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Spain's Government set to hike capital requirement of Cajas

Tue 25th Jan 2011

Further to the Spanish government's austerity drive to restore the global financial sector's faith in its solvency, Economy Minister Elena Salgado announced yesterday that the minimum capital requirements for the country's banks would be increased.

The 'Tier 1' core capital ratio will be lifted from currently being 6 % of their risk-weighted assets, to 8 %, which the minister estimates to involve an investment of around 20 billion euros. Any of the cajas that are unable to raise the required capital by September, and can not show that things are well in hand to acheive this, will instantly be transformed from a caja and into a commercial bank so that the Fund for Orderly Bank Restructuring (FROB) can inject capital into them, essentially meaning their partial nationalization. The FROB would then hold stakes in the cajas for a maximum of five years, Salgado said.

These new rules will be introduced by means of a decree, with the cajas given until December to comply with them. The 8 % minimum is the same as that included in the so-called Basel III international statutory requirements for banks, which are not due to come into effect until 2013.

Salgado commented that non-listed cajas without a considerable number of private investors and funding requirements of in excess of 20 % of their assets will be required to have even greater minimum capital ratios.

Salgado added that the reforms are aimed at "lifting any doubt about the solvency of the Spanish financial system and its ability to resist even the most unlikely adverse scenarios."

Moody's Investors Service yesterday commented that any moves to restore market confidence in the cajas "would also help to improve market perception of the government's own credit profile, now weighed down by the continued concern about potential banking-sector liabilities."

Meanwhile, the government is still hoping to find agreement with the unions in order to raise the retirement age from 65 years to 67, but sources said it seems increasingly likely it would have to approve the increase at Friday's Cabinet meeting without the desired accord.

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