Spain will empower its banking authorities to swoop in on lenders that appear to be heading to trouble and if necessary liquidate them, Spanish media said Thursday.
The new legislation, reportedly to be passed by government ministers either this Friday or on August 31, was leaked to the leading daily El Pais and the business paper Expansion.
Aimed at preventing new banking catastrophes, it gives the Bank of Spain and the state-backed Fund for Orderly Bank Restructuring (FROB) new powers to intervene before crises erupt.
Spain’s eurozone partners agreed in June to lend up to 100 billion euros ($124 billion) to salvage the nation’s banks, buckling under record bad loans built up since a 2008 property crash.
Eurozone powers agreed the loan in return for a list of conditions drawn up in a June 20 memorandum of understanding. The new laws aim to comply with those demands.
The Bank of Spain could intervene early even in a bank that complies with liquidity and solvency requirements, if there is objective evidence that it cannot continue to meet those standards, the papers said.
The central bank would have extensive powers to demand that the suspect bank provide an action plan within 10 days, agree a debt restructuring plan with creditors or fire the management.
The FROB would be in charge of the restructuring or “orderly resolution” of banks, with powers to liquidate those entities it considers to be non-viable and unable to repay public money in a reasonable time frame.
According to Expansion, already nationalised banks would be first in line for the new treatement, except for those whose liquidation would present “systemic risk”, an allusion to Bankia.
Non-viable banks may be placed in bankruptcy or subjected to a resolution plan by the FROB. A FROB resolution plan would have to include a valuation of the lender, the method to be used to dispose of the bank, and the financing required by the Deposit Guarantee Fund.
The FROB has three options to dispose of a bank, said Expansion: Sell the business; transfer its assets and liabilities to a “bridge bank”; or cede them to an asset management company.
The new legislation foresees the creation of a “bad bank” to pool troubled banks’ bad assets and also a “bridge bank” to manage healthy assets for up to five years until a buyer can be found, the reports said. Whether a bank is restructured or liquidated, investors in the lender would suffer, the reports said.
Shareholders and subordinated creditors would have to suffer losses in case of restructuring or liquidations under the new law, Expansion said, complying with a condition set by the eurozone.
Such a requirement would hurt many ordinary customers who were pursuaded by their banks to invest in preference shares without fully understanding the risks, Expansion said.
Three nationalised banks — Bankia, CatalunyaCaixa and NovaGalicia — alone had 150,000 such customers with a total investment of 4.5 billon euros in preference shares, Expansion said.
