Editor’s note: This article was first published in December 2011, when Mariano Rajoy was about to take office and a Spanish bad bank was only being discussed. The forecast that it could be running in the first half of 2012 did not come true, as Sareb was set up at the end of 2012.
There has been a lot of talk these days about creating a “bad bank”, and many people are wondering what this kind of bank is, so we will try to shed some light on the subject. The bad bank is meant to get credit flowing again in Spain, a priority for Mariano Rajoy, since without reopening the credit tap Spain would struggle to get out of the crisis.
Creating a bad bank means finding a way for one or more state institutions to take over defaulted property loans, the homes and land repossessed for non-payment of loans, and so on. In short, moving the toxic debt to the bad bank.
The idea is that banks would stop spending their energy trying to sell flats, refinance debts or manage the bad situation of the institution in question, and could focus on lending again to businesses, entrepreneurs’ projects and families. Although some institutions disagree with this kind of banking, the Governor of the Bank of Spain is looking favourably on this option. If the idea gets the green light, the bad bank could be up and running in the first half of 2012.
How does a bad bank work?
The idea is that regulators can force a struggling bank to split in two. A good part, where the bank keeps the select assets and liabilities and can continue lending money to select, creditworthy customers. The bad part would own the debts. There is a similar model of sorts with several Spanish banks: BFA-Bankia and La Caixa-CaixaBank.
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Would a bad bank work in Spain?
That’s the million-dollar question, because you would have to look at the ability and preparation of the government team that would be in charge of selling the flats. This model is used successfully in Germany, but the German system is a voluntary one in which an autonomous entity is set up for each bank, while a federal office guarantees them, in exchange for the damaged assets, the same amount at which those assets are recorded on their balance sheets, on condition that an identical amount goes to their customers in the form of loans. That is far from guaranteed in Spain, since the last time we injected capital into the banks, they used it to pay off their own debts and credit stayed the same (much worse today).
Several experts warn that Spain runs the risk of creating “zombie” banks, meaning banks that stay open thanks to constant public aid.
Who pays for the bad bank?
In theory, if the bad bank does not work as planned and the expected results do not materialise, the state would end up paying for it out of public funds. In practice, public money is citizens’ money, so once again we will be paying for the solution to a problem we didn’t create, by handing part of our money to those directly responsible for the financial crisis.
My personal opinion
I don’t think a bad bank is the solution right now, because it would be like picking up the rubbish and moving it somewhere else. Sooner or later, the rubbish starts to smell again. On top of that, house prices are still falling, so valuing the assets in the middle of a price slump will be a very complicated task.
And let’s not forget that, once again, the mistake is being made of using public capital and European aid to bail out the banks. In my view there are too many banks, and just as with companies, only the strongest should survive. If a company has a bad manager who drives it into bankruptcy, the manager is fired and the company is closed. The same should happen with a bank.
Featured image: Flickr user grupofranciscohernando, CC BY-SA 2.0, via Wikimedia Commons.
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