Spain acts to help lenders
Spain's central bank has bowed to pressure and relaxed provisioning rules for lenders in a move that could help some banks avoid losses next year and allow others to strengthen their capital ratios.
The Bank of Spain on Thursday confirmed that it had advised all banks that they would no longer have to set aside the full value of high-risk mortgage loans - those for more than 80 per cent of a property's value - after two years of arrears.
Instead, they would only have to provision for the difference between the value of the loan and that of 70 per cent of the mortgaged property. In the case of a mortgage for the total cost of a new home, for example, banks would provision for 30 per cent of the property's value. But the central bank also warned banks to "update" property valuations.
Although the regulator has long recognised the "residual value" of mortgaged properties at 70 per cent, its schedule of provisioning for riskier loans in effect forced lenders to assume that a 100 per cent mortgage was irrecoverable after two years of non-payment, against six years for most other credits.
The assumption was typical of a regulator whose tough stance on off-balance sheet investment vehicles saved Spanish lenders from the worst effects of the US subprime crisis. Its insistence on precautionary bad loan provisions has also allowed them to withstand the collapse of the domestic housing market about two years ago.
But the non-performing loan rate for the financial system has almost quadrupled in the past year, to 4.27 per cent of total assets, and is much higher at some of the caja, or weaker savings and loans banks.
Recent estimates put the value of property repossessed or swapped for debt by Spanish banks at about €16bn ($22bn, £14bn).
In April, the Bank of Spain took over a caja based in the Castilla La Mancha region. Another two recently announced they were in merger talks. The government, meanwhile, is setting up a bank restructuring fund which it says will provide up to €90bn for rescue operations. Lenders have welcomed the new provisioning criteria.
[Source: BY Mark Mulligan in Madrid, Financial Times, London, 17Jul09]
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