Bank Of Spain Relaxes Rules On Bad Debt Cover

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Finally, yesterday the Bank of Spain announced a relaxation of the rules applied to banks when they have mortgages in arrears.

Previously the level of funds a bank had to move to their balance sheet to cover bad debts was very high in comparison to the rules covering banks in other countries.

The very high level of liquid funds the banks had to send to their balance sheet made it difficult for banks to negotiate payment terms and assist clients in trouble as this was very costly for banks to provide. Allowing a client to sit 3 months arrears and then negotiate a payment plan to recoup arrears over a longer term and assist with immediate payment difficulties meant a bank had to move a very large part of the loan to its balance sheet and tie up liquid cash.

The impact of previous rules encouraged the banks to take back property and get the asset on its balance sheet rather than maintain a long-term mortgage with a client who had just short-term issues.

It is hoped that the banks will now use this relaxation of rules to be more pro-active in assisting clients with short-term problems rather than rushing straight to the courts.

We have long predicted the Bank of Spain would have to take measures and hopefully this is better late than never.

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