Bad Bank Good Bank. How the spanish bad bank will absorb unsold property.

A bad bank is an entity or financial institution that is responsible for transferring the toxic assets of banks, which includes those investment funds and poor conditions that were created from mortgages or loans to people with little economic solvency, to a public body which would be responsible for settling payments.

In short, the State buys those loans with a high probability of being very profitable for the bank, and does so at a price that would be between by the market value and the book value of the asset, ie, the state would take a underestimation of the credit. Finally, these assets would cause losses upon sale, a figure that would depend on the management of such banks.

Spanish banks will transfer the unused properties in its portfolio to the bad bank at an average discount of 52.2 percent over the original book value and the discounts applied in existing homes are on average of 52.2 percent, said the same source.

"Banks will have to apply additional discounts of seven percent in the baseline scenario in the stress test set by Oliver Wyman, leading prices to levels similar to those contained in the adverse scenario," said the source.

The tests conducted by the consulting firm Oliver Wyman to request the Government to determine independently the recapitalization needs of the banking sector - with a maximum aid from Brussels more than 100,000 million - watched the baseline discount of 45.2 percent for new housing and 40.5 percent in second-hand housing. In this adverse scenario, the discounts applied by the consultant were 52.4 and 50 percent, respectively.

The source added that banks would be forced to transfer their land assets with discounts of around 85 percent after applying a discount of 13 percent on the 72 percent seen in the baseline scenario. The agreement on the discount of the assets in the transfer is practically closed.

The bad bank is designed to bring together up to 90,000 million euros in assets, although the government expects a much lower final figure. The CEO of the Fund for Orderly Bank Restructuring (FROB), Antonio Carrascosa, already announced last week that the final size of the bank would be between 60,000 and 70,000 million euros, implying an average discount of over 50 percent.

Therefore, the entities will not have to bear the full weight of the discount on their balance sheets, as undertaken by various government regulations. The discounts required by the two decrees issued by the government this year - before the bank bailout and the exercise of Oliver Wyman - assume a discount on the gross value or acquisition of 80 percent on land, 65 percent in development and rental 35 percent on completed housing.