The creation of a separate asset resolution entity was an idea proposed by foreign specialists. Their proposals were initially contested and resisted by the Spanish authorities but later accepted as being the appropriate response to the crisis [5]
Sareb was established as a condition set by the European Union in exchange for aid of up to 100 billion euros to the Spanish banking sector.[6] It was designed and developed from the work of three independent specialists: Oliver Wyman, BlackRock and European Resolution Capital (ERC).
Sareb functions as a bad bank,[7] acquiring property development loans from Spanish banks in return for government bonds, primarily with a view to improving the availability of credit in the economy. Over the 15 years Sareb has to dispose of all of its assets, its main objective will be to maximise its profitability.[7] However, it does not possess a banking license. Sareb enjoys legal advantages which do not apply to other Spanish limited liability companies (Spanish: Sociedad Anónima), such as status as a preferential creditor for subordinated debt over other creditors.[8] The Spanish central bank is to establish the exact price of assets transferred to the institution by Spanish banks.[6]
History
On 31 August 2012 the Spanish government approved a Royal Decree-Law creating a bad bank. The law established that the FROB had the administrative power to oblige financial institutions to transfer to an asset management company (Sareb) certain assets: particularly impaired assets and assets which could be considered a threat to the viability of an institution. The aim is to remove the assets from the balance sheets of the institutions to allow them to be independently managed. The asset management company may issues bonds and securities recognising or giving rise to debt. The law establishes that the assets are to be transferred to the asset management company without any need for consent from third parties. Prior to transfer the Bank of Spain will determine the value of the assets based on appraisal reports.
For several years prior to 2008, the Spanish authorities had decided to ignore the problems associated with the cajas. These problems were essentially due to easy access at low borrowing costs which facilitated uneconomic lending practices, overly encouraged by local and regional governments. This provisional of 'loose money' fueled the growth of the property and constructions sectors of the economy; eventually leading to an unsustainable overexposure to these sectors at classic speculative bubble. The scale of impaired and bad debts were masked by the initial growth and then exposed by the effects of The combination of the global Credit Crunch and then Sovereign Crisis of the Eurozone which revealed these domestic problems and the scale threatened the Spanish economy. The Spanish authorities and successive governments refused to tackle the widespread and increasing insolvency issue. Piecemeal actions were taken as individual cajas entered insolvency and administration under FROB (such as Unicam) at huge costs to taxpayers or were forced by mergers into non-viable entities, such as Bankia (which itself eventually collapsed).
The Spanish authorities changed position as the two-phase refinancing failed. The weaker banks remained exposed.[9] Three specialist firms provided assistance to the Spanish authorities.
A bad bank and associated asset management structure was designed and put in place to resolve the rapidly increasing book of toxic property loan by establishing price and a process of resolution. In addition, a set of policies were enacted between competing ministries as well as the appointment of a new governor-general for the central bank (Banca de Espana).
This initiative was already being demanded by housing developers enable a flow of credit from financial institutions. This measure is considered fundamental by the People's Party government to the process of restructuring the Spanish banking system and reactivating the country's real estate market. This assumption failed since the flow of credit has already not recovered as of 2017, more bank failures have occurred, and government's financial aid to banks have mounted since then.
Structure
Investors and shareholders
Capital contributions and subordinated debt by shareholders and investors (February 2013, millions of euros)[10]
Sareb aims to make a profit of 15% over its 15-year life, focusing on selling packages of assets at the best possible time to maximise their value.[21]
Sareb manages real estate assets with a value of 40 billion euros, although they were recognised in the accounts of the transferring entities at 80 billion euros, implying impairment of 53%. At the start of 2013 the total assets under management rose to 55 billion euros following the acquisition of assets from 'Group 2' banks:[citation needed]Liberbank, CEISS, Banco Mare Nostrum and Caja3.
ECB comments
On December 14, 2012, the European Central Bank (ECB) sent a report on Sareb, signed by its vice president, Vítor Constâncio, to the Spanish Ministry of the Economy[22] in response to a request from the Spanish Secretary of State for Economic Affairs and Business Support for an opinion on the draft Royal Decree on the legal regime for asset management companies. Although the report was favourable it proposed limitations on dividend payments to ensure payment of the state-guaranteed debt used in the financing of Sareb. The report also warned of potential conflicts of interest at the shareholder banks and favoured vendor financing of assets.[23]
The other point that the ECB focused on was how to facilitate potential purchases.
"The establishment of financing arrangements would greatly facilitate asset disposals by the SAREB. As the SAREB is not a bank, it cannot extend credit to potential buyers to facilitate asset purchases, but will be competing with banks which offer such financing to buyers of foreclosed and distressed assets. The terms of such financing arrangements should be competitive when compared with the terms offered by Spanish banks."
