The benchmarking used for Spanish banks during the recent EU Stress Tests published recently is flawed according to Gregory Butcher, chairman of Ocean Village Gibraltar.

The tests were carried out to assess whether banks will be able to survive future economic shocks.

A total of 27 Spanish banks were subject to testing and several of the smaller banks are expected to fail.

Butcher believes Spanish regional lenders in particular are a cause for concern, having racked up heavy losses following the collapse of the Spanish property market.

He said: “Being based here in Gibraltar and operating daily in the property and financial markets we are aware of both the ‘real life’ situation and the situation as shown in Spanish financial institution’s quarterly results.

“But the benchmarking used in valuations of property assets in the appraisal of bank lending in Spain is flawed and as a result overvalues the assets and hence shows less impairment.

“Spain’s financial institutions subsidise the mortgages on sales of their own repossessions to gain higher capital prices than buyers would normally pay and appraisals take those sales as the basis of valuations across bank’s entire property book. This overvaluation is then used by the bank appraisers and hence in the EU’s stress tests.

“Secondly, the volume of overhang of unsold new homes (610,000), the number of repossessions expected this year, coupled with the homes for sale in the private market (1,100,000) represent some years supply (414,000 were sold in 2009), even if no new homes were added and yet more are still being built.

“As such the overhang is greater proportionally than that in the US, which is in its third year of property price correction. A substantial price correction is required to sell the overhang which will not have been reflected in the EU stress tests, nor will the consequential scale of the impairment.

“The UK and US have had their banking crisis. Spain faces proportionally a greater one, arguably with fewer resources to deal with it and yet is unable to avoid it. It is also presumably intent on attempting its postponement.”

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