Mariano Rajoy´s government on Friday approved by decree a fundamental change to the banking sector with the creation of a ´bad bank´ to take ownership of toxic debts held by Spain´s mortgage banks, notably Bankia, Santander, BBVA, and the various cajas with high debt to assets ratios.
Responding to demands from the ECB and other Eurozone members to clean up Spain´s banking industry, the move is expected to satisfy Eurozone partners and start the process of Spain receiving upto 100 billion Euros of banking sector bailout funds to stabilise the economy.
Speaking after the announcement Soraya Saenz de Santamaria, the deputy Prime Minister, said that this additional decree and the creation of the ´bad bank´was needed to “get credit flowing in the economy” again.
Banks with distressed property assets that are transferred into the ´bad bank´ will walk away with a combination of cash, debt or shares to add to their balance sheets, with the requirement that all banks increase their core capital classed as rock solid to 9% of total assets, a shift from the current 8%.
As well, the government announced that remuneration for senior managers and directors of distressed banks would be capped at 500,000 Euros per year, in an effort to stem protests at former directors of failed banks taking home millions of Euros in compensation at the expense of bank shareholders and depositors.
Olli Rehn, Economics Affairs Commissioner for the EU praised Rajoy´s cabinet for approving the decree stating that the creation of a bad bank sends an important signal to the world financial markets that Spain is determined to clean up and strengthen its banking sector.
With unemployment over 25% across the board and important regions such as Catalonia and Valencia asking for central government bailouts, Rajoy´s cabinet needed to do something to stem the banking sector crisis before tackling local government debt.
The Bank of Spain warned at the same time that capital flight to foreign banks had reached 20% of GDP, with June alone seeing net capital outflow of 56 billion Euros, and an estimated total of 220 billion in the first half of the year. Both the Spanish government and Eurozone will be hoping the creation of the ´bad bank´ will be sufficient to restore some confidence and stem the flow of cash leaving the country´s banks.
In a concession to the Spanish public, the economy minister Luis de Guindos announced that the government´s banking agency (Frob) will be given new teeth to take control of failing banks, and replenish funds in the depositor guarantee scheme which have been completely used in previous bank rescues.