UPDATE 1-Bank of Spain hopes to soften capital blow for banks

Tue Jul 9, 2013 5:50am EDT

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By Jesús Aguado

MADRID, July 9 (Reuters) - The Bank of Spain is optimistic of softening the impact of new rules that could weaken the capital position of the country's banks, without hurting government finances, the central bank's governor said on Tuesday.

The issue relates to the treatment of so-called deferred tax assets (DTAs), which are created when a bank makes losses or writedowns that it can offset against future tax bills when it returns to profit.

Under international Basel III rules, DTAs will not be counted as part of a bank's capital from January 2014, potentially reducing a key measure of solvency for Spanish banks, many of which had to be rescued by European funds in the wake of the financial crisis.

The banks want the government to convert their DTAs to tax credits, which would then qualify as capital under Basel III. But the worry has been that this would have a detrimental effect on already strained government finances.

"It's a matter in discussion between the Economy Ministry, the Treasury, the Bank of Spain and lenders. I have hopes," Bank of Spain governor Luis Maria Linde told reporters on the sidelines of an event in Madrid, when asked about whether the matter would be resolved favourably.

"It's a complicated and technical issue, but there's no reason why it should affect Spain's sovereign debt," he added, without elaborating.

Other countries, such as Ireland, face similar issues, but the DTAs in Spain are among the biggest, and banks there have already come under huge pressure to bulk up capital.

Spanish banks have between 40 billion and 50 billion euros ($51-64 billion) in DTAs, largely as a result of massive writedowns on soured real estate assets.

($1 = 0.7773 euros) (Additional reporting by Sarah White; Writing by Sonya Dowsett; Editing by Mark Potter)

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