The so-called bad bank Spain’s government will set up to take soured real estate from the lenders it has bailed out will seek private investors and try to sell the assets over 10 to 15 years.
“The asset-management company should be viable and not generate losses and in the end not have any impact on the taxpayer,” Economy Minister Luis de Guindos said at a news conference in Madrid today. The aim is for private investors to take a majority stake in the bad bank that would take on real estate assets, he said.
The bad bank was among the mechanisms approved today by Spain’s cabinet as it set out a new framework for restructuring a banking industry mauled by losses from the country’s property crash. The terms of the European bailout of as much as 100 billion euros ($126 billion) that Spain sought for its banking system in June require the government to spell out procedures for dealing with failed lenders that limit costs to taxpayers.
“A bad bank is clearly the right mechanism,” said Tobias Blattner, a euro-region economist at Daiwa Capital Markets in London. “It’s a tool that we know can work to help banks do what they need.”
Spanish bank shares rose after de Guindos unveiled details of the bad bank. Banco Santander SA (SAN), Spain’s biggest lender, climbed as much as 5.4 percent and Banco Sabadell SA as much as 6.3 percent.
Spain is tightening bank regulation against a backdrop of doubts about the nation’s finances that has spurred the government to call on the European Central Bank to buy its bonds to rein in financing costs. Spanish lenders have about 180 billion euros of troubled real estate assets, according to the Bank of Spain.
“From the market’s perspective, what matters most at the current juncture is the anticipated request from Spain for a broader bailout deal,” Blattner said. “These details won’t have an impact until we know more about the wider picture.”
In its third reform of the financial system this year, the government also bolstered the powers of its bank rescue fund, known as FROB, to restructure troubled banks. FROB will be able to take on debt to a limit of 120 billion euros in 2012, the economy ministry said in a statement.
Referring to plans to shore up the Bankia (BKIA) group, a lender taken over by the government in May, de Guindos said FROB may consider injecting funds into the bank before a definitive recapitalization plan is completed.
The cabinet also set out ways for dealing with banks that can’t be salvaged by restructuring and a framework for imposing losses on holders of subordinated debt on failed lenders.
The rules now give the authorities “early intervention” powers for banks in trouble that would be recapitalized by issuing contingent capital securities for a maximum of two years, the economy ministry said in a statement. The bonds, known as CoCos, convert into equity if capital ratios fall below a certain level.
In cases where a bank proves to be not viable, the authorities can force the sale of its business or transfer its assets and liabilities to a “bridge bank” before an eventual sale, the ministry said.
The government also toughened rules for sales of subordinated debt such as preference shares to retail investors.
From now on the minimum investment in the securities issued by non-public companies will be 100,000 euros and half of the amount should be sold to professional investors, the ministry said. In the case of debt sold by public companies, the threshold amount will be 25,000 euros.
The government also adjusted its solvency rules to make all banks achieve a so-called principal capital ratio, a measure of financial strength, of 9 percent by 2013. The requirement is now 8 percent or 10 percent for banks deemed to have difficult access to wholesale financing or be too reliant on it.
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