Spanish banks will need to put aside extra provisions of up to 10 billion euros to cover loans that borrowers will struggle to repay, according to an internal estimate by the Bank of Spain.
According to recent data, Spanish banks rolled over more than 200 billion euros of loans before they expired – often because corporate borrowers would be unable to repay their debt on time and in full. The 10 billion euro estimate is the first official assessment of the likely impact of the central bank's new approach towards these refinanced loans.
The Bank of Spain believes that the risks emanating from this practice, known as "extend and pretend", have not been fully covered and is pressing all banks to reclassify their refinanced loans according to tighter standards by the end of September. The new regime will make it harder for banks to treat refinanced loans as if they were performing normally, in turn forcing lenders to take additional provisions.
"Our banks will need more provisions," a senior official at the Bank of Spain told the Financial Times. "The provisions will affect their results, but the question is by how much. We cannot know for sure but we think the impact will be between 5 billion and 10 billion euros [in provisions] across the system."
The new round of provisions is expected to make a significant dent in profits at a time when Spanish bank earnings are already under severe pressure in their home market. Spain is mired in a two-year recession, with both companies and households suffering the aftermath of a debt-fueled housing bubble and soaring unemployment.