Dodgy boom-year loans cost Spain €2.6 billion

Dodgy boom-year loans cost Spain €2.6 billion
Most of the dubious operations at regional lenders that have been detected involved real estate deals, the Spanish government said. Photo: Josep Lago/AFP
Dubious lending by regional Spanish savings banks in the boom years before the collapse of a property bubble in 2008 generated huge losses in the billions of euros, Spain's Economy Minister Luis de Guindos said on Tuesday.

Spain's bank restructuring fund FROB has identified 42 suspect operations carried out between 2005 and 2008 by regional lenders that needed to by bailed out by the government, he said.

"According to preliminary FROB estimates…the losses from these 42 potentially irregular operations are estimated to total around 2.6 billion euros ($3.3 billion)," he told parliament's economic affairs committee.

Most of the operations that have been detected involved real estate loans, the minister said.

Spain's regional savings banks underwent an uncontrolled expansion fuelled by a decade-long housing bubble and the removal in 1989 on restrictions on establishing branches outside their home regions.

The number of savings-bank branches rose from 13,650 in 1990 to a peak of 25,035 in September 2008, according to a study by the Elcano Royal Institute, a major Spanish think tank.

By comparison the number of branches of Spain's two largest banks, Santander and BBVA, dropped over the same period from 17,075 to 15,617

But after the housing bubble burst in 2008 as the global financial crisis hastened a correction that was already underway in the property sector, the regional lenders needed to be bailed out by the government.

Spain received €42 billion in European bailout funds in 2012 to restructure the sector.

The number of regional Spanish savings banks has fallen from 45 when the sector started being restructured to just seven.

In order to receive the EU funds Spain agreed to create a so-called bad bank, which took over €45 billion in toxic assets from the restructured lenders at heavily reduced prices.

Earlier this month FROB informed public prosecutors of 23 irregular operations that it had detected at Catalunya Banc and Novacaixagalicia which caused losses of around €1.5 billion.

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