Government wants to limit size of bad bank to a maximum of 90 billion euros

The bad bank the government is setting up puts a limit on the amount of toxic assets to be absorbed from the country’s lenders at 85-90 billion euros, Economy Ministry sources said Wednesday.

The administration plans to approve a decree on November 16 on the establishment of the bad bank with a view to it being effective on November 19. It is opening the draft law to public consultation as of Wednesday through to October 25.

The text establishes that apart from toxic assets deriving from lenders’ exposure to the moribund real estate sector, the Orderly Bank Restructuring Fund (FROB), which operates under the auspices of the Bank of Spain, can also order loans to consumers and small to midsized companies, as well as mortgages, to be transferred to the bad bank if their quality is sufficiently deteriorated so as to pose a threat to the viability of the financial institution in question.

The bad bank will go under the formal name of Banking Restructuring Asset Management Corporation (SAREB). The draft decree states that SAREB will be in existence for no more than 15 years.

SAREB’s shareholders may include the FROB, both national and foreign banks, insurers, investment, pension and hedge funds, mutual guarantee schemes and the European Investment Bank. The decree puts a cap on state participation in SAREB of 50 percent.

SAREB’s board will be made up of a minimum of five and a maximum of 15 members, who must have of five years’ experience in top management in finance or real estate management. At least a third of members must be independent. SAREB will publish a half-yearly report on its activities, which will be posted on its website.

The minimum value for property units to be transferred to the bad bank has been set at 100,000 euros and at 250,000 euros for loans in order not to over-burden the task of the bank in offloading these assets.