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Spain to approve overhaul of savings banks

Source: AFP - Thu 8th Jul 2010

On Friday the Spanish government will finally approve an overhaul of the country's regional savings banks, known as caja's, the weak link in its financial system and the subject of growing concern in the markets, the prime minister said.

The reforms, which will open up the banks to more private investors and restrict the role of elected officials, are "essential to modernise our financial system and make it more efficient" Jose Luis Rodriguez Zapatero told a news conference Thursday.

The regional savings banks have become a cause of growing concern for the government, regulators and investors.

Spanish banks got off relatively lightly from the global credit crunch in 2008 as the country's strict rules meant they did not invest heavily in the high-risk US home loans that hurt financial institutions elsewhere.

But many of the 45 regional savings banks, many owned by regional politicians, have been exposed to massive bad debt since the collapse of the property sector at the end of 2008.

The Bank of Spain and the government has called for the consolidation of the sector in order to maintain liquidity in the wider financial system.

The central bank said last month that 39 of the regional banks are involved in mergers or alliances.

It said the banks have requested a total of 10.19 billion euros (12.43 billion dollars) from a special government fund, the FROB, set up last year to oversee their merger plans.

Under the new reforms worked out between the Socialist government and the conservative opposition Popular Party, more shareholders will have voting rights in a bid to attract more investment.

The measures will also include restrictions on elected officials sitting on the boards of the banks.

The reforms will be approved by decree on Friday but be officially passed by parliament at a later date, Zapatero said.

Spain plunged into its worst recession in decades at the end of 2008 following the bursting of the real estate bubble and only returned to tepid growth this year.

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