Newspaper article International Herald Tribune

With Eye on Rescue Funds, Spain Will Create 'Bad Bank'

Newspaper article International Herald Tribune

With Eye on Rescue Funds, Spain Will Create 'Bad Bank'

Article excerpt

The bank is expected to absorb the most troubled real estate assets of the country's financial institutions.

The Spanish government on Friday approved the creation of a so- called bad bank to absorb the most troubled real estate assets of the country's financial institutions, helping to clear the way for Madrid to receive European rescue money for Spain's banking industry.

The move is meant not only to let Spanish banks eventually begin to receive money from the EUR 100 billion, or $126 billion, reserve that European finance ministers have approved, but also to restore market confidence in the country's banking system. Spanish banks have been having problems borrowing money, even as depositors withdraw money at a rising pace and move it to foreign banks.

Underscoring that worrying trend, the Bank of Spain reported on Friday that the country had sustained a net capital outflow of EUR 56.6 billion in June, up 40 percent from May.

That raised the capital outflow in the first half of this year to EUR 220 billion, which is equivalent to about a fifth of Spain's gross domestic product.

The banking changes were adopted by decree Friday by the cabinet of the Spanish prime minister, Mariano Rajoy. The changes also give the government's banking agency, known as the Frob, much greater powers to revamp rescued banks, as well as to limit the salaries of their top executives. Under the new rules, senior management as well as board directors of rescued banks will have their annual salaries capped at EUR 500,000.

In the past two years, some of the directors of collapsed savings banks have walked away with multimillion-euro compensation packages, adding to the public's resentment.

And yet, other details of the banking overhaul still need to be worked out. One open question is what value will be assigned to the assets that banks are now expected to transfer to the bad bank before the end of the year. Spanish banks hold an estimated EUR 180 billion in property loans that are in or near default.

But the Spanish economy minister, Luis de Guindos, voiced confidence on Friday that the bad bank would be able to sell the problem real estate assets within 15 years. …

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