Spain approves ‘bad bank’ to handle toxic assets

MADRID: Spain’s government made a further attempt at solving its economic crisis yesterday when it approved a new package of measures to create a “bad bank” to handle the country’s toxic property investments and give the central bank more powers to shut down troubled lenders.
The reform is the fifth such package Spain has introduced since its financial difficulties began in 2008.
Economy Minister Luis de Guindos said the new “bad bank” would be up and running by the end of November and will be controlled by the central bank but would also involve the private sector.
He said the measure was chiefly aimed at unburdening banks of their bad investments so they can concentrate on managing people’s savings and investments and get credit flowing again into the ailing economy. The bad bank would be able to bring some of the real estate assets — such as unused land and unsold houses — back onto the market.
Spain’s banks have an estimated 184 billion euros ($232 billion) in problematic real estate loans and investments following the collapse of the country’s property market in 2008. Concerns about the sector pushed Spain to accept a 100 billion-euro loan from the other 16 countries that use the euro to spend on rescuing banks.
De Guindos gave no indication as to how much or what type of toxic assets the new bank would take on or at what discount they would be bought from the troubled banks. The creation of the bad bank was among conditions of the euro zone’s loan package.
The minister did say the new institution would have between 10 and 15 years to sell off those assets and the Bank of Spain would decide the value of the toxic assets.
“We’re laying the basis to avoid a repetition of such a crisis in the future,” the minister said at a news conference after a Cabinet meeting.
De Guindos said that given that the new entity would only be dealing with those banks that have been bailed out, it would be managing a figure considerably smaller than 184 billion euros, though he declined to say how much it would amount to. So far, eight banks have been taken over.
He said the new institution would be financed mostly by private investment with additional money from Spain’s bank restructuring fund, or FROB. He said only a small amount would come from the euro zone aid package.
De Guindos also announced the Bank of Spain would be given greater powers to intervene in earlier — and close down if necessary — banks with financial problems. The central bank would be able to intervene in banks that meet solvency requirements but are uncertain of fulfilling them in the future.
He said that in line with European banking rules, the government was raising the core capital requirements — the level of high-quality assets a lender has to hold to protect it from economic shocks — to 9 percent for all banks.
The reform comes as Spain battles to convince investors it can handle its finances and avoid following Greece, Ireland, Portugal and Cyprus in requesting a government bailout.
Suffering near 25 percent unemployment, it got yet another dose of bad news yesterday as the Bank of Spain reported a net capital outflow of 56.6 billion euros in June, topping an exit of 41.3 billion euros in May.
It said the outflow for the first six months of 2012 was nearly 220 billion euros, compared with an intake of 22 billion euros for the same period last year.