The Bank of Spain plans to introduce a new rule forcing banks and savings banks (cajas) to double the amount they write off when they own a repossessed property for a year or longer. This will give banks and cajas a big incentive to reduce their prices to liquidate their growing stock of repossessed properties and developments.

Under the new rule, banks and cajas will have to increase their provisions from 10% to 20% of appraisal values for repossessed properties they have owned for a year or more.

In the past they only had to write of 10% at the time of repossession. Now they must write of an additional 10% in provisions for properties they haven’t sold after a year.

The new measure, which is expected to come into force in a few weeks time, is being interpreted as a warning from the Bank of Spain that banks should stop their practise of disguising bad debts by swapping debt for property. It will also encourage banks to drop their prices to reduce their property holdings.

Banking analysts estimate that banks and cajas have repossessed property valued on their books at 36 billion Euros. This implies they may have to write off 3.6 billion Euros collectively when the new rule comes into force.

Note, however, that BBVA and Santander, Spain’s biggest banks, are unaffected by the new rule. They were already making provisions of 20%.