Spain ‘Bad Bank’ to Drive Down Home Prices as Banks Invest

Spain wants banks, insurers and other investors to control its so-called bad bank, a vehicle that will drive down house prices, Economy Minister Luis de Guindos said.

“The bad bank is going to acquire assets at very conservative prices, and I believe it’s going to make the real estate market more dynamic in Spain and it is going to put homes on the market at lower prices,” de Guindos told a parliamentary committee in Madrid today. Improved access to housing is “absolutely the will of the government,” he said.

Spain is setting up a bad bank, a mechanism also used in countries such as Ireland, to house the real estate of lenders to help shed assets that consume capital and to create conditions for loan growth. The creation of the vehicle follows the publication on Sept. 28 of independent stress tests that showed seven Spanish lenders had a capital deficit of 59.3 billion euros ($76.6 billion) in an adverse scenario.

Private investors will hold at least 55 percent of the bad bank’s equity and subordinated debt, de Guindos told Parliament. Nationalized banks, including Bankia group, will be the first to move assets to the bad bank starting in December, he said.

“The transfer price is linked to the real economic value of the assets and will be established through a thorough revision of their quality,” de Guindos said. “This price will ensure the profitability of the company and will make possible the incorporation of private investors.”

‘Conservative’ Valuations

De Guindos said the bad bank would take primarily assets linked to lending to property developers, including foreclosed properties. Other types of assets may be moved to the bad bank if they deteriorate sufficiently, he said.

“Prices must take into account prices today and in 15 years,” said de Guindos. “The prices will be conservative so that in each segment the bad bank is profitable.”

Valuations at which assets are transferred to the bad bank are important because if they are too high, investors may be unwilling to take part. Banks may have to cover more losses if the valuation levels trigger greater provisioning needs.

Spanish home prices fell 14.4 percent in the second quarter from the same period a year earlier, the National Statistics Institute said Sept. 14. Home prices have dropped 32.4 percent since a December 2007 peak, according to separate data from Tasaciones Inmobiliarias, Spain’s largest home appraiser.

‘Problematic Assets’

“The key to this is the price because the problem is that if the price is very cheap you are going to pull to earth the prices of the houses,” Maria Dolores Dancausa, chief executive officer of Madrid-based Bankinter SA, said in comments yesterday to broadcaster Antena 3 that were made available by the lender. “If it’s a very high price, you’re paying too much to these lenders with these problematic assets.”

The creation of the bad bank is a condition, along with the stress tests, of Spain’s request for as much as 100 billion euros of external aid for its financial system made in June.

Prime Minister Mariano Rajoy is still weighing the terms of a Sept. 6 proposal by the European Central Bank to buy bonds of cash-strapped nations, including Spain. He said yesterday that a bailout request wasn’t imminent.

The bad bank will pay lenders that transfer assets with debt that they can use as collateral for loans from the ECB, de Guindos told Parliament.

There will also be a tranche of equity made up of capital and subordinated debt bought by the government’s bank rescue fund and private investment funds, he said. That tranche will amount to 10 percent of the company’s assets, he said.

The bad bank won’t take real estate assets valued at less than 100,000 euros or loans of less than 200,000 euros, de Guindos said.

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