—OPINION OF THE EUROPEAN CENTRAL BANK of 14 December 2012 on asset management companies [22]
The ECB stated that it considered it would be easier to recover the value of the assets from the bad bank if they were grouped and managed by independent specialists and favoured separation of assets as a means to boost the system's credit capacity.
"More generally, by facilitating the transfer of non-performing assets into a separate institution, asset removal schemes such as the SAREB assist participating banks in restructuring their balance sheets, which should, in turn, improve their financial soundness. By facilitating banking sector restructuring and recovery, albeit by transferring risk from the banking sector to the State, such schemes should positively contribute to banks' ability to extend credit and support economic recovery. In addition, the value of the distressed assets may be better recovered when consolidated and managed by independent specialists."
—OPINION OF THE EUROPEAN CENTRAL BANK of 14 December 2012 on asset management companies [22]
In mid-November 2011 BBVA created a unit in which it planned to accumulate 30 billion euros in real estate assets, representing 80% of such assets.[26]
The institution born from the merger of the Galician savings banks created a bad bank with their toxic assets, bringing together 11.15 billion euros of loans, of which 3 billion corresponds to mortgage loans for land and 1.9 billion has no associated mortgage. Following the Bank of Spain's appraisal, which reduced the opening capital from 1.71 billion euros to just 181 million, the former savings bank was left with 6.8% of Novagalicia Banco.[27]
"...Real estate developers insist that the way out of the crisis, for the economy in general, but also for their sector, involves removing toxic assets from banks' balance sheets – valued at 176 billion euros by the Bank of Spain. They favour creating an entity to group these assets, restructure them, and put them back on the market when considered appropriate. The aim would be to get credit and the real economy flowing once again..."
In the opinion of the professor of the University of Valencia Joaquín Maudos, "the creation of a bad bank, by any means, is key to breaking the credit crunch."[29]
Under the Irish model, the banking sector would transfer its assets to the state and receive in exchange government debt which could be used to obtain liquidity from the ECB and thus enable the sector to extend loans. Ireland broke its credit crunch, but many institutions went bankrupt and were nationalised with government debt. Under the German model, the state pays the banking sector the price on their balance sheets, minus any provisions made. In exchange, the sector assumes the risk that it will take some time for assets to return to the prices at which they were bought, with a distant cut-off set beyond which the institutions will assume the drop in value. In this model, the institutions agree to extend as much credit as they receive in aid.
Pedro Pablo Villasante, general secretary of the Spanish Banking Association (Spanish: Asociación Española de Banca) considers that the creation of a bad bank would be viable to assist unviable institutions, on the condition that they would accept to be absorbed by more solvent Spanish or foreign institutions.[30]
The Platform for Nationalisation of Savings Banks (Spanish: Plataforma por la Nacionalización de las Cajas de Ahorro) considers that the new rectifications made by the Spanish government, allowing public funds to injected into financial institutions in exchange for toxic assets, will be beneficial for the banking sector and detrimental for Spanish citizens.[31]
"...Once again we are seeing an 'anything goes' operation to save banking entities using public funds, whilst attempting to cover up the small question of who will end up paying for the party. You don't have to be a genius to see that the bill won't be charged to those responsible for the bankruptcies but rather the general public..."
—Carlos Sánchez Mato.
The first attempt - real estate companies
Luis de Guindos indicated that, since there would be no public money The government won't create a bad bank, or anything of the sort.[32]
Having ruled out the option of a bad bank Mariano Rajoy's government searched for a place where institutions could deposit real estate assets, many of which are covered by provisions, with the intention of selling them in the long term. This vehicle would not be a bad bank because it would not have a financial business. Real estate divisions were not suitable either, as they would be consolidated in balance sheets.
It was decided that banks would transfer their assets following an appraisal.[33]
Theoretically, in being freed of the asset, the financial institution is also freed from the associated risk, and would thus no longer consume capital and would be able to extend loans to customers.
Spain is acting differently from the rest of Europe and the United States. In these areas the bad banks were created first, and then the financial system was recapitalised.[34] The government of José Luis Rodríguez Zapatero and the Bank of Spain believed the financial regulations in place before the crisis would act as a buffer, which did not exist in any other country. The buffer, however, proved insufficient.
