Spain setting up state owned bad bank to hold non-performing loans

Taking a failed strategy from the Irish playbook, Spain is setting up a state owned bad bank to hold the non-performing assets in its banking system.

Regular readers know that bad banks fail for a number of reasons.

• What qualifies as a non-performing asset?  Remember, a sizable percentage of the real estate related loans on the Spanish bank balance sheets are in 'extend and pretend' mode.  Are these going to be realized as non-performing?

• What price does the bad bank pay for the assets?  If the bad bank overpays for the assets, then the Spanish taxpayer incurs far higher losses than necessary.

• How does anyone know that all of the bad assets have been removed from the Spanish banking system?  It is this question that renders the entire exercise futile.  Are market participants going to trust the Spanish authorities who have repeatedly said there is no problem only to have a major problem emerge?  Ultimately, the only way to assure that all the assets have been removed is to require the banks to provide ultra transparency and disclose their current exposure details.  

According to a Bloomberg article,

Spain will put its bank rescue fund in charge of the bad assets separated out from the nation’s struggling lenders that are receiving a European bailout. 

The FROB fund will be the main shareholder in a so-called bad bank, according to a proposal that will be approved by the Cabinet on Aug. 24, Economy Minister Luis de Guindos told the Efe news agency in an interview today. 

All the banks receiving loans from European rescue funds will have to transfer their non-performing assets to the bad bank, he said. The comments were confirmed by a Spanish official, who asked not be identified, citing government policy.