European Union officials waived the requirement in last year’s bank bailout that Spain tighten risk controls because policy makers are writing common rules for the 27-nation bloc, two people familiar with the matter said.
Spanish regulators won’t have to implement a plan to revamp loan-loss provisions and bolster curbs on concentration of credit in businesses such as real estate, the people said. EU and European Central Bank officials decided during a visit to Madrid last month that the region-wide regulations will be enough, said the people, who asked not to be named because the talks are private.
The move lifts the threat of a third wave of bad-loan set-asides since January 2012 by struggling lenders such as Banco Popular Espanol SA (POP) and Bankia SA. (BKIA) It may also help spur the flow of credit to an economy that has shrunk three of the past four years.
“The changes in the provisions last year, while they were arguably needed, contributed to credit restrictions and, in turn, to the recession,” said Salvador Ruiz Bachs, a Madrid-based partner of the banking regulatory practice at Allen & Overy LLP.
The shift on banking strategy follows budget chief Olli Rehn’s signal last month that he’s ready to ease Spanish budget-deficit targets to ease the economic slump.
Simon O’Connor, a spokesman for Rehn, referred to his Feb. 4 statement, in which he said that “important decisions have been taken to reinforce the supervision and regulation of the sector.”
Bank of Spain
A Madrid-based press officer at Bank of Spain, who asked not to be identified in line with policy, declined to comment. A press official at the Economy Ministry referred questions to Bank of Spain officials.
Officials are trying to stitch together the continent’s banking markets under ECB oversight as a bulwark against future shocks as Germany shies away from backstopping Spanish lenders that racked up 180 billion euros ($241 billion) of toxic assets during the real estate crash.
The Spanish government has spent about 40 billion euros from an EU bailout package cleaning up the banks. Bad loans as a proportion of total lending at Spanish banks jumped to a record 11.38 percent.
Spain won’t need to propose further measures for lenders to cap their exposure to risky activities because the ECB, which will take over the supervision of euro area banks in 2014, will enforce continent-wide rules, said the people. The Bank of Spain will continue assessing Spain’s banking provision and risk-management framework and will pass on its conclusions to the ECB, one of the people said.
The EU is working out how to apply the latest version of the Basel banking rules that will harmonize the capital and provision charges across the continent as the ECB takes over supervision. The region is weighing a Jan. 1, 2014, date for the gradual phase-in of Basel capital rules, one year later than initially expected.
“We can’t afford going on our own with separate legislations,” ECB President Mario Draghi said at a Feb. 7 press conference. “Eventually we’ll have to converge on one rule for the euro area and possibly for the union. This is in the interests of everybody.”
Spain got an EU bailout of as much as 100 billion euros to restructure its financial sector, saddled with bad real estate loans after a decade-long boom collapsed. Under the conditions, the country was committed to bolster its regulation and banking supervision.
Spain increased the provisions lenders need to set aside twice last year, forcing banks like Popular to cut shareholders’ dividends and weaker lenders led by Bankia were forced to take a bailout from taxpayers.