Govt Adopts Bill Establishing a Bad Bank
The government adopted on Thursday a bill setting up a bad bank in a bid to purge bank balance sheets of soured loans and kick-start lending. The operation will cost an estimated EUR 4bn in state guarantees, Finance Minister Janez Šušteršič explained.
"From what we know at present, this is the upper estimate of the value of bad loans in the principal systemic banks in Slovenia," Šušteršič explained after the cabinet session.
The minister was quick to point out that this was just an estimate based on the book value of the claims, suggesting that there could be "discounts" when the bad claims are transferred; in Ireland, they averaged almost 50%.
But if discounts are applied, banks may have to book additional write-downs, according to Šušteršič.
"This would mean additional capital requirements that will partly be provided by private shareholders if they want to remain shareholders, or by potential new investors."
But the bad bank itself will also have the power to take part in recapitalisation; it will be allowed to borrow up to a billion euros with state guarantees for this purpose.
Under the bill, banks' non-performing loans will be taken over by a special fund owned by a state-owned company, a special-purpose vehicle for bad loans.
The fund will issue bonds backed by state guarantees, which the banks will receive in exchange for handing over the bad loans.
This will make it possible for the banks to obtain financing from the European Central Bank (ECB), according to the minister.
Bad loans will not be transferred automatically, the process will be triggered at the request of the special-purpose vehicle, the banks themselves or the central bank.
"The proposals will be examined by a joint commission featuring five government representatives and two representatives of the central bank," Šušteršič said.
The final decision will be taken by the government, taking into account three criteria: the bank's importance, the impact of the individual loan on the bank's assets, and the urgency of the move in terms of capital adequacy.
If the government decides to include a bank in the scheme, the bank will have to draw up a programme outlining its strategy and, if the bank has private shareholders, "the share of the burden of resolving these bad claims that they will carry."
The special-purpose vehicle will have a seven-member board with three executive and four non-executive directors, Finance Minister Janez Šušteršič said.
The non-executive directors will be appointed directly by the government and will then name the executive directors.
Šušteršič said the government wanted to "keep all options open" regarding staffing, echoing a remark by Economy Minister Radovan Žerjav earlier today that foreign experts could well be enlisted for the job.
To sweeten the deal, the board members will be exempt from provisions of the act which limits executive pay in state-owned companies. "The pay can be set for each board member individually," Šušteršič said.
At the request of the central bank, the legislation includes provisions on loans of last resort, a new instrument recently introduced by the ECB which allows central banks to lend to banks that have acute liquidity problems.
The government has also agreed with the central bank to speed up work on amendments to the banking law in order to give Banka Slovenije additional oversight instruments.
The bad bank is projected to operate until 2017, whereupon any remaining assets would be transferred onto the Sovereign Holding.
Parliament is expected to pass the bill at the plenary session next week.