Spain to set up bad bank


The Council of Ministers has approved a new finance reform act which will allow for the establishment of a ‘bad bank’ where toxic assets can be lodged. The bank will be launched in November and will be in existence for about 10 to 15 years. The move will not cost taxpayers anything according to the government.

A translation of the press release as published on the prime minister’s website is as follows:

The Council of Ministers approved a Royal Decree and Resolution Restructuring Act of Credit Institutions, which is essential in the process of reforms being carried out by the Government.

(Deputy Prime Minister) Soraya Sáenz de Santamaría stressed that “today is the culmination of a reform of the first order” because the financial sector consolidation is essential to restore the funding and credit to households and businesses.

In addition, the restructuring aims to boost the property market to take on sale and local housing stock still in the hands of the banks so they can be sold at reasonable prices. To promote this sector, “will be an important element in boosting the economy and job creation.”

Soraya Sáenz de Santamaría explained that the draft standard includes important measures to protect small savers: “It is necessary to strengthen your protection, know what to really invest in and have a perfect knowledge of what they offer.”

With this Royal Decree, the Government delivers on commitments made in the program of financial assistance to Spain for the recapitalization of the banking sector, agreed by the Eurogroup on July 20 and set out in the MOU. “We are fulfilling our European commitments in a timely manner,” said Soraya Sáenz de Santamaría.

The Deputy Prime Minister added that the restructuring of the financial system “will not cost taxpayers a Euro”.

Key actions

The Minister of Economy and Competitiveness, Luis de Guindos, said that the “general principle of the rule is to act preventively, minimize the cost to taxpayers, ensuring that we have a healthy banking system and solvent critical to the safety of savers and credit recovery, and make available to the economic fabric some entities that build trust”.

De Guindos detailed the measures included in the standard, having collaborated in the drafting with the European Central Bank, European Commission and International Monetary Fund.

Entities with problems

The rule establishes three levels of management, according to the minister. The first is early action measures for entities that are viable but have slight difficulties, so it may require exceptional and temporary help in a maximum two-year horizon.

The second level would be the restructuring actions, scheduled for entities that are viable but need resources for a maximum period of five years with an extension of two more years.

The third level is the orderly resolution of entities. Unlike the restructuring, which would apply to viable entities that can repair itself with some aid, the resolution is for those who cannot do in a reasonable time and comply with the requirements of solvency.

If the resolution is for the sale of the business, the transfer of the assets and liabilities to a “bridge bank” and the worst assets would take a management entity.

Strengthening the FROB

The rule makes an absolute separation between the Deposit Guarantee Fund and the FROB. The Deposit Guarantee Fund “would focus on endorsing the Spanish savings deposits and is the only mission that will have”, according to De Guindos.

The minister indicated that the new rule removes a currently existing involvement of private capital in the FROB and gives it a capital and borrowing capacity of 120,000 million for 2012. The State shall establish permanent monitoring of the performance of the FROB. Its president will appear quarterly before the Commission of Economics Congress of Deputies.

Restructuring costs

Luis de Guindos said that it aims to minimize the impact bank resolution processes will have on the taxpayer: “It’s about making the best use of public resources, the costs of banking crises are minimized and are shareholders and creditors who pay such crises. ”

Asset management company

Luis de Guindos explained that the new bank will purchase impaired assets from banks so that these remain in a situation of greater solvency, with a healthy balance sheet and focus on their business logic: managing savings depositors and lend. The “so called bad bank” will acquire assets, disposed with a time horizon of 10 to 15 years.

The minister announced that the new bank must be in place in late November or early December. The Royal Decree gives the FROB’s ability to force banks receiving state aid to transfer assets to the ‘bad bank’.

Protection retailers

The Economy Minister said that the marketing that has occurred so far was not the most appropriate for individual savers. Therefore, the Government will protect small savers and establish “transparently the purpose of marketing these products.”

They require any complex product placement that exists to have at least 50% of professional investors. At the same time establish a limit of EUR 100,000 minimum amount to discourage small savers from acquiring them.

Main Capital, Bank of Spain and remuneration of directors

Moreover, Luis de Guindos has said that there will be rising capital requirements for all banks from 8% to 9%. Powers are transferred to the Ministry of Finance and Bank of Spain to set the limits with respect to the remuneration of directors and executives of companies with financial assistance. The maximum current reduced from 600,000 to 500,000.

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