Spanish practices

19 July 2012 By Fiona Maharg-Bravo, Hugo Dixon Follow @hugodixon

Spanish banks receiving state aid will be forced to sell dud assets to a bad bank. That’s a good idea. But how will Madrid finance what could be a 100 billion euro bill and keep it off balance sheet? That’s where creative finance could come in. Ireland provides a model.

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Spanish banks that receive state support will transfer impaired assets to an external Asset Management Company (AMC) by the year end, according to a draft memorandum to be agreed by Spain and the Eurogroup by July 20. Banks that need less than 2 percent of their risk-weighted assets can opt out if other means of moving impaired assets off balance sheet are “less costly”.
Assets will be transferred from the banks to the AMC at the “real long-term economic value”, crystallising losses for the banks, according to the memorandum. Spain’s restructuring fund, FROB, will contribute cash and/or high quality assets in return for a certain percentage of the AMC. The banks will receive a “suitably small” stake in the AMC, bonds issued by the AMC and guaranteed by the state, or cash and/or high quality securities.
According to an EFSF document on the Dutch finance ministry’s website, up to 25 billion euros of the Spanish bank bailout will be used for the bad bank. According to the document, FROB may contribute cash or high-quality securities to the AMC, which could be kept by the AMC or paid to banks for the assets received.

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