The Spanish stock market crash in April 2012 reflected a failure of the reforms implemented by De Guindos to restore confidence in the country's financial sector. The key issue is the price at which the assets are bought and who will assume the loss. The European bailout fund will also need to make a contribution, perhaps of 100,000 million.[35]
The text agreed between Spain and the Eurogroup in the early hours of Tuesday 10 July 2012 included a commitment by the Spanish government to undertake substantial reforms of the country's financial sector. This reform, overseen by the European Central Bank, the European Commission and the International Monetary Fund includes the creation of a bad bank to group all of the toxic real estate assets weighing down banks' balance sheets.[36]
This bad bank will receive funding from the European Union via two different means: a capital injection into the FOBR from the European bailout fund and acceptance by the ECB of the bonds issued as payment for supposedly impaired assets. Spain will thus have an additional 20 to 50 billion euros to finance the bad bank, which will become a vehicle for the government and the financial institutions to group the financial sector's undesirable assets and later sell them.[37]
Any institution that receives EU funds of any sort will be required to transfer its assets to the bad bank. The transfer prices for the assets have yet to be set and the Spanish authorities will submit a proposal at the end of August to create the entity,. which will start operating from November
This article needs to be updated. Please help update this article to reflect recent events or newly available information.(April 2013)
For Spain to receive a bailout of its banking system, 32 short-term conditions have been set. One of these conditions, number 7, refers to the bad bank. At the end of August the governing regulations must be ready, and by November it must be operational:[39][40]
"...7. Prepare a comprehensive blueprint and legislative framework for the establishment and functioning of the AMC. End-August 2012..."
—Condition 7
"...15.Adopt legislation for the establishment and functioning of the AMC in order to make it fully operational by November 2012...."
—Condition 15
The new governor of the Bank of Spain, Luis María Linde, started work immediately, as he stated when appeared in the Congress of Deputies, assuring the house that the possibility of creating a bad bank or toxic asset management company was being studied. The governor of the Bank of Spain stated that he was working on the project but did not have the necessary skills to manage it.[citation needed]
↑ An acronym of Sociedad de Gestión de Activos procedentes de la Reestructuración Bancaria;[1] English: Company for the Management of Assets Proceeding from the Restructuring of the Banking System
The European Central Bank (ECB) is the central component of the Eurosystem and the European System of Central Banks (ESCB) as well as one of seven institutions of the European Union. It is one of the world's most important central banks with a balance sheet total of around 7 trillion.
The Bank of Spain is Spain's central bank and the Spanish member of the Eurosystem and has been the monetary authority for Spain from 1874 to 1998, issuing the Spanish peseta. Since 2014, it has also been Spain's national competent authority within European Banking Supervision. It was originally established by Charles III in Madrid in 1782, as the Banco Nacional de San Carlos, and took its current name in 1856. Its activity is regulated by the Bank of Spain Autonomy Act. The bank doesn't translate its name to English but uses its Spanish name in all English communications.
A non-performing loan (NPL) is a bank loan that is subject to late repayment or is unlikely to be repaid by the borrower in full. Non-performing loans represent a major challenge for the banking sector, as they reduce profitability. They are often claimed to prevent banks from lending more to businesses and consumers, which in turn slows economic growth, although this theory is disputed.
La Caixa, also known as the "La Caixa" Foundation, is a not-for-profit banking foundation based in Spain, with its headquarters in Palma de Mallorca since October 2017.
Caixa Geral de Depósitos (CGD) is a Portuguese state-owned banking corporation, and the largest bank in Portugal, established in Lisbon in 1876.
The Spanish property bubble is the collapsed overshooting part of a long-term price increase of Spanish real estate prices. This long-term price increase has happened in various stages from 1985 up to 2008. The housing bubble can be clearly divided in three periods: 1985–1991, in which the price nearly tripled; 1992–1996, in which the price remained somewhat stable; and 1996–2008, in which prices grew astonishingly again. The 2008–2014 Spanish real estate crisis caused prices to fall. In 2013, Raj Badiani, an economist at IHS Global Insight in London, estimated that the value of residential real estate has dropped more than 30 percent since 2007 and that house prices would fall at least 50 percent from the peak by 2015. Alcidi and Gros note; “If construction were to continue at the still relatively high rate of today, the process of absorption of the bubble would take more than 30 years”.
CaixaBank, S.A., formerly Criteria CaixaCorp, is a Spanish multinational financial services company. CaixaBank is based in Valencia, with operative offices in Barcelona and Madrid. It is Spain's third-largest lender by market value, after Banco Santander and BBVA. CaixaBank has 5,397 branches to serve its 15.8 million customers, and has the most extensive branch network in the Spanish market. It is listed in the Bolsa de Madrid and is part of the IBEX 35.
A zombie bank is a financial institution that has an economic net worth of less than zero but continues to operate because its ability to repay its debts is shored up by implicit or explicit government credit support.
The 2008–2009 Belgian financial crisis is a major financial crisis that hit Belgium from mid-2008 onwards. Two of the country's largest banks – Fortis and Dexia – started to face severe problems, exacerbated by the financial problems hitting other banks around the world. The value of their stocks plunged. The government managed the situation by bailouts, selling off or nationalizing banks, providing bank guarantees and extending the deposit insurance. Eventually Fortis was split into two parts. The Dutch part was nationalized, while the Belgian part was sold to the French bank BNP Paribas. Dexia group was dismantled, Dexia Bank Belgium was nationalized.
