IMF Says Spain May Need to Use More Public Funds for Banks

Spain may need to use more public money to shore up its banks, the International Monetary Fund said, as it raised the possibility of lenders offloading toxic assets into separate vehicles.

While the largest banks “appear sufficiently capitalized,” the capacity to deal with adjustments “differs significantly across the system,” the Washington-based lender said in a report yesterday after sending a mission to Spain.

“Greater reliance on public funding may be needed” to avoid the costs of the overhaul becoming too high for the industry, the IMF said.

Spain made legal changes in February to force banks to recognize deeper real-estate losses. While the state’s bailout fund can buy securities from banks that need help, an industry- financed facility is bearing the cost of failed banks. In a new phase of the overhaul, the government may encourage lenders to pool assets in jointly owned companies to get them off their books, an Economy Ministry official said on April 23.

The country needs to “further deepen the financial-sector reform” and make a priority of dealing with so-called legacy assets, the IMF said. Separating those assets into separate asset-management companies is an option, according to the report.

Comprehensive Diagnostic

“To give guidance on the best possible strategy for the Spanish banking system going forward, a comprehensive diagnostic of the impaired assets can be particularly useful,” the IMF said.

The idea of letting banks split off bad assets once losses are recognized was raised last week by Jose Maria Roldan, head of regulation at the Bank of Spain. The Madrid-based central bank gave no more details in the text it published after Roldan made a presentation to analysts in London on April 19.

The Economy Ministry official didn’t say how the program may be financed, adding that taxpayers’ money wouldn’t be used as the nation struggles to trim the euro region’s third-largest budget deficit.

Deputy Economy Minister Fernando Jimenez Latorre said yesterday it’s up to Spanish banks to find the best way to dispose of bad assets, or assets which take a long time to sell.

“Whether they create a vehicle more specialized in the real estate sector, with independent management, with the participation of third-party funds, it will be the banks themselves that do it,” Latorre said in Madrid after the IMF released the report.

The IMF also said bad loans may be higher than data suggest, amid “lender forbearance.” It said 10 banks were identified as “vulnerable.” Of those, five have merged, three are being auctioned and two have submitted business plans to the central bank.

“To preserve financial stability, it is critical that these banks, especially the largest one, take swift and decisive measures to strengthen their balance sheets and improve management and governance practices,” it said, without naming any of the lenders.

To contact the reporter on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net

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

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