Spain may need to use more public money to shore up its banks, the International Monetary Fund said, as it raised the possibility of lenders offloading toxic assets into separate vehicles.
While the largest banks “appear sufficiently capitalized,” the capacity to deal with adjustments “differs significantly across the system,” the Washington-based lender said in a report today after sending a mission to Spain.
“Greater reliance on public funding may be needed” to avoid the costs of the overhaul becoming too high for the industry, the IMF said.
Spain made legal changes in February to force banks to recognize deeper real-estate losses. While the state’s bailout fund can buy securities from banks that need help, an industry- financed facility is bearing the cost of failed banks. In a new phase of the overhaul, the government may encourage lenders to pool assets in jointly owned companies to get them off their books, an Economy Ministry official said on April 23.
The country needs to “further deepen the financial-sector reform” and deal with so-called legacy assets as a “priority,” the IMF said. Separating those assets into separate asset-management companies is an option, according to the report.
“To give guidance on the best possible strategy for the Spanish banking system going forward, a comprehensive diagnostic of the impaired assets can be particularly useful,” the IMF said.
The idea of letting banks split off bad assets once losses have been recognized was raised last week by Jose Maria Roldan, the head of regulation at the Bank of Spain. The Madrid-based central bank gave no more details in the text it published after Roldan made a presentation to analysts in London on April 19.
The Economy Ministry official didn’t say how the program may be financed, noting that taxpayers’ money wouldn’t be used as the nation struggles to trim the euro region’s third-largest budget deficit.
The IMF also said bad loans may be higher than data suggest amid “lender forbearance.” It said 10 banks were identified as “vulnerable,” five of which have merged, three are being auctioned and two have submitted business plans to the central bank.
“To preserve financial stability, it is critical that these banks, especially the largest one, take swift and decisive measures to strengthen their balance sheets and improve management and governance practices,” it said, without naming the and of the lenders.
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