The BdE released the Spanish banks stress tests results on Friday. The total capital needs are expected to be a bit less than €60bn under the adverse scenario (cumulative 6.5% fall in GDP). Only banks with 37% of total bank assets are the ones with negative capital, with the rest not having any problems:

Actual capital needs will be even lower since banks will move assets to the ‘Bad Bank’ and the government will impose ‘burden sharing’ on hybrid and subordinated debt holders. Subordinated bonds are around €41.6bn while hybrid debt is €23.6bn. As a result, a large part of the capital relief can actually come from losses on such instruments. These losses and bank resolution are scheduled to be completed by the end of 2012.

RoW currently holds around €180bn in bonds and €408bn in deposits with MFIs so these steps will probably help in limiting any further capital outflows out of Spain, as long as the remaining bank liabilities are considered safe.

One problem of the stress tests (which was raised by zerohedge) is the fact that there’s a very important role played by the ‘capital buffer’. Total losses under the adverse scenario are projected at €270bn, with €110bn covered by existing provisions, €59bn by new profits and €36bn by the capital buffer (which is actually a total of€ 73bn):

The capital buffer is basically the result of bank deleveraging. Banks are expected to dispose of assets, thus lowering their risk adjusted capital needs. Still, the size of the capital buffer corresponds to an extreme asset disposal. Currently, Spanish MFIs hold a total of €3.6tr in assets. Their borrowing from BdE is already around €412bn while they also have €408bn in debt securities issued. How much of their €782bn deposits to MFIs is securitized is difficult to know but it’s obvious that a large part of their assets are already pledged as collateral. By disposing of assets banks will have to ackowledge any losses due to the difference between the booked value and the price they ‘ll manage to get at the market, losses that will lower their capital base and the final capital relief.

What is worrying is the fact that the capital buffer is actually very important even for banks that are considered to have excess capital. Santander has a capital excess of €25.3bn with €22.7bn in the capital buffer, while BBVA a capital excess of €11.2bn with €13.4bn in the capital buffer (under the adverse scenario). Caixabank & Banca Cívica have €5.7bn against €8.9bn, KutxaBank €2.2bn against€ 3.4bn, Sabadell & CAM €0.9bn against €4.7bn and Unicaja & CEISS €0.13 against €3.62bn. It’s rather strange that excess capital under the adverse scenatio is actually higher for the first two banks than under the baseline.

Overall, one should probably consider the capital buffer figures extremely optimistic. Actual capital needs might be even double the €60bn figure which will lead to large losses on hybrid and subordinated liabilities.

The Spanish government might end up with a fiscal safety buffer of €20-30bn out of the original €100bn EFSF loan which will help with covering its financial needs for the rest of 2012. Given that foreigners now only hold 1/3 of the total government debt and the Spanish Treasury held a bit less than €40bn in deposits in August i think that it’s a safe bet to suggest that it will be able to cover any bond redemptions for 2012. This fact might push any actual bailout into 2013, especially given important regional elections in the next few months.