Spain's banks urged to create capital buffers

Forthcoming new banking regulations will require Spain's banks to strengthen their capital base to cushion them from future shocks even if the majority of banks are in good health, its central bank governor said on Thursday.

Evidently our banking system will have to make an effort to strengthen capital and create liquidity cushions in the coming years," said Miguel Angel Fernandez Ordonez.

However, he said that international regulatory reforms were advancing in general terms in line with those already adopted by the Bank of Spain and Spanish institutions.

"It seems reasonable to think that Spanish banks will be less affected than those of other countries" he said.

Tougher new rules governing banks' capital position known as Basel III are due for release on Sunday and have increased concerns over the situation of weaker banks that stress tests were meant to soothe two months ago.

Indeed, Ordonez said uncertainty over the economy's recovery was still high and that nearly all economies were growing below their potential.

"There still exist important problems in various segments of financial markets and the banking systems have still not returned to functioning normally."

He also said that new banking rules could have a high cost for the global financial system and economy if they were all applied rigorously against a difficult economic backdrop.

Spain's banks still faced a number of challenges. He said there was still a lot of work to do improve the assets of banks as many still had high exposure to bad property assets.

However, the worst may be over given that bad loans data for the sector had started to improve.

He also welcomed new rules permitting Spain's savings banks to raise capital which would bring them up to speed with market standards and make them more accountable to markets.

WORK

Ordonez also urged Spanish businesses to take full advantage of a labour reform that was passed through parliament on Thursday aimed at cutting the country's 20 percent unemployment rate.

Some have criticised the reform for not going far enough to really change the jobs market, something Ordonez acknowledged.

"Although the proposed reform does not change all the elements of the past set-up, it does make important changes, that firms in trouble will be able to adopt" he said.

Spain must continue to assure markets of its commitment to cutting its public deficit. Spain aims to slash its deficit from 11.2 percent in 2009 to 3 percent by 2013.

"It is essential that all the objectives announced are strictly met, and corrected if necessary should any deviation occur" he said, adding that serious measures had been well received by markets but that new periods of instability could not be ruled out.

He also reiterated his call for a pension reform in the country, which the government aims to wrap up by the end of the year.