What is a bad bank? SAREB, the Spanish example

imagesA bad bank is a corporation that buys from banks and savings banks with public aid, their toxic assets linked to the brick. That is, property development loans in default or at risk of default  and buildings and land that banks have received from unpaid debts like mortgages. The bad bank will have to manage and sell all these assets over the next 15 years.

How much and how the bad bank will pay to the banking institutions by those assets?

The Spanish bad bank which is called “SAREB” buys from financial institutions assets at an average discount of 63.1%, that is, pay for them 36.9% of its current value. In the case of new housing, the discount will be 54.2%; 63.2% for real state promotions unfinished in the hands of those banks and 79.5% for soil. As for loans to developers, the bad bank will acquire at an average discount of 45.6%.

The bad bank will pay to the banks for these assets with subordinated debt endorsed by the State and for instance, these entities may use it as guarantee to the European Central Bank to obtain cheap financing and therefore liquidity.

Who sells the assets? Could a consumer  buys a property to the bad bank?

The bad bank managers themselves that are, the FROB (The Fund for Orderly Bank Restructuring)  and private- shareholders, appoint teams responsible for managing and selling assets. They may sign agreements with developers, financial institutions or specialized websites to take charge of selling those assets as well. As a result, some properties may end up being sold between individuals.  However,  SAREB will have no offices or locations to which an individual can go to buy those assets.

Are there bad banks in other countries?

Yes. Other countries like Ireland, Holland, Germany and Sweden, among others, have created their own asset management companies to consolidate their financial institutions. The Spanish case is similar to the Irish, who formed the National Asset Management Agency (NAMA), after the bursting of the housing bubble. Sweden did the same in the 90s when the housing market collapsed.

What kind of assets does SAREB manage?

The SAREB was created with assets valued at 50.781 million euros. The entities transferred to the bad  bank 200,000 real estate assets. Just over half are homes and land without buildings or works. The rest are loans to developers.

Will the State earn money with the bad bank?

By setting a heavy discount on assets, the bad bank may go selling them at a higher price as the real estate market recovers it. According to the draft business plan SAREB designed by the authorities, the bad bank would have an average annual return of between 14% and 15% of its capital. In any case, the FROB itself admits that in the early years these benefits will be more moderate and it is not excluded that it may generate losses.

Source: The Wall Street Journal

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Author Spotlight

Emilio Aranda Molina

Emilio Aranda Molina

My name is Emilio Aranda Molina. I am 27 years old and I am from Spain.

I held the bachelor of Law and Business Administration from Granada University and master of International Business Administration from CECO and ICEX. Currently I am working in Trade Office of the Spanish Embassy in Beirut to help national companies to trade beyond Spain.

I have been studying abroad in year 2009/2010 in United Kingdom at University of Strathclyde (Glasgow) Read Full

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