Friday, 6 November 2009

Bank of Spain will be introducing new rules in the next few weeks to double the amount written off by Spanish banks and Cajas

Bank of Spain will be introducing new rules in the next few weeks to double the amount written off by Spanish banks and Cajas (saving banks) when the banks hold repossessed properties for longer than a year.Currently, the banks and cajas, by law, must have provisions of 10% on the appraisal values for repossessed property that have been owned for a year or longer. This figure will now increase to 20%.
There are currently several theories for the this change being implemented by the Bank of Spain. The first is that this is a warning to the banks to stop trying to disguise their bad debts by swapping debt (from promoters/developers) for properties. Many banks have been successfully swapping debt for property with the long term view of recouping their money instead of simply writing of the bad debt.
The second theory, is to help motivate the banks to liquidate their property assets sooner rather than later by getting them to drop the prices. In theory this is a possibility as it is estimated that the Spanish banks currently hold 36 billion euros with of property assets. So we are talking about an additional write down 3.6 billion! In theory at least. Unfortunately the reality is that several of the largest banks, including BBVA and Santander, already make provision of 20%, so there will be no additional motivation to try and sell their properties faster.

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