Spain To Request EU Extension For Use Of Bank Bailout Fund

Ahead of the publication of bank stress-test results on July 23, Spain will ask the European Commission for an extension to use its state-financed bailout fund, or FROB, to provide capital to any banks that are found to be dangerously weakened, Finance Minister Elena Salgado said Tuesday.

Following a meeting with European Union finance ministers, Salgado told journalists in Brussels Spain would ask for the extension as a "precautionary" measure, according to an audio clip on a Spanish government website. Salgado said any possible capital shortfalls in the Spanish banking system would not be large.

In an effort to boost investor confidence in EU banks, the Committee of European Banking Supervisors is testing 91 EU banks for their ability to maintain solvency in the face of adverse economic and financial conditions.

After a forcing a wide restructuring of mutually owned savings banks, Spanish authorities have said their banking system is basically healthy and spearheaded the push for the EU-wide stress tests in order to show that. Nearly one third, or 27, of the banks to be tested are Spanish.

Currently, 39 of Spain's 45 savings banks, or cajas, are merging and will receive EUR10.19 billion from the FROB to shore up their capital bases. Spain has set aside EUR12 billion for the FROB and it can be expanded up to EUR99 billion, though the Commission had only authorized its use until June 30.

"We believe the needs of our financial system have already been largely met" Salgado said.

Many analysts, however, believe Spanish banks will need more funds in order to ensure their solvency. Credit rating agency Fitch Ratings Monday said it thought the overall system could need between EUR23 billion and EUR88 billion in new capital.