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Reform saves Spanish banks 30 billion euros in capital requirements

Cabinet to allow lenders to transform deferred tax assets into state-backed tax credits

The Cabinet on Friday approved a reform of the treatment of deferred tax assets (DTAs) that potentially will boost the capital of the Spanish banking sector by 30 billion euros as of the beginning of next year.

A deferred tax credit is an asset on a firm’s balance sheet that may be used to reduce income tax expenses in the future. Under the new rules, part of the banks’ deferred tax assets will become state-backed tax credits that can count as core capital. Generic provisions for potential loan losses are a form of DTAs if losses are actually generated.

The Cabinet also approved a draft bill transposing a European Union directive on the Basle III capital adequacy regulations. Under Basle II deferred tax assets counted as capital but after Basel III takes effect at the start of 2014 this will no longer be the case, hence the rationale behind the reform approved Friday by the cabinet.

Economy Minister Luis de Guindos estimated that Spain’s banks have around 70 billion euros in deferred tax assets, of which 50 billion euros were generated in meaning. Of this amount about two thirds, or 30 billion euros, can count as core capital.

European banks are to be subjected to asset quality and stress tests next year, which could require them to increase their capital. The reform passed by the Cabinet will reduce any potential capital Spanish lenders have to raise.

De Guindos insisted that the reform in no way represented a “present” for the country’s banks and that it “would have no impact on the public deficit or public debt.”

The minister said similar accounting relief was granted to Italy’s banks.