Spain Ruling Helps Banks Pad Capital Buffers Before ECB Review

Spain passed rules that will allow the country’s banks to keep counting 30 billion euros ($40.8 billion) of deferred tax assets as capital, easing the burden on lenders as they face tougher rules.

About 60 percent of the 50 billion euros of DTAs banks have amassed are included, Economy Minister Luis de Guindos told reporters in Madrid after a weekly cabinet meeting today. The change won’t affect the government’s debt or deficit in the short or medium term, he said.

Spanish banks have been pushing the government to shield them from new financial regulations known as Basel III that will force banks to deduct these assets from capital over time. The International Monetary Fund said last week it supported steps to convert some DTAs into claims backed by the government as long as Spain also makes banks take further steps to bolster capital by selling shares or skipping cash dividends.

“Under Basel II, these DTAs were capital of the highest quality, but under Basel III that’s not the case,” said de Guindos. “If we hadn’t made this change to company tax, Spanish banks would have been at a disadvantage to their competitors.”

DTAs arise from carrying over losses and may be used by companies to reduce future tax expenses. The large amount held by Spain’s banks mostly stems from losses booked in 2012 as the government forced them to clean up their real estate. Today’s change is almost identical to one carried out by Italy, de Guindos said.

‘Not Enough’

“It’s a positive but not enough to mitigate all other concerns I have about the Spanish bank industry such as asset quality and the outlook for the economy,” Neil Smith, an analyst at Bankhause Lampe in Dusseldorf, Germany, said in a phone interview.

The changes come as the European Central Bank prepares to assume oversight of euro-area lenders late next year. The ECB will carry out a three-part review of banks’ balance sheets before taking over as supervisor.

Financial markets have been pressuring banks to meet their capital ratios under Basel III earlier than required by its timetable, Jose Ignacio Goirigolzarri, chairman of Bankia SA, said at an event in Madrid yesterday. A solution for DTAs is good news for banks and will help their share prices, even though Bankia could comfortably meet all regulatory requirements, he said.

Wider Changes

Bankia, which was bailed out last year, is one of the lenders that most benefits from a change to the rules because it had 8.9 billion euros of DTAs in 2012, compared with 6.9 billion euros for CaixaBank SA, 5.6 billion euros for Banco Sabadell SA and 7.4 billion euros in Spain for Banco Bilbao Vizcaya Argentaria SA, according to a July report by Keefe, Bruyette and Woods.

Bankia fell 1.5 percent in Madrid trading to 97 cents. Banco Santander SA, the largest Spanish bank, and Sabadell fell 0.6 percent.

Spain also implemented wider changes to adapt its banking rules to European regulations, said de Guindos. The country will limit bonuses for senior executives to 100 percent of their salary, unless shareholders decide otherwise. In that case, bonus payments can’t exceed 200 percent of fixed pay, the Economy Ministry said in a statement.

Bank chairmen also won’t be able to simultaneously serve as chief executive officer unless the Bank of Spain allows it in exceptional circumstances, the ministry said.

(Updates with analyst comment from sixth paragraph.)
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