–Banks That Can’t Raise The Money Can Borrow It At 10% From Government
–Government To Appoint Independent Evaluators To Study Bank Assets

PARIS (MNI) – Spain’s government today approved a new reform of the
country’s banking sector that will require financial institutions to
raise up to E30 billion in new provisions against potential losses on
real estate loans, Economy Minister Luis de Guindos said Friday
afternoon following a cabinet meeting.

Banks unable to raise the necessary funds can borrow them from the
government at an interest rate of 10%. The borrowing would be in the
form of convertible bonds issued by Spain’s bank restructuring agency
(FROB). The bonds would be convertible to equity if the banks ran into
subsequent difficulty – thus increasing the government’s stake in the
Spanish banking sector, which is buckling under the weight of loans to a
property sector that has gone bust since the onset of the financial
crisis.

On Thursday, the government took a 45% stake in troubled
BFA-Bankia, the country’s fourth largest banking group. It expects to
inject additional capital of at least E7 billion into that bank, also in
the form of convertible bonds that could ultimately make it a majority
owner.

The reform announced today also requires banks to transfer their
holdings of repossessed real estate by the end of this year to separate
entities for eventual liquidation. Before that, all banks will have
their books examined by independent evaluators to determine the extent
of their toxic assets. The government will name two companies to conduct
the evaluations.

“Without absolute certainty about the solvency of the banking
sector, the economic recovery is much more difficult,” de Guindos told
reporters in Madrid after the cabinet meeting. He said his goal was to
achieve a “total absence of doubt” about the health of the sector.

Today’s reform targets an estimated E123 billion in supposedly
non-problematic loans. It requires banks to sharply increase their
provisions against those assets, from 7% to 30%, in order to protect
against potential future problems. The new requirement amounts to an
additional E28 to E30 billion in provisions, on top of the E54 billion
that the government had previously required to be set aside against
loans that were mostly considered to be “toxic.”

The idea behind bolstering provisions against theoretically healthy
loans is to address a warning issued last month by the International
Monetary Fund about “hidden delinquency” on the books of some Spanish
banks, the daily El Pais reported.

Today’s reform plan must be approved by the Bank of Spain within 15
days.

–Paris newsroom, +331-42-71-55-40; bwolfson@marketnews.com

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