Banks forced to increase write downs, paving way for bigger price reductions

The Bank of Spain (BoS) has announced plans to force banks to recognise bigger losses on debt-for-property swaps. That might mean bigger discounts for home buyers if the impairments are passed on.

Miguel Ángel Fernández Ordóñez, Governor of the Bank of Spain
Miguel Ángel Fernández Ordóñez, Governor of the Bank of Spain

The BoS wants to increase the provisions that banks have to make when they take over the properties of their debtors. Draft plans to this effect have been released for consultation.

Over the last year or so Spanish banks have resorted to debt-for-property swaps to keep their bad debt ratios lower. The BoS wants to discourage this and stop Spanish banks building huge property portfolios as their loans go bad.

Under the proposals banks will have to make provisions of up to 30% of property values after 2 years, reducing pre-tax incomes of banks by up to 10%, according to estimations by the BoS.

Bank reluctance to accept write downs on property portfolios has kept asking prices too high, is one of the big obstacles in the way of a property market recovery.

If lenders are forced to accept bigger provisions they should be able to offer house-hunters juicier discounts, if the provisions don’t push them into insolvency that is.