Cabinet approves financial reform that tightens controls on lenders

The Cabinet on Friday approved a decree that Economy Minister Luis de Guindos described as an “authentic reform” because it incorporates Brussels’ conditions for a bank bailout of up to 100 billion euros.

The new law creates a bad bank that will absorb real estate toxic assets that are weighing on struggling lenders and sell them to private investors in a period of up to 15 years without incurring losses. De Guindos said the bad bank will not cost taxpayers any money and help banks clean up their balance sheets.

Commercial and savings banks are holding around 180 billion euros’ worth of problematic real estate assets, according to the Bank of Spain.

Deputy Prime Minister Soraya Sáenz de Santamaría said the new law approved by the Cabinet will serve to “dynamize the digestion” of Spain’s real estate system, which remains blocked by the property crash.

“If we’d had instruments like these before, this banking crisis would have been addressed differently, although now we need to look to the future,” added De Guindos.

The bad bank will have broad powers to buy and sell all kinds of assets and issue debt. It will also be exempt from most of the controls and conditions that govern other asset managers, according to the draft law sent to Brussels, to which EL PAÍS had access.

The decree also includes the obligation for lenders to provide better information for clients interested in subordinate debt or preference shares and reserving a portion of these shares for professional investors. The law establishes minimum investment thresholds of 25,000 euros for listed companies and 100,000 euros for non-listed ones.

The law also establishes ways to liquidate failed banks and permits early intervention of lenders even if they still meet solvency criteria.

Bankia, a symbol of the Spanish savings bank debacle, announced losses of nearly 4.45 billion euros in the first half of 2012, compared with profits of 205 posted in the same period the year before. The Bank of Spain and the Economy Ministry, which run the Orderly Bank Restructuring Fund (FROB), have decided not to wait for the first tranche of European money and will advance Bankia money ahead of time.

Besides the devaluating real estate on their books, Spanish banks are now facing a new problem: capital flight reached close to 220 billion euros between January and June of this year, as investors take their money elsewhere in case rumors about a return to the peseta and a devaluation become true.

Meanwhile, the government announced that the state’s deficit reached 48.5 billion euros in the first seven months of the year, or 4.62 percent of GDP, already above the target for the full year.