A bad bank is a corporate structure which isolates illiquid and high risk assets held by a bank or a financial organisation, or perhaps a group of banks or financial organisations. A bank may accumulate a large portfolio of debts or other financial instruments which unexpectedly become at risk of partial or full default. A large volume of non-performing assets usually make it difficult for the bank to raise capital, for example through sales of bonds. In these circumstances, the bank may wish to segregate its good assets from its bad assets through the creation of a bad bank. The goal of the segregation is to allow investors to assess the bank's financial health with greater certainty. A bad bank might be established by one bank or financial institution as part of a strategy to deal with a difficult financial situation, or by a government or some other official institution as part of an official response to financial problems across a number of institutions in the financial sector.
The 2008–2014 Spanish financial crisis, also known as the Great Recession in Spain or the Great Spanish Depression, began in 2008 during the world 2007–2008 financial crisis. In 2012, it made Spain a late participant in the European sovereign debt crisis when the country was unable to bail out its financial sector and had to apply for a €100 billion rescue package provided by the European Stability Mechanism (ESM).
The European debt crisis, often also referred to as the eurozone crisis or the European sovereign debt crisis, was a multi-year debt crisis that took place in the European Union (EU) from 2009 until the mid to late 2010s. Several eurozone member states were unable to repay or refinance their government debt or to bail out over-indebted banks under their national supervision without the assistance of other eurozone countries, the European Central Bank (ECB), or the International Monetary Fund (IMF).
Bankia was a Spanish financial services company that was formed in December 2010, consolidating the operations of seven regional savings banks, and was partially nationalized by the government of Spain in May 2012 due to the near-collapse of the institution. As of 2017, Bankia was the fourth largest bank in Spain, with total assets of €179.1 billion. In 2021, the bank merged with CaixaBank to create a new entity, initially preserving its original name.
Luis de Guindos Jurado is a Spanish politician serving as Vice-President of the European Central Bank since 2018. He previously served as Spain's Minister of Economy, Industry and Competitiveness from 2011 to 2018.
European Banking Supervision, also known as the Single Supervisory Mechanism (SSM), is the policy framework for the prudential supervision of banks in the euro area. It is centered on the European Central Bank (ECB), whose supervisory arm is referred to as ECB Banking Supervision. EU member states outside of the euro area can also participate on a voluntary basis, as was the case of Bulgaria as of late 2023. European Banking Supervision was established by Regulation 1024/2013 of the Council, also known as the SSM Regulation, which also created its central decision-making body, the ECB Supervisory Board.
ABANCA Corporación Bancaria, S.A. is a Spanish bank based in Galicia. It was created in September in 2011 following the "bankisation" of Novacaixagalicia savings bank. It operates in the autonomous communities of Galicia, Asturias and the province of León, in other parts of Spain and in Portugal, as well as offices in the UK, Germany, France, Switzerland, Brazil, Venezuela, Panama, Mexico and the USA.
The European debt crisis, often also referred to as the eurozone crisis or the European sovereign debt crisis, was a multi-year debt crisis that took place in the European Union (EU) from 2009 until the mid to late 2010s. Several eurozone member states were unable to repay or refinance their government debt or to bail out over-indebted banks under their national supervision without the assistance of other eurozone countries, the European Central Bank (ECB), or the International Monetary Fund (IMF).
Banco Bilbao Vizcaya Argentaria, S.A., better known by its initialism BBVA, is a Spanish multinational financial services company based in Madrid and Bilbao, Spain. It is one of the largest financial institutions in the world, and is present mainly in Spain, Portugal, Mexico, South America, Turkey, Italy and Romania.
Novobanco, Novo Banco, SA, is a major Portuguese financial bank headquartered in Lisbon, Portugal. Following the entry into force of European Banking Supervision in late 2014, Novo has been designated as a Significant Institution and is supervised by the European Central Bank.
↑ economia.elpais.com "The bad bank is confident that it will not drive down house prices even further. The chairwoman of SAREB Belén Romana, expects to attract more foreign investors and says that property sales to individuals will be limited".
↑ Guindos rules out creating a bad bank - CincoDías.com: "Spain's Minister of the Economy and Competitiveness, Luis de Guindos, has denied that the Spanish government will create a bad bank to group the real estate assets of lenders with liquidity problems." Washington - 22/04/2012
↑ If the appraisal value proves to be lower than the book value, the process becomes complicated. The affected entitites must recognise the difference between the provisioned amount and the expert appraisal in capital. For example, if a property acquired for 10 million is provisioned at 70%, it could be transferred for 3 million. However, if the appraised value is 2 million, the institution must recognise the one million difference.
This page is based on this Wikipedia article Text is available under the CC BY-SA 4.0 license; additional terms may apply. Images, videos and audio are available under their respective licenses.
