MADRID, Aug 23: Spain will empower its banking authorities to swoop in on lenders even before crises erupt and liquidate them if necessary, according to a draft law obtained on Thursday.

A draft of the legislation, expected to be approved by government ministers either this Friday or on August 31, was obtained by AFP after being leaked to Spanish media. Aimed at averting fresh banking catastrophes, it gives the Bank of Spain and the state-backed Fund for Orderly Bank Restructuring (FROB) new “early intervention” powers.

Spain’s eurozone partners agreed in June to lend up to 100 billion euros to salvage banks buckling under record bad loans built up since a 2008 property crash. Eurozone powers agreed the loan in return for a list of conditions drawn up in a July 20 memorandum of understanding. The new laws aim to comply with those demands.

The Bank of Spain could intervene even in a bank that meets liquidity and solvency requirements, if it is “reasonably foreseeable” that it will not continue to do so, the draft said.

The central bank would demand that the suspect bank provide within 10 days an action plan to fix the situation, which would be subject to approval. Further, the Bank of Spain could order that the bank management be fired, require a programme for restructuring of debt, or a recapitalisation in agreement with the FROB.

The FROB would be in charge of any restructuring or “orderly resolution” of banks, equipped with powers to liquidate those entities it considers being non-viable. Banks that need public money to be viable but can repay the money would still be restructured.

In certain cases, banks that likely cannot repay the money may be restructured if an outright liquidation might threaten the stability of the whole financial system, the draft says, widely seen as an allusion to rescued banking giant Bankia. Non-viable banks may be placed in bankruptcy or subjected to an “orderly resolution” plan drawn up by the FROB.

A FROB resolution plan would have to include a valuation of the lender, the method to be used to dispose of the bank, and any support required from the Deposit Guarantee Fund. The FROB has three options to dispose of a ban: Sell the business; transfer its assets and liabilities to a “bridge bank”; or transfer them to an asset management company.

The new legislation foresees the creation of a “bad bank” to pool troubled banks’ bad loans and also a “bridge bank” to manage failed banks for up to five years until a buyer can be found, the reports said. Whether a bank is restructured or liquidated, investors in the lender would suffer, the reports said.

Shareholders and partners would be first in line for losses in case of restructuring or liquidations under the new law, the draft says, followed by subordinated creditors. Such a requirement would hurt many ordinary customers who were persuaded by their banks to invest in preference shares without fully understanding the risks, business daily Expansion said.

Three nationalised banks — Bankia, CatalunyaCaixa and NovaGalicia — alone had 150,000 such customers with a total investment of 4.5 billion euros in preference shares, Expansion said. —AFP