The Wall Street MARKETS OCTOBER 21, 2011
For Bank in Spain, Links Aren't Plain
BY SARA SCHAEFER MUÑOZ AND DAVID ENRICH
LONDON--Spanish banking giant Banco Santander SA frequently says that
it doesn't shuttle money among its far-flung units, a declaration
meant to assure investors that its parent won't raid those units for
cash in a pinch.
The bank has "a model of subsidiaries which are autonomous in funding
and capital," Chairman Emilio Botín said in a speech here last month.
The same day, Santander's chief executive delivered a slide
presentation that said "Each subsidiary is responsible for its own
capitalization and funding needs... no cross border funding."
But an examination of the financial relationship between Santander and
its British unit, Santander U.K. PLC, shows that billions of euros
have moved between the parent and its subsidiary in recent years. Much
of the activity has been routed through a little-known unit of
Santander U.K. called Abbey National Treasury Services PLC.
Regulatory filings show the U.K. subsidiary today provides a total of
more than GBP 2 billion ($3.15 billion) in funds to its Madrid-based
parent company. The parent company houses its Spanish business, which
has suffered losses tied to the country's economic downturn.
There are also funding arrangements between the parent bank and its
Brazilian and U.S. subsidiaries.
The amounts are small for a bank like Santander, which has a 1.23
trillion euro balance sheet. It also isn't unusual for a global bank
to move funds around, as long as local capital buffers remain adequate
and it is done in a transparent manner.
Still, when informed of the transactions, some analysts said they
appear to contradict Santander's frequent statements about its units'
independence. And the analysts say the transactions raise questions
about how Santander will be affected by proposed British regulations
that would restrict the movement of funds between different
"There's been a significant amount of free movement of funding around
the Santander group in the recent past," said Alastair Ryan, an
analyst at UBS AG., when made aware of the transactions. As a result
of that movement, the pending U.K. regulations "would be a significant
issue" for the bank, he said.
The mobility of banks' funds is taking on greater importance amid
Europe's burgeoning financial crisis. Many investors and regulators
are anxious about the ability of banks in Spain and other countries to
line up the funds they need to finance their daily operations.
Regulators worry about banks taking funds out of foreign subsidiaries,
leaving them strapped for cash.
In the U.K., Financial Services Authority officials have expressed
concerns to Santander U.K. about its funding relationship with the
parent, according to people familiar with the matter. The regulators
want to ensure that if the Spanish parent encounters trouble, it won't
drag down the British subsidiary as well, these people say.
Partly as a result of such concerns, the British regulator over the
past 18 months has required Santander U.K. to beef up its pool of
liquidity and to move forward with plans to transform Santander U.K.
into a fully independent, publicly-traded company, these people say.
Santander executives say that all British banks are being forced to
stockpile liquidity and said FSA officials haven't confronted the
company about its funding patterns. "U.K. regulators have not raised
concerns with us about this," said the bank's chief financial officer,
Jose Antonio Alvarez. An FSA spokeswoman declined to comment.
Santander has repeatedly emphasized its units' independence. The
bank's 2010 annual report says Santander's subsidiary-based business
model avoids "any complex interconnections." A senior Santander
spokesman said, "Santander U.K. does not fund any other group units."
However, executives later acknowledged that Santander U.K. and its
subsidiaries have engaged in a series of financial transactions with
their parent company.
A bank spokesman said the transactions at issue don't meet the
traditional definition of funding and therefore don't contradict the
bank's previous statements. He said, when capital is moved, it is done
in a transparent manner, with regulators' blessings and when it "makes
business or strategic sense."
But some analysts were surprised to learn of the transactions. "These
are very small amounts . . . but it's not totally consistent with what
the group has said about its subsidiaries being independently funded,"
said an analyst at a major global investment bank.
The structures of the transactions vary. In 2008, Santander U.K.
acquired British lender Alliance & Leicester and the deposit base of
another, Bradford & Bingley. That left Santander U.K. overflowing with
deposits. On the heels of those transactions, public documents show,
Abbey National Treasury Services, or ANTS, loaned GBP 8.35 billion to
the Madrid-based parent.
At the end of last year, GBP 643 million, a third of which is
unsecured cash, was still outstanding, according to ANTS documents and
More recently, Santander U.K. and ANTS also have helped their parent
boost its liquidity through a series of so-called "reverse repo"
transactions, according to documents and executives. In such
transactions, one party transfers assets to another for cash, with the
understanding that it will be reversed down the road. It is a
traditional liquidity-management technique, and it is classified as a
Banco Santander initiated the reverse-repo program last year, shifting
highly rated European government bonds from the Madrid parent to its
British units in exchange for cash, the executives said. The use of
such transactions has more than doubled since it started. As of June
30, GBP 1.54 billion of those reverse-repo transactions were
outstanding, listed on Santander U.K.'s balance sheet as a "credit
risk exposure" to Spain.
Santander executives say the transactions were negotiated on
commercial terms and just as easily could have taken place with
unaffiliated companies, although they say Santander U.K. offered the
They say the transactions involved a "trivial" amount for a bank of
- posted 8 years ago