A report from the Bank of Spain seems to give the first step toward a decision about the "bad bank". In order to figure out the magnitude of the story that real balances in the financial sector are being hidden or misrepresented because of the devastated real estate industry, the supervisor will require lenders to provide qualitative and quantitative information about their housing loans, construction financing, housing titles and other goods received in payment for debts.
It is about identifying not only the size of the total deficit, but the strategies that institutions are going to employ to clean up their portfolios.
The Bank of Spain thinks that it is asking for more information in order to improve their understanding of the risks that are deeply imbedded in lender balance sheets. But all indicators suggests that there are more underlying reasons, especially after finding out that the governor has already been in contact with populists leaders in order to resolve the problem that led to the heap of toxic real estate assets currently plaguing banks.
At any rate, how the BOS proceeds will be critical as they execute their plan, transfer shares to a kind of public real estate agency, and dig up realized capital losses.
These extreme measures could very well be integral to the plan, and it is important that the transfer process is transparent so that there is no doubt that it will not be necessary to cover up any holes later.
The other alternative is to clean up the real estate assets by raising the guarantee on deposits. Lastly, any information that will foment this new banking striptease is critical for resolving the crisis.
