Spanish Bank Regulator Is Getting Tougher

Spanish Bank Regulator Is Getting Tougher
Last Wednesday, the Spanish Central Bank published new provisioning guidelines for non-performing loans (NPLs) and real estate assets with the aim of accelerating the recognition of losses derived from these asset classes. The changes are credit positive since they require banks to strengthen themselves more quickly, a requirement that will restore confidence in the Spanish banking system faster.

The main changes proposed by the regulator are as follows:

• Provisioning schedule is being tightened: full coverage of NPLs is to be completed in 12 months as opposed to between 24 and 72 months, depending on the type loans.
• Remove the obligation to set up 100% provisions against NPLs if loans are collateralized by real estate assets. The Bank of Spain proposes different haircuts in the value of the guarantee depending on the underlying asset, ranging from 20% for first residences to 50% for land and other higher-risk real estate assets. This proposal is less conservative than the general current rule where 100% of the NPL needs to be provisioned irrespective of the guarantees, but the regulator wants to reflect the lower expected loss for a collateralized loan.
• Increase provisioning requirements on real estate assets resulting from repossessions and payment-in-kind transactions. Currently Spanish financial institutions are required to set aside 10% provisions at the moment of acquisition and 20% after the real estate asset has been on the balance sheet for more than 12 months. The new guidelines propose increasing provisioning to 30% if the assets are held for more than 24 months on the balance sheet and a new appraisal value shows additional damage above the 20% provision.