Spain’s Bankia to set up ‘bad bank’

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Bankia, the nascent Spanish retail bank comprised of Caja Madrid and six other savings banks, will establish a “bad bank” for impaired assets to ease its stock market listing later this year.

In a regulatory filing, the bank’s managers said they intended to float Bankia with assets of €275bn ($391bn) and a net book value of €12bn, retaining repossessed land and other impaired assets in the existing legal entity called Banco Financiero y de Ahorros (BFA).

The Spanish government and the central bank have accelerated a process of bank restructuring designed to ease investor fears about the country’s sovereign debt, forcing a series of mergers between cajas and declaring that the financial system needs an extra €15.15bn of capital on top of state funds already lent. Other estimates of the capital required are much higher.

Most of the new capital is expected to come from the Fund for Orderly Bank Restructuring (Frob), with private investors so far reluctant to commit themselves without the security of some kind of asset protection scheme, whether it be a national “bad bank” or separate ones for each financial institution.

La Caixa, the big Barcelona-based savings bank, has made the most progress towards a stock market listing for its main banking activities, and was the first to announce the creation of a “bad bank” in which to place impaired assets.

Bankia would be the largest lender in the domestic market and is regarded in Madrid as “too big to fail”. According to Bank of Spain calculations, Bankia would need €5.77bn in new capital if it failed to list and €1.79bn if it succeeded.

The central bank says listed banks need principal capital – a measure of financial strength akin to core tier one capital – of 8 per cent of risk-weighted assets, while most unlisted lenders need a ratio of 10 per cent.

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