A top-read story on Bloomberg this Thursday morning?
One that combines the words ‘foreclosed homes’ with ‘Spain’ and ‘tripled’ :
Nov. 25 (Bloomberg) — The number of foreclosed homes for sale in Spain may triple next year as new accounting rules prompt lenders to dump their depreciating assets, according to the co-founder of a website that advertises repossessed properties.
About 100,000 houses and apartments owned by banks are now on the market, Fernando Acuna said in an interview. A quarter of them are listed on the website operated by his Madrid-based company, Pisos Embargados de Bancos, on behalf of 25 banks. Spanish lenders have a total of 181 billion euros ($242 billion) in “troubled” construction and real estate loans, the Bank of Spain said last month. Since Sept. 30, the banks have been required to account for falling property values more quickly, encouraging them to shed assets without waiting for the market to recover from a three-year decline.
‘Tis, in simplified terms — the end of (some) of the extend and pretend that’s been taking place in Spain. Similar stuff that’s been happening in the US and Ireland.
To be fair — the Bank of Spain’s accounting rules for loan losses were always pretty stringent. They use dynamic provisioning, which helps banks build up a buffer of extra loan loss provisions in the good times to cushion against the bad times. It’s an idea that, post-crisis, has now become something of an accounting world darling.
However, one of the criticisms of Spain’s current provision rules has been that they may be too stringent. For instance, by requiring banks to book non-performing loans (NPLs) that lack collateral at a 100 per cent loss (in contrast to Europe or the US, where banks only have to provision for the portion of the loan that isn’t expected to be recovered), it was thought Spanish banks might be discouraged from recognising those losses. Hence the recent plethora of loan modifications and novations.
The Bank of Spain’s recent rule change does things like force banks to provision for bad loans after a year — rather than the previous 72 months. But (just going back to that collateral issue) banks will now be able to take into account any ‘supporting’ property when making their NPL provisions. That effect, however, is entirely dependent on the quality of the collateral, and still come with various haircuts.
What you wouldn’t want to see is a flood of homes suddenly hitting the Spanish market — as banks rushed to offload and head off declining prices — combined with continued peripheral jitters and eurosystem funding pressures.
Rapidly, falling asset values + nervous markets = not good.
And of course, Spain’s banks would have to rely on their existing loan loss provisions to weather such a scenario. And despite that dynamic provisioning, there remains a question mark over whether these (to date) have been good enough. Which might be why the Bank of Spain went for those accounting changes in the first place.
A screenshot of Mr Acuna’s website, to liven up an otherwise dry accounting post:
Related links:
That extended España RMBS - FT Alphaville
Provisioning for losses the Spanish way – FT Alphaville
BBVA, an exercise in Spanish banking losses – FT Alphaville
Spanish banking crises, then and now – FT Alphaville