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Bank of Spain says new bank law essential

Source: Reuters - Mon 21st Feb 2011

A new decree detailing capital requirements for Spain's banks and aimed at dispelling market concerns is essential to deal with possible problems within the financial sector, the Bank of Spain's governor said on Monday.

"It was essential and absolutely necessary to approve the decree law to deal with problems in the financial system ... and win back the confidence of the markets," Miguel Angel Fernandez Ordonez said.

"The law approved on Friday strengthens the Spanish financial system even further and will allow the sector's restructuring and clean up, started when the crisis began more than three-and-a-half years ago, to be completed," he said.

The decree forces savings banks to seek private capital, either by direct investment or stock market listings, in order to reinforce financial safety nets weakened by heavy lending to property developers during a property boom and bust.

The cajas have until September to get private capital on board, but if they fall short of minimum requirements, they can get the deadline extended to March if they can show plans for listing are in progress.

The banks have been under intense market scrutiny since the beginning of the crisis and are considered the Achilles' Heel of the state in its fight to deflate a massive public deficit.

Spain's banks have mostly been shut out of international wholesale debt markets, with some economists claiming they could be facing a capital shortfall of up to 120 billion euros .

The total exposure of savings banks to the property and construction sector was 217 billion euros, of which 173 billion euros corresponds to loans and 44 billion euros to property taken on in exchange for debts, the Bank of Spain said.

Of that figure, the potentially troubled banking book (that classified as doubtful, sub-standard and foreclosed) amounted to 100 billion euros, the bank said.

However, Ordonez echoed government comments that banks would not need more than 20 billion euros to reach the required core capital levels -- a measure of a bank's ability to withstand financial shock.

The banks have already taken around 11 billion euros from the bank restructuring fund (FROB). The fund has comfortable liquidity levels and would issue more debt on the market if necessary, Deputy Governor Javier Ariztegui said.

The new decree demands an 8% minimum core capital ratio for listed banks, which jumps to 10 percent for unlisted banks that fail to attract private funds for more than 20 percent of their equity.

"Things won't change overnight. Markets have a lack of confidence in Spain but reinforcing the banking system means that when the economy picks up we have a solid system," Ordonez said.

"There will come the time when lending picks up, jobs begin to be created and the banking system will be ready."

There would be no restrictions on which investors would be permitted to invest in the banks which should not use the system for speculative investments, Ordonez said.

"There will be no restrictions at all on foreigners. We are in the European Union, but we want stable investors ... with a commitment to permanency. We don't want speculators," he said.

Ongoing concerns over the lack of transparency prompted the government to require the banks to declare all property sector interests and increase minimum capital requirements.

"The savings banks have recognized that a high percentage (46%) of their credit investment in this sector is potentially problematic and the portfolio is completely covered by provisions," the central bank said in a statement.

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