Bank Of Spain Tells Lenders To Take 30% Loss Provisions On Foreclosed Real Estate Held For Over Two Years

Tyler Durden's picture

Here comes the latest destabilizing Central Bank "intervention" in Europe. The Bank of Spain, doing what Fed and the Treasury should have done with domestic toxic loans backing worthless real estate, has notified lenders that they should be prepared to set aside much greater loss reserves against assets, "such as real estate, acquired in exchange for bad debts once the holdings have been on their books for more than two years." The staggered loss provision schedule will call for a 10% loss assumption for real estate acquired in foreclosures, 20% for real estate held for more than a year, and 30% for anything held for more than 2 years. Bloomberg reports that Spanish lenders have foreclosed upon property worth nearly €60 billion, which means that very soon Spanish banks, which as we pointed out earlier are already suffering a liquidity crunch as a result of loss of access to Commercial Paper, will have to take an incremental up to €18 billion in asset write-downs, a development which will have a major adverse impact on Spain's banking sector once it funnels through the banking system, and especially once the need for liquidity spikes yet none is found.

From Bloomberg:

The Bank of Spain plans to make lenders set aside more reserves against assets, such as real estate, acquired in exchange for bad debts once the holdings have been on their books for more than two years.

Banks that received property, for instance, from developers unable to pay back their loans, would have to make provisions to take account of a drop in value of at least 30 percent if they keep the assets for more than two years, the regulator said in a statement sent by e-mail.

The regulator is taking steps to force banks to recognize the declining value of real estate after lenders acquired property worth almost 60 billion euros ($73.3 billion) through foreclosures, debt-for-asset swaps or purchases. Banks must immediately provision for a 10 percent drop in value of the assets when they’re acquired and 20 percent after 12 months.

The regulator also wants to impose a new calendar ensuring banks fully provision for bad loans after 12 months, rather than as long as 72 months previously.

At the same time, the Bank of Spain said it would take steps to recognize the value of real-estate guarantees while adjusting their value according to their level of risk. For example, a loan guarantee consisting of a finished home that’s the normal residence of the borrower would carry a 20 percent cut in value, while plots of land would carry a 50 percent reduction.

The proposals will undergo a period of consultation before taking effect. The Bank of Spain said a study of the impact of the change on a sample of banks estimated a 2 percent increase in provisions for 2010, implying a 10 percent average drop in pre-tax profit from the lenders’ domestic business.

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homersimpson's picture

Funny - as soon as this story popped on ZH, the DJI started to tank. Spooky.

knukles's picture

Here here!

Doing exactly what is necessary.  Recognize the losses, take the pain, write it down, impair capital and start afresh.

This is what Japan and the US have NOT done...thereby creating a veritable Zombie Banking system.  And don't have to look any further whatsoever than the Japanese experience to see its impact on the economy.

Cheers for the Spaniards with respect to this one decision.  Betcha the rest of EU doesn't follow, for the impairment of deeply entrenched political motivations will not allow the Power Elite to in essence, Admit thier faults of the Past and Move Forward.  

(Continued to take inventory and when we were wrong admitted it.) 

heyligen's picture

Admit our Faults? recognize our losses? What the Fed are you talking about?

M.B. Drapier's picture

It's certainly progress. But after Ireland's experience with the NAMA real-estate writedown program, my gut feeling is that these writedowns may turn out to be well short of the real losses.

Traianus Augustus's picture

US banks beaten to the punch again.  I guess they can follow Spain's lead...but they will have to wait until after next quarter years earnings season...

SheepDog-One's picture

What IS 'the real value of real estate'...simply what someone else is willing to pay for it! Time to deflate this world real estate bubble, its ridiculous.

SayTabserb's picture

Odd that the country which gave us tilting at windmills should prove so realistic. Shouldn't we lend them our FASB rules so they can avoid this depressing act of realism? How do you say "extend and pretend" en Espahnyol?

SheepDog-One's picture

All along, all of this printed trillions in stimulus and bailout nonsense has been about this exact thing, refusal of banks to recognize their 'assets' are hyperinflated in valuation! You have to take your losses Wall St sooner or later, because Im sure as hell not going to make up the difference for you!

mikla's picture

We now know what happened:  Conspiracies are too hard to keep going when you keep adding people.

Central banks the world over agreed to defraud their people and print, swallowing and hiding toxic crap from their taxpaying servitude morts.  That is, it was a great plan until you start getting banks that won't play ball.

Of course, the Bank of Spain is in the EU and theoretically can't print overtly.  That's a problem too.  And, officials in Spain know the potential rioters will actually kill the central planners.  That could be considered intimidating to the elites against participating in fraud a-step-too-far.

Who would have thought the fear of the populace would hold the overlords accountable?  Weird.

vote_libertarian_party's picture

Wasn't there a call for a nationwide strike in June for Spain?  Maybe the gvt is trying to prove to it's people "Listen, we have to make major changes, see how bad our banking situation is."

Zeroexperience2010's picture

there is one for Italy, don't know about Spain...

GoldBricker's picture

Maybe also trying to show the markets that it's serious, the way Ireland has done and recently Italy (with its 5% public-pay cut). Better to get out in front of the issue; you'll be unconvincing once you're in a Grecian spiral.

Rogerwilco's picture

People laughed when old man Templeton warned that in a few years they would be able to buy real estate for pennies on the dollar.

101 years and counting's picture

Why doesn't the internation community institute mark to myth accounting?

It has worked so well here.  Banks are making gobs of money, paying themselves hundreds of billions in bonuses, etc.....

Tic tock's picture

That's one central bank that's got stones

carbonmutant's picture

 It'll be interesting to see how successful this plan is.

There are some other countries that could use this model if it works...

RSDallas's picture

They should have started at a 30% haircut and moved from there.  In any event, three cheers for Spain!

Ripped Chunk's picture

Bottom feeders (that want a villa in Spain) unite!!!!

BlackBeard's picture

How do we trade regulators?

Mitchman's picture

Bravo and Ole for Spain!  Tough to believe that their funding costs didn't already reflect what everyone knows about their balance sheets.  

citizen2084's picture

Is this the same Spain that o-bomb-a touted as the economy we should emulate?

So the green economy of the future is not found in Spain? 

My world view is crumbling. My dear leader cannot be wrong.

Mommy, I need my mommy!!





b_thunder's picture

What the f*&^%$  are they doing???   30% haircut?  Haven't they heard about "stress test?"  Just do the test, raise a few bucks euros and no more writedowns!  Don't they understand that they MUST keep the bubble going????



Popo's picture

B..b..but..what about Mark to Magic?

Buck Johnson's picture

Mark to magic, thats a good one.  I don't think Spain and some much of the EU has the ability anymore to keep the game going.  In a ponzi scheme the weakest link is what starts the ball rolling down hill.

M.B. Drapier's picture

a development which will have a major adverse impact on Spain's banking sector once it funnels through the banking system, and especially once the need for liquidity spikes yet none is found

I don't think the ECB is ready to capitulate yet, do you? I wonder if this was co-ordinated in advance with Trichet as part of a confidence-raising manoeuvre, or if Spain is mugging the ECB with a hand-grenade. Of course, if you were to do the latter, you'd first want to merge as many banks as possible, in order to maximise the systemic risk...

Privatus's picture

Hey Reggie! Time to upgrade to an Abramovich-class yacht.

Josephine29's picture

This crisis in Spain seems to go on and on. I was reading about the three new rule changes by the Bank of Spain on the notayesmanseconomics web blog earlier. Added to it is BBVAs failure to renew some 1 billion Euros of commercial paper borrowing in the US and things appear to be deteriorating in Spain...