• Coverages for real estate assets classified as non-problematic are expanded
  • The process will require additional provisions for some 30,000 million euros
  • All the provisions will cover 45% of the assets linked to the developer sector

The Council of Ministers today approved a Royal Decree-Law that increases the generic provision of the portfolio of loans and non-problematic real estate assets of banks (123,000 million euros), which will mean around 30,000 million euros of new provisions that will have to be done before December 31 of this year. These write-downs join the 54,000 million euros in write-downs already carried out after the approval of the Royal Decree-Law on financial reform in February, so that the total write-down carried out will be close to 84,000 million euros.

The aim is to advance and deepen the consolidation of the Spanish financial sector with the aim of recovering confidence and guaranteeing solvency in a difficult environment for the Spanish economy. The new measures preventively address new provisions for assets linked to developer credit that are not yet considered problematic. It is a second phase of the financial reform undertaken last February and the final objective is for banks' balance sheets to be more healthy and protected against promoter risk, so that they can dedicate themselves to their main activity and return to grant loans to families and companies .

With the norm approved today, the banking entities will have to increase the coverage with provisions of their land to the current payment (that add 25,000 million euros) from 7% to 52%; that of ongoing promotions (16,000 million euros) from 7% to 29%; that of finished houses (61,000 million euros) from 7% to 14%; and that of those loans without real guarantee (18,000 million euros) from 7% to 52%. Banks must present their plans to meet the new requirements before the Bank of Spain before June 11.

Those entities that, after this write-down, present a deficit of own resources or principal capital in accordance with current regulations, will have to be capitalized in the market or, failing that, may request the FROB to subscribe for contingent convertible bonds (“coco”) or of capital to strengthen its balance sheet. In the case of going to the FROB it is not about any type of public aid or subsidy. The "coco" will pay the FROB a market interest rate, which will be approximately twice the cost of financing the Treasury over the same term (five years). Entities that resort to the FROB must present a restructuring plan.

The objective of the measure is to place the financial sector in a position to face a hypothetical worsening of the situation of its real estate portfolio without affecting its solvency. In other words, provisions are anticipated for a possible default on these healthy loans, according to the stress tests carried out. The new effort in provisions places Spain among the most demanding countries in Europe in this area.

Financial institutions will be required to relocate their portfolio of foreclosed assets in an independently managed company before December 31, 2012 (December 31, 2013 for those that are undergoing a merger process), in order to delimit clearly and precisely the promoter risk of the financial sector.

With these two measures, the Government begins the second phase of the financial reform. In the first, the Executive considerably raised the provisions and capital of the problematic real estate assets (184,000 million euros), which will have to be carried out this year. The entities presented their sanitation plans to the supervisory authorities on March 30 and must detail their integration-based sanitation plans before June 30.

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