The so-called ‘bad banks,’ into which Spain's troubled banks will be able to move toxic assets, are expected to be given green light in a parliamentary vote in late August or early September, according to European Union sources.  These new entities will be under the control of the state-backed rescue fund for the banking sector, known as the Frob after its Spanish abbreviation.

The creation of ‘bad banks’ - although some sources say there will only be one such entitiy - is part of the agreement with the Eurogroup over the rescue package to Spain’s banking sector that will be formally approved by the signing of the Memorandum of Understanding on Friday, a day after the German parliament gave Chancellor Angela Merkel its approval.

The final agreement could be reached only after Spain and Finland, one of the countries that most strongly opposed the injection of up to €100bn into Spain’s troubled banks, arrived to a deal under which Finland will receive collateral of up to €770m from Spain’s bank deposit guarantee fund in return for its support.

On Thursday, the Spanish parliament also approved a law to allow the Frob to provide money to troubled entities before the credit line from Europe, which initially will amount to €30bn, will be available by the end of this month. The governing Popular party, which holds absolute majority in the parliament, was the only party to vote in favor.

'Bad banks' take over toxic assets

The ‘bad banks’ will take over the management of the problematic real estate assets of the banking sector in order to sell them out in medium-term. The aim is for the banks to clean up their balances and adjust them to the current financial situation.

The details around how these entities will function are still being negotiated by the Ministry for Finance, the European Central Bank, the European Commission and the International Monetary Fund.

According to sources in the financial sector, the government is preparing the creation of several entities rather than one new entity, while other sources say there will only be one such entity.

The Spanish government and the EU have agreed that the ‘bad banks’ should be fully operational by November.

The valuation of the assets will to a large extent depend on the result of the audits that are being carried out in the Spanish banking sector and which are expected to be published in September.

Over market value

The MoU will provide indications on how to value these assets, because, for instance, it will not be measured by market value but by taking into accounts the “long-term value” of these assets, which is interesting for the entities that will transfer assets from their balances into these entities.

The Frob will pay for the assets by cash or with securities guaranteed by the state, by a percentage that will be decided at the time for the creation of the ‘bad banks.’

This article was translated and edited by Stina Lunden.