Spain creates 120 billion euro bad bank to absorb toxic assets

Spain is to create a “bad bank” to absorb the “toxic assets” of financial entities in Spain, with an expected eventual capitalisation of around 120 billion euros.

The idea is to setup a nationalised entity which will take the bad loans and empty houses off the books of the Spanish banks, allowing these banks to free up resources and improve their balance books.

The million odd homes estimated to be owned by Spanish banks will slowly be sold off to this entity, which will then hang onto them and then hopefully sell them off in the future.

Money generated from these sales will then go towards cancelling the bad debts and anything left over is returned to the public purse. The properties will be sold off at “realistic market price” plus 10%.

According to Luis de Guindos, the minister of Finance, Spanish banks hold around 180 billion euros of toxic assets, and a further 120 billion euros worth of real estate assets that they simply can’t shift. I believe the difference is that toxic assets are loans that won’t be repaid and half built homes, whilst the real  estate assets are finished properties that are just sitting there.

Banks who have to ask the State for aid will be able to offload their toxic assets which will remove the charges from the finance sheet. It’s a cunning financial way of pumping cash into the banks without actually having to give them “real” cash – the loan is simply transferred from bank to the State. The State buys the loan off the banks and then tries to recoup the loan in the same way that the banks would have. But since the loan is now nationalised it’s not affecting the balance sheet in the same way and can be written off if necessary.

The new FROB has been created with the approval with the EU and was signed into law today. It will have a central committee of nine directors, four appointed by the Bank of Spain and five appointed by the government. It will depend on the Bank of Spain for its regulation, and although it’s being called a “bad bank” it’s not actually a bank, but a state sponsored financial entity.

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