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The story
Founded by Government of Spain in 2012.1
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. 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.
Background, the 2008 Spanish real estate crisis
The first bad bank in Spain was created by Caja de Ahorros y Pensiones de Barcelona. By transforming Microbank into Criteriabank the creation of Caixabank was made possible, which excluded the real estate assets included in Criteria 2.0 Inmobiliaria. This bad bank, which is unlisted, took on both Servihabitat, a subsidiary operating in the real estate sector and the interests in Inmobiliaria Colonial and Metrovacesa, as well as much of the industrial portfolio: Gas Natural, Agbar, Abertis, Port Aventura and Mediterránea.
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.
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.
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"...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."
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.
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.
"...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..."
Creation
Spain's Ministry of the Economy took the first step on 25 August 2012 by setting out the plans for the bad bank, as was agreed with the European Troika formed by the European Central Bank, European Commission and International Monetary Fund.
The FOBR has therefore contracted the services of Álvarez & Marsal, the consultancy firm which oversaw the winding up of Lehman Brothers, which specialises in problem solving. According to Expansión, the firm in turn hired Nomura, PwC and Cuatrecasas.
From Wikipedia’s article on Sareb, shared under CC BY-SA 4.0.3