Spain's Central Bank is consulting with international bankers and property experts on setting up a holding company to value and sell off toxic real estate assets from the country's troubled financial sector, two sources said on Monday.
The consultation process will last a few weeks, one of the sources, from the central bank, said. "When we have those opinions we will use them for input on the formula for the entity," the source told Reuters.
Spain's banks were hit by billions of euros of losses after a decade-long property bubble burst in 2008 and concern about them, and the country's overspending regional governments, have fanned fears of a new euro zone debt crisis.
It has restructured the financial sector three times, injected some 18 billion euros into the system, taken over five banks and forced banks to recognize steep losses.
But investors are not convinced all the risks have been worked out of the system and Spain's borrowing costs are hovering around 6 percent, a point below levels deemed unsustainable.
The government is looking at what it calls a liquidation structure -- refusing to use the term bad bank -- to take toxic assets off the banks' books.
"Separating the real estate assets from the bank balances is something that makes sense and is positive for the banks from many points of view," Economy Minister Luis de Guindos said at a news conference on Monday.
"It allows you to free up capital and fundamentally it allows the banks to do their banking business and not the real estate business," he said.
Asked which banks were advising the government de Guindos declined to answer, saying talks were ongoing. The Bank of Spain source also declined to name the advisers.
Credit ratings agency Standard & Poor's downgraded Spain's public debt by two notches last week, saying the country's banks could become a burden for the state. It followed that up on Monday by chopping the credit score of 11 banks saying they faced the same economic risks as government debt.
The government has ruled out seeking an international bailout like Greece, Portugal and Ireland and has said several times that it is not following Ireland's bad-bank model.
Under the current thinking, the Spanish entity will not have a banking license and will not be able to do financial operations, but will function as a real estate liquidation firm.
The banks are holding some 184 billion euros of troubled real estate assets, including land, buildings and bad loans to developers. They will write off some 60 percent of that in forced provisioning this year under new rules announced by de Guindos in February.
On Friday government officials said that if the assets that go into the liquidation company sell for less than their written-down value, the banking sector will have to absorb the losses.
However, it is not clear how that would be done and over what time period.
BANKIA UNDER SCRUTINY
One of Spain's bigger banks, Bankia, lies at the heart of concerns over the banking system due to its large exposure to the country's property sector.
A holding company solution might benefit Bankia and its parent company Banco Financiero y de Ahorros (BFA), which have repossessed real estate assets of around 11 billion euros of which 5 billion are undeveloped land.
Under de Guindos's new rules for banks, it must boost capital this year by 5 billion euros to cushion against future losses. It has already set aside about half of that.
Despite pressure to consolidate with another bank, Bankia is sticking to its standalone strategy, saying it could meet requirements for provisions against property losses without public money or a merger.
The Central Bank is in the process of auctioning off Banco Valencia and CatalunyaCaixa, which it took over last year. Up until now it has had to provide steep guarantees against future losses in order to unload rescued banks.
Financial sources expect Banco Valencia to be taken over by a mid-sized savings bank while bigger banks are looking at CatalunyaCaixa.
Santander, the euro zone's biggest bank, has so far stayed out of the banking consolidation fray in Spain, but its chief executive said last week that it was looking at the next banks the Central Bank will be selling off.
Savings bank CatalunyaCaixa could offer Santander or another Spanish banking giant BBVA a way to increase their network in the industrialized eastern region of Catalonia.
(Reporting by Fiona Ortiz and Jesus Aguado; Editing by Julien Toyer and Philippa Fletcher)
By Fiona Ortiz