order to boost capital to plug the second-biggest country shortfall after the 30 billion-euro identified for Greece by saying they would raise money from earnings and improve their capital ratios as they build “internal models” that will reduce their risk-weighted assets.

‘Optimizing’ Assets

None of the banks planned to tap shareholders for new capital or intended to reduce dividends. Saenz said Santander, which now has a shortfall of 5.22 billion euros under EBA criteria, could find 4 billion euros by “optimizing” risk- weighted assets and rolling out “internal models.”

“It’s how much capital you have divided by your risk- weighted assets,” said Saenz at an Oct. 27 news conference in Madrid. “If my risk-weighted assets decline, my ratio improves.”

The Spanish banks may face skepticism from investors as they recalibrate the risk-weighting of assets instead of raising money, said Peter Hahn, a lecturer in corporate finance at the Cass Business School in London.

“The most obvious question is if your models are wrong, why have you waited until now to get them fixed?” said Hahn, adding banks would have to provide “a massive amount” of information about how the models work. “If you say your capital ratios are going to be higher tomorrow than they are today, that starts to look like a major mystery.”

‘Huge Difference’

The average ratio of risk-weighted assets to total assets for Spanish banks is 58 percent, according to a study of seven domestic lenders by Keefe Bruyette & Woods Inc. Banco Bilbao Vizcaya Argentaria SA (BBVA)’s ratio is 58 percent and Santander’s 49 percent. That compares with the average for Europe of 36 percent, according to KBW.

“There are quite a few banks and many of them with a business model that is identical to Popular’s with risk-weighted assets in the region of 20 percent to 30 percent -- that is a huge difference,” Gonzalez-Robatto said on an Oct. 28 conference call, adding his bank wasn’t “making excuses.” “The EBA has focused mainly on the numerator of the ratio of capital but not so much on the denominator, which are the risk- weighted assets.”

Saenz of Santander picked out Swiss banks as examples of lenders that are less rigorous in the way they calibrate assets according to risk. Switzerland’s UBS AG (UBSN), the country’s largest bank, has a ratio of risk-weighted assets to total assets of 17 percent and Credit Suisse Group AG 20 percent, according to KBW.

“I would say look for the fudges beyond our frontiers because I ask myself why do you have the transformation of 100 million of accountable assets into 15 million of risk-weighted assets as happens in the Swiss banks?” said Saenz. “How is this done when every 100 million of my accounting assets costs me 50 or 55 million in risk-weighted assets?”

Spokesmen for Zurich-based UBS and Credit Suisse declined to comment. UBS had a core Tier 1 capital ratio of 16.3 percent at the end of September, while Credit Suisse had a ratio of 13.1 percent at the end of June, according to company reports.

To contact the reporter for this story: Charles Penty in Madrid at cpenty@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net

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