Spain sets up ‘bad bank’ to buy toxic real estate
Bad bank is part of ambitious new banking law Spain’s
conservative government promises will save ailing
finance sector Spain will inject emergency capital into
the country’s biggest ailing bank, Bankia, as it puts into
place reforms to allow loss-making banks to receive
eurozone bailout money.
The move came after Bankia admitted losing more than
€4bn (£3.168bn) in the first half year and as the
conservative government of prime minister Mariano
Rajoy delayed a decision on losses to be absorbed by
small investors in bailed out banks.
The Fund for the Orderly Bank Restructurin (Frob)
said Bankia’s restructuring plan should be ready by
October, allowing eurozone rescue money to arrive in
November. “While the restructuring process is
completed, the Frob intends to inject capital shortly,”
it said. This would be an advance on the eurozone
The Spanish government passed an ambitious
banking law on Friday pledging once more that this
would be the definitive shakeup for its finance sector
that needs up to a €100bn (£80bn) bailout.
“This brings reform of the finance system to its crowning
point,” the deputy prime minister, Soraya Saenz de
Santamaría, said as the government presented its third
reform in six months.
A so-called “bad bank” will swallow large amounts of the
toxic real estate that has brought down several Spanish
banks and threatens several more. The property is left
over from the housing construction bubble that burst in
2008, just as the credit crunch happened, and which lies
at the root of Spain’s double-dip recession and 25%
The bad bank will receive building plots, unfinished
developments and possibly tens of thousands of unsold
homes from developers who went bust or are struggling
to repay loans. It will be expected to sell this stock at a
profit over the next 10 to 15 years. “It will be viable and
will not post losses,” the finance minister, Luis de
The creation of the bad bank – which the government
hoped would be mostly privately financed – was one of
the demands made by the eurozone countries providing
the €100bn loan facility to Spain’s banks.
The law also creates a process for breaking up and winding down
banks, while ensuring that small savers who invested widely in
risky preference shares in banks would bear some of the losses
when they are bailed out.
The decision to use the Frob to inject capital into Bankia rather
than an emergency facility set aside by the eurozone rescue fund,
came as the finance ministry failed to give full details of what
losses would be born by shareholders and small investors who
bought hybrid preference shares in banks that receive eurozone
money. Those losses may now not be made public until after
regional elections in Galicia and the Basque country in October.
De Guindos did not say what price the bad bank would pay for
toxic assets, but promised a transparent system. This should be in
place by December.