Spain Limits Size of Real Estate ‘Bad Bank’ to 90 Billion Euros

Spain Limits Size of Real Estate ‘Bad Bank’ to 90 Billion Euros
Sale and rental signs sit in the windows of a new residential apartment block in Madrid. Photographer: Angel Navarrete/Bloomberg

Spain limited the size of its so-called bad bank to house the soured real estate assets of lenders that take state aid to 90 billion euros ($118.2 billion), an Economy Ministry official said.

The eventual size of the vehicle, set to be operating by the end of November, will probably be well below that figure, the official, who spoke on condition of anonymity, told reporters in Madrid today. Spain’s bank rescue fund will also be able to make lenders transfer other doubtful assets, such as consumer loans or mortgages, he said.

Spain is setting up a bad bank, a mechanism also used in countries such as Ireland, to help lenders shed assets such as soured real estate that consume capital in a bid to create conditions for future loan growth. The creation of the vehicle is a condition of a European bailout of as much as 100 billion euros for Spain’s banking industry agreed to in July. The government is seeking to purge about 180 billion euros of bad assets linked to real estate that the Bank of Spain says are lying on the balance sheets of lenders.

Banks that take state aid will have to transfer to the bad bank foreclosed real estate assets worth more than 100,000 euros, real estate and builder loans of over 250,000 euros and controlling stakes in property firms, the official said. The government will aim to pass a decree to regulate the bad bank on Nov. 16, he said.

Transfer Valuations

The Bank of Spain will fix transfer valuations for assets based on the stress test of Spanish lenders carried out by Oliver Wyman and published on Sept. 28. It can apply discounts as necessary, the official said. Shareholders in the bad bank, to be known by its Spanish acronym SAREB, can include banks, insurers and investment funds, he said, and private investors will have majority ownership.

The government may also seek investors for real estate through the creation of funds to hold different types of assets, said the official. Bonds issued by SAREB will have a government guarantee, he said.

Spanish Economy Minister Luis de Guindos pushed through decrees in February and March that will make lenders recognize a total of 84 billion euros of losses on real estate assets by making them provision more aggressively to cover declines in their value. De Guindos told Spain’s Parliament on Oct. 3 that he wanted the bad bank, which will function for as long as 15 years, to drive down house prices.

Some lenders are stepping up efforts to dispose of real estate assets before the bad bank comes into being.

Banco Sabadell SA, a Catalan lender, boosted sales of its properties by 56 percent in the first half of the year and this week began applying additional 25 percent discounts to 15,000 properties on its books. Bankia SA, a nationalized Spanish lender, said today it would put 1,100 properties, including some owned by developers, on sale at auction with discounts of 30 percent to 60 percent.

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