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Bank of Spain Succumbs to Guindos & Repeals the Obligation to Label Refinanced Loan As Default

19/03/2014 – El Confidencial

The Bank of Spain accepted a new regulation on amendment of provisions of refinanced loans established by the Government. In practice it means overthrowing the law approved a year ago. (…) The change might possibly clash with the Law of Autonomy of the national bank. What is more, it might evoke fear of suppressing the real default rates by banks.

The Royal Decree from 4/2014 on Debt Restructuring and Refinancing stated that the Bank of Spain shall “set up unified criteria for risk considered normal in restructuring process within one month”. The enforcement undermines the independence of the entity that was granted it after entering the Euro zone.

(…) The regulation mentioned before has been adapted in April 2013 and imposed obligation to classify as sub-standard by default all the refinanced loans, charging them with a minimum provision of 15%. Thus, it pushed the majority of them into deliquency and restricted cases in which they could be qualified as ´normal risk´without provision requirements, and in fact vast majority could have obtained this label. The law provoked an abrupt shoot up in loan deliquency rates in 2013 (in January it marked a 13.78% record high). (…).

On the other hand, “when a proof of insufficiency in future cash flows supposed to support the refinancing exists”, the loans shall be classified as defaulting or sub-standard. (…).

Now the question is whether the setback could provoke loss of trust in goodness of Spanish banks. (…) Since the risk premium has fallen and investors scan the market feverously in search of opportunities, the Government´s priority turned towards rescuing companies with huge indebtness. This is the main target of the Royal Decree that modified many paragraphs of the Insolvency Law (…).

The sector is emboldened and challenges Luis de Guindos (the Minister for Economic Affairs) himself by retaining José María Roldán as the head of the Spanish Banking Association (AEB in Spain).

 

 

 

Original article: El Confidencial (Eduardo Segovia)

Translation: AURA REE