Sep 25

Bad bank … Or maybe not so much ?

In recent weeks we are meeting new news for banks to clean up their accounts and start offering credit to their customers . To do this, is to create what is called bad bank , which is nothing more than a bank that brings together the toxic assets of each of the entities in the balance , ie by the state purchasing these assets , so that the banks to have liquidity and can access credit and loans granted again.

Logically , this measure is totally anti-populist , as it would mean major infusion of money to the commercial banks. But does it really would do any good ?

Why have so many toxic assets on the balance sheet ?

The banks have granted loans to many people of dubious solvency during growth that occurred in Spain in the housing bubble until mid-2008 , when the crisis broke . By offering so many mortgages, flat prices soared. But like any bubble, the price of them broke , and some of these families and companies of dubious solvency stopped to pay those floors . The bank foreclosed homes, and became his property.

And so it was with a lot of real estate , especially . As now the demand is much lower , the price of apartments has dropped considerably , and its current market value can be 40% of the purchase price thereof, or what is the same with a 60% discount . That is why what is called toxic , because its current value is well below its book value , expected significantly higher performance .

And here comes the problem. Because granting many loans , the liquidity of banks has become real estate, and that is why they can not offer credit to their customers, basically no money . They need to get rid of all these assets , but they will not want to do it at any price. Many of them have expressed their desire to keep some of the assets as long as the situation is this , and do not raise the prices of flats .

What is the role of the state ?

Here is where it plays an important role the state. The creation of bad bank will help banks to obtain liquidity rapidly, restructure their balance sheets and to start to revive credit again. The State would buy these assets at their current market value , not book value . There are different models used and in Europe :

In Ireland, bought the property for its current market value , ie a value of 60% discount . The entities were provisioned by 27 %, so that the overall losses for the same was 33 % . He came to revive credit , but many institutions went bankrupt .
In Germany , were acquired by the state the value they had in balance by subtracting the provisions , so that there were no losses in principle for entities , and they had an obligation to deliver that money received in the form of public debt to individuals and companies .

Either way , it means public debt issuance by the State , ie to create bad bank debt. This is really dangerous if the granting of such debt is not associated with a control entities for lending , credit will not be reactivated . If we follow the example of Ireland , will fund the government deficit financial institutions , and banks have to take losses on their balance sheet , with the danger that many of them go bankrupt and have to be recapitalized or nationalized .

If , however , artificially inflate property prices until they can get to cover losses without provisions, go into greater state deficit , but we made sure that no entity goes bankrupt, and that focus on granting loans and not in any losses they may have.

You have to be careful with the way they delivered the money to the banks. Assuming that no state should be the guarantor of a financial institution in trouble for their own mistakes, if you make these cash transfers unchecked, may not have been for nothing the further into debt than we are .