Spain imposes higher provisions for real estate in bank cleanup

Spain will hire two auditors to gauge the value of assets of the country’s banks and will force lenders to raise provisions against real estate holdings in the government’s fourth attempt to clean up the financial system.

The audit will be on all bank assets and the government may buy convertible shares in lenders that can’t raise the funds for the higher provision levels on their own, Deputy Prime Minister Soraya Saenz de Santamaria said. The government adopted measures to promote the rental market, which accounts for 17 percent of all residential properties.

The plan aims to “give credibility and confidence to our financial system to help get credit flowing and to allow for real estate to be sold at reasonable prices,” Saenz de Santamaria said today at a press conference after a Cabinet meeting in Madrid to approve the plan.

The latest bid to cleanse the banking system after efforts in 2010, 2011 and February this year is part of Prime Minister Mariano Rajoy’s effort to quell doubts about hidden losses at lenders that have driven up the country’s borrowing costs.

Spain announced the takeover of Bankia, the banking group with the most real estate, on May 9 in another step to bolster confidence in a financial system burdened by 184 billion euros ($238 billion) of what the Bank of Spain terms “problematic” assets linked to real estate.

“All the previous efforts have been announced with a drumroll and a big clash of cymbals but they weren’t credible in the end,” said Javier Diaz-Gimenez, an economics professor at the University of Navarra’s IESE business school in Madrid. “They must get it right this time.”

Banks have already had to set aside 53.8 billion euros of charges and capital ordered by the government in the previous cleanup effort in February.

Spain will take over Bankia by converting its 4.5 billion euros of preferred shares in the group’s parent company into ordinary shares, it said two days ago. Jose Ignacio Goirigolzarri, a former second-in-command at Banco Bilbao Vizcaya Argentaria SA, will replace Chairman Rodrigo Rato.