Banks need to provision 65% for apartments and 35% for homes

The Spanish government expects to approve the latest round of financial reforms on Friday. When Spain meets with other European nations in the next Summit on January 29, it wants to present a strong package of reforms that leaves no room for doubts that cutbacks that it will soon apply and that markets will likely approve. Still, the initial harshness has been diminished over the past few days and the plan on the table right now is opening up survival strategies for all lenders.

The provisions that will be demanded, according to calculation from the Ministry of the Economy, will not be more than the 50 billion euros that Minister Luis de Guindos announced two weeks ago.

Assets in real estate portfolios will need to increase by 65%. For homes that amount will be 35% and between 35% and 40% for residences under construction. To cover these new asset requirements, Spanish banks could raise the funds, find them among their current resources or merge with another lender.

If a bank decides not to merge with another, it will have a period of six months to come up with necessary provisions, which it will charge against profits. If this strategy is not sufficient, a bank will be allowed to charge part of the costs against its capital reserves. The way to do this would be to issue shares that can be converted into capital.

If a bank does not have sufficient resources to cover all the required provisions, it can still rely on the Frob, which is offering safe harbor through its guarantee of deposits fund. Thus, the Frob could issue shares (currently its vaults are practically empty) and own a corresponding part of a bank.

If that were to happen, a lender would be forced to try its hardest to stay alive and remaining banks, through their participation with the Frob, would contribute to its bailout. Also, the bank could decide to initiate a merger with another bank, a deal which is encouraged through Spain's banking reform plan.

The bulk of the provisions will be created, in this case, against reserves. This cleanup process can take up to two years. The reform, according to sources in the financial industry, is designed so that no bank ends up bankrupt, which would have happened if the Ministry of Economy's original plan had been carried out. It had planned to deny any form of aid originating outside the banking sector.