Spain’s Finance Minister Luis de Guindos unveiled new rules today designed to sweep worthless property off its banks’ balance sheets, Reuters reported. The cabinet will approve the plan on Friday.
According to the Wall Street Journal:
The balance-sheet cleanup seeks to give investors a more positive view of Spanish banks and make it easier for them to finance themselves on international markets. The idea is that if that happens, banks will, in turn, be able to make more loans.
Spanish banks currently have some 176 billion euros worth of troubled real-estate assets on their books, and the government is raising the amount of capital it requires banks to set aside to cover potential losses on such assets, the Wall Street Journal reported.
For example, banks will be required to reserve 80 percent of the book value of undeveloped land, up from 31 percent currently, and to set aside 35 percent of the value of new homes, up from 25 percent, the Wall Street Journal reported.
The new rules will encourage banks to unload unsold homes that they’ve been holding onto while prices are low, de Guindos said, according to the Wall Street Journal.
In total, Spain's banks will be obliged to set aside 50 billion euros or $65.7 billion for problematic property assets, the New York Times reported. Banks will get one year to set aside the funds, unless they have recently merged or are planning to merge, the New York Times reported.
To encourage Spain’s banks to consolidate, the government will give merging banks two years to complete the cleanup. Spain will also help merging banks finance their cleanups with loans at market interest rates from its Fund for Orderly Bank Restructuring, the Wall Street Journal reported.
"The Spanish banking system will emerge from this process stronger, with fewer but more solid banks, meaning that Spanish lenders will be among the healthiest in the European Union," the Economy Ministry said in a statement, Reuters reported.
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