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Spain's new banking regulations take effect today

Thu 10th Mar 2011

This morning saw new rules come into play concerning capital requirement for Spanish banks in and many of the weaker banks are seeking ways to boost their funds. Under these new rules, all Spanish banks must now increase their core capital ratio to a minimum of 8%.

The new regulations are even harsher for unlisted savings banks, known as 'Cajas', and those that have private investments below 20% need to raise a core capital ration of at least 10%.

The changes come as the non-performing loan ratio, an indicator for Spanish banks' financial strength, jumped to its highest level since 1995.

The Bank of Spain recently reported how Spain's total bad debt reached 107 billion euros last month - a bad loan ratio of 5.81%, and an increase on the 5.68% reported for November of last year.

The majority of the larger listed lenders are expected to be able to manage their bad debts and reach the new requirements with reasonable comfort, however there are concerns that some of the smaller or weaker cajas may struggle to acheive this.

Following the first round of stress tests for all EU banks last summer, the number of Spain's cajas reduced from 45 to 17 as a result of a program of mergers encouraged by the government. The remaining cajas are now being asked to improve their solvency or face partial nationalization.

All lenders who fail to increase their core capital ratio to the minimum required will then need to approach FROB - the restructuring fund for the banking sector.

FROB would then inject fresh capital into such banks, and would hold an interest for a maximum of five years. Last month Finance Minister Elena Salgado expressed her confidence that banks would not need in excess of 20 billion euros.

Since the new rules were laid down at the start of the year, a number of cajas - significantly Caja Madrid, and la Caixa - have listed themselves as commercial banks. They have also approached the market for an injection of fresh capital.

Earlier this week, Bankinter followed suit, with a 3-year convertible bond auction aimed at raising 406 million euros.

Critics have expressed concerns that this new plan won't be enough to restore confidence in the Spaish economy overall, however, passing the next round of EU stress tests is a major priority for the government. Last year, 8 of the larger listed Spanish banks passed the EU stress tests, but 5 of the cajas failed.

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