Banks to receive state funding to recapitalize

The Spanish government has started to explain to the country's banks what its planned reform of the sector will consist of, banking sources said Wednesday.

The Economy Ministry will require banks not only to increase provisions for potential losses from real estate assets on their books, but also to do likewise for part of the loans they have granted to the property sector. The latter will consist of generic provisions of 7 percent of the value of those loans.

In parallel, as part of its desire to see further consolidation in the sector, the government will provide an incentive for banks to tie up in the shape of a two-year instead of a one-year deadline to clean up their balance sheets. At the same time, merging banks will be able to tap the Orderly Bank Restructuring Fund (FROB) to facilitate tie-ups. Such funding will take the form of a loan, but banks will be allowed to count this as capital.

The plan is similar to that executed through the FROB in an earlier round of consolidation, which saw the number of players in the savings bank sector reduced from 45 to about a dozen. A number of those savings banks also set up commercial banking arms to absorb their core business activities. The FROB will acquire preference shares in the banks, which can be repaid in a number of years and will carry an annual interest rate of around 8 percent.

The ministry will require banks to make provisions for possible losses on holdings of land and real estate developments that have been halted, of up to 80 percent of the value of those assets. Provisions for foreclosed apartments will entail a minimum coverage of between 35 and 40 percent. As a result, total coverage for all real estate assets will amount to 50 percent of their value, the level of provisioning that sector leader Banco Santander on Tuesday said it had achieved.