Spain sets up 'bad bank' to process unrecoverable loans

Thu, Oct 18, 2012, 01:00

SPAIN HAS set a €90 billion limit for the size of a bad bank created to take over other financial entities’ toxic real estate assets, a necessary step to obtain European funding for the sector.

The country is preparing to receive the first funds from a €100 billion credit line for its banks agreed with Europe in June, paving the way for a fuller bailout that is likely to dominate talks at a European Union summit starting today.

Lenders will transfer foreclosed property and unrecoverable loans to house builders to the bad bank, to be called Sareb, in a move aimed at freeing up the flow of credit to families and businesses.

The final size of Sareb, which is supposed to be up and running by the end of the year and exist for 15 years, is likely to be much less than the €90-billion limit, economy ministry sources said yesterday.

The bad bank’s remit could be widened beyond real estate to include non-performing consumer loans, the sources said, as a deep-rooted recession causes more Spaniards to default on debt.

However, this would only be in cases of extremely damaged assets.

Pricing is key to the success of the bad bank. Assets must be priced low enough to attract private investors but high enough to sufficiently recapitalise teetering banks.

The sources at the economy ministry reckoned the government expected the bad bank to start booking profits only during the last third of its lifespan.

Spain must set the price at which the assets are transferred from banks’ balance sheets to Sareb in the seven days following November 19th, when the legislation to set up the bad bank is passed, the sources said.

But some details about the discounts on the assets could be announced in the coming days.

Spain has already forced banks to write off €137 billion in bad real estate investments through two laws this year, giving lenders an average of 40 per cent coverage against their book value.

But banking sources expect a further 5 to 10 per cent to be shaved off the value of assets before they are transferred to the entity in order to attract investors.

The state wants to limit its ownership to under 50 per cent, to avoid an impact on public debt, and expects private investors to own at least 55 per cent of the bad bank.

Banking sources said Spain’s healthy listed banks – Santander, BBVA and Caixabank – would probably be the biggest investors in the bad bank, with foreign investors steering clear.

The equity tranche of the asset management company will make up about 10 per cent of the bad bank.

The rest of it will be financed by state-backed bonds given to lenders forced to transfer assets, which they can use as collateral with the European Central Bank to get cash.– (Reuters)