Spain's government has approved the creation of a so-called "bad bank" that will take over most of the nation's worst property assets and defaulted loans, reported Reuters over the weekend, in an effort to secure some much-needed eurozone bailout money for the nation's loss-making banks and to reform a banking industry devastated by a property crash.
The move is Spain's fifth attempt in three years to overhaul its financial sector; and has been designed to not only let Spanish banks eventually begin to receive money from a 100 billion euro ($126 billion) European reserve, but to also restore market confidence in the country's banking system.
"This brings reform of the finance system to its crowning point," added Deputy Prime Minister Soraya Saenz de Santamaría on Friday, with the nation's Fund for the Orderly Bank Restructuring (FROB) also set to inject capital into the country's biggest ailing bank, Bankia, in order to meet the demands of the European rescue of the financial sector.
According to Reuters, the bad bank will begin operating in late November or early December and will exist for at least 10 and 15 years, during which time it will "not have any impact on the taxpayer," said Economy Minister Luis de Guindos.
The aim is for private investors to take a majority stake in the 'bad bank' that would take on real estate assets, added de Guindos, who also announced new rules allowing for swift government takeovers of problem banks, salary caps for executives at state-controlled banks, as well as rules that will stop banks selling complex securities to unsophisticated investors.
"The reform is a step in the right direction, but there is still much to do," told Carlos Vergara, of the IESE business school, toThe Guardian.
"The key is at what price these [toxic] assets are bought," added Jordi Fabregat of the Esade business school. "If it is too high, then the Spanish people will end up paying for it."
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Presently, Spanish banks are saddled with over 184 billion euros ($231 billion) worth of toxic assets. de Guindos did not say what price the bad bank would pay for the toxic assets, but promised a transparent system nonetheless.
"The assets that will be transferred will not be that bad," he later said at a news conference, cited by the New York Times.
According to Reuters, the Bank of Spain will eventually determine the prices for assets transferred to the 'bad bank'. Analysts say that the prices cannot be so low that they cripple already weak banks, yet still must be low enough so they can be sold at a profit at some point in the future.