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Spain to Unveil Bank Overhaul

Spain will give struggling banks more time to take their share of 50 billion euros ($65.7 billion) in real estate charges if they agree to merge with other lenders.

Banks will have until the end of May to present merger plans that will mean they get two years instead of one to make additional provisions for real estate piled up on their balance sheets, Economy Minister Luis de Guindos said at a Madrid news conference today. They will also be able to offset charges for the loss in value of the assets against capital instead of profits, and receive financing from the government’s bank rescue fund, he said.

Prime Minister Mariano Rajoy, in power since December, pledged a “true restructuring” of the industry at no cost to the taxpayer four years after the decade-long property boom collapsed. Lenders have about 175 billion euros of what the Bank of Spain terms “troubled” assets linked to real estate on their books. The government wants to remove doubts about valuations to help banks make loans and tap financing as it also seeks to shrink the industry.

“The aim is for housing to come onto the market and for Spanish banks, by being cleaner, stronger and more transparent, to be able to extend credit, which is something that’s not happening at the moment,” de Guindos said. “By improving the transparency and the perception of strength of Spanish banks, they will be able to finance themselves better, and that is going to allow them to make loans.”

Provisions Ratio

The government will make banks increase the ratio of provisions set aside for urban and rural land to 80 percent from 31 percent, de Guindos said. For unfinished developments, the provisioning level will rise to 65 percent from 27 percent and to 35 percent for other so-called “troubled” assets including finished developments and houses, he said.

“It looks to me like a lot of stick and not very much carrot -- these are tough rules that are going to cause a lot of distress in the banking industry,” said Ricardo Wehrhahn, a partner at Roland Berger Strategy Consultants in Madrid. “The danger is that banks will be under pressure to seek mergers just to gain some time instead of doing so for sound business or economic reasons.”

The 50 billion euros in increased real estate charges for banks will be in the form of 25 billion euros of provisions to be taken against earnings, the economy ministry said.

Capital Buffer

Another 15 billion euros will be in the form of making banks build a capital “buffer” for land and unfinished developments, the ministry said. The remaining 10 billion euros will come from a 7 percent provision against healthy developer loans.

Banks that agree to merge will be able to tap Spain’s FROB bank-bailout fund by selling contingent convertible bonds to the facility, de Guindos said, adding the steps won’t affect the country’s budget deficit. The bonds, known as CoCos, convert into equity if capital ratios fall below a certain level.

To strengthen the FROB, the Treasury will increase its equity to 15 billion euros from 9 billion euros, while the fund will maintain its current capacity to issue as much as 90 billion euros of debt.

To contact the reporters on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net; Charles Penty in Madrid at cpenty@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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