Spain to give Deposit Guarantee fund $3.2b to help investors in risky bank debt

MADRID (Reuters) - Spain will ask its healthy banks to make an extraordinary contribution of 2 billion euros (S$3.2 billion) to the country's Deposit Guarantee fund to help compensate 300,000 investors in risky bank debt who lost money in the country's financial crisis.

Five years ago, just as Spain's economy entered a prolonged crisis, banks sold some 8 billion euros worth of risky hybrid debt instruments known as preference shares. Many of the investors were depositors who thought they were buying a low-risk deposit.

"The Deposit Guarantee Fund will ask all of the financial institutions to make an extraordinary contribution, of 3 (euros) per every 1,000 in deposits. That means a quantity of approximately 2 billion euros," Economy Minister Luis de Guindos said at a news conference on Friday, March 22.

Smaller banks and weaker banks would be exempted from the extraordinary contribution, he said.

Mr De Guindos said holders of the preference shares would receive bank shares in exchange.

But, since state-owned banks such as NCG Banco and CatalunyaBanc do not have traded shares, the government will use the Deposit Guarantee Fund, or FGD, to buy out the shareholders.

The financial sector collapsed in 2008 after a property market crash. Last year the European Union rescued Spain's banks to the tune of 41 billion euros. The state has taken over a total of seven banks, and still controls five.

Spain has struggled to find ways to compensate investors in preference shares for their losses after a European rescue of the country's banks last year.

Brussels requested that the government impose losses on investors on the banks, as a condition for the rescue money.

Despite the government's new plan to compensate preference shareholders, they will likely still have to take some loss.

Investors will also have an opportunity to file complaints seeking full compensation if they can prove their bank did not properly inform them of the risks involved.

Many preference share owners were unsophisticated investors, and the sale of the instruments has been a national scandal.

There are frequent protests on the streets and in banks by holders of such instruments, demanding compensation.

Mr De Guindos said that banks that have invested in a so-called bad bank, set up to sell off toxic property assets from the real estate market crash, will be allowed to make lower extraordinary contributions to the FGD.

BBVA, Spain's No. 2 bank, is the only bank that did not invest in Sareb, as the bad bank is called.