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The SAREB: A Closer Look into the Spanish 'Bad Bank'
Alberto Núñez-Lagos Burguera, Partner, and Teresa Camacho Artacho, Associate, Restructuring and Insolvency, Uría Menéndez, Madrid, Spain1. A sluggish start in Spanish bank restructuring that has led to the implementation of a package of urgent measures
The restructuring of the Spanish financial sector has intensified over the past few months as a consequence of the deficient strategy followed for years since the start of the financial and economic crisis. Some may argue that certain measures were already implemented previously, such as the reshaping process of savings banks (cajas de ahorros) to concentrate the sector – that started in 2009 with the setting up of the Spanish Bank for Orderly Bank Restructuring ('FROB', Spanish acronym) although it did not actually start until 2010, and which has reduced the number of players from 50 credit institutions to 141 banking groups comprising 90% of the Spanish banking system in September 2012 – and increasing the minimum capital requirements. However, these measures proved insufficient to absorb the adverse effects of the sharp adjustment resulting from the bursting of the real estate bubble created by a boom in credit-driven domestic demand, and the deep economic recession that followed. Financial markets perceived a high level of uncertainty in relation to the accounts of Spanish banks, which had a sizable exposure to construction and property developers.
As the cost of sovereign external financial needs for the country soared and reached unsustainable levels, the Spanish government that took office at the end of 2011 promptly reacted with reforms aimed at significantly increasing the provisioning requirements for loans related to real estate development and foreclosed assets. These reforms were implemented through regulations enacted in February (Royal Decree-law 2/2012) and May (Royal Decree-law 18/2012), the purpose of which was to target impaired real estate assets and standard risk real estate loans, respectively. Very broadly, the total coverage for, among other things, secured non-retail real estate loans after both the February and May reforms would range between 14% for completed development and 52% for land.
Royal Decree-law 18/2012 also envisaged, as an additional measure, the creation of Asset Management Companies ('AMCs') for each financial institution to allocate distressed real estate-related assets and loans. The AMCs have been further developed in the regulations that will be further analysed and co-exist with the so-called Spanish bad bank. They are intended to be part of a package of permanent banking restructuring tools available for Spanish banks as a segregation scheme for non-performing assets in credit institutions that do not need State aid.
In spite of the measures adopted, the market still perceived that the strong deterioration suffered by real estate-related assets had not comprehensively materialised in losses adjusting prices to market value. In this context of ongoing restructuring of the banking sector and given that, apart from certain exceptions, Spanish banks had lost access to wholesale funding markets on affordable terms, on 25 June 2012, the Spanish government had to request external financial assistance under the terms established by the EFSF to recapitalise financial institutions. Shortly afterwards, a Memorandum of Understanding ('MoU') was entered into with the Eurogroup to set out the policy conditions required on specific measures to reinforce financial stability in Spain.
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