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Spain's banking system much improved says central bank

Source: Reuters - Thu 14th Jul 2011

Spain's overhaul of its financial system has led to fewer, healthier banks with better corporate governance, the Bank of Spain said on Wednesday, ahead of a Europe-wide test of banking health.

Four savings banks may need capital from the state-backed bank restructuring fund, the FROB, and auditors are assessing those savings banks' books to judge at what value the FROB will buy into their capital, the central bank said.

The four savings banks have not ruled out other options for raising capital, such as private equity investment, and make up 8 percent of Spain's banking system.

If other banks are identified as falling short of capital in the Europe-wide stress tests, they may apply for FROB funds to bring their capital up to the required level, as laid out in March's bank reform law, the Bank of Spain said.

Spain's largest savings bank Bankia and its smaller rival Banca Civica are in the middle of book building to try to raise a combined 5.5 billion euros in public share offerings to boost their capital levels.

Including 4.5 billion euros from Spain's state-backed restructuring fund, the Caja Madrid-led merged entity passed the last stress test in July 2010, unlike Civica. A smooth stock market listing for Bankia especially would gauge the success of Spain's banking sector overhaul.

Analysts expect a handful of saving banks with limited systemic importance to fail the tests, but fears remain the tests could reveal nasty surprises.

"Notwithstanding the Bank of Spain comments, it's the sheer scope of the Spanish banking weakness - and what we don't know yet - that worries me most," said Bill Blain, senior director at broker NewEdge Group.

Spain has forced mergers among its unlisted regional banks, or "cajas", which make up around half its financial system. It has forced them to seek private capital or face nationalisation in order to assure international markets of their solvency.

Some Spanish banks may fail the Europe-wide stress tests on Friday, Economy Minister Elena Salgado has warned, due to different criteria on what counts as capital.

The FROB has around 6.6 billion euros in its coffers plus a 3 billion euro line of credit with 13 banks. To capture additional funds, it would have to access tumultuous markets where Spain's cost of borrowing is at euro-era highs.

The Bank of Spain gave an updated figure of 17 billion euros as the shortfall in the banking system to bring entities' solvency ratios up to 10%, falling to 8% if they manage to capture private funds.

The stress tests require a solvency ratio of 5 percent in an extreme economic downturn.

The banking system overhaul will likely reduce the total number of cajas to 15 from 45, once all the merger processes are complete, the Bank of Spain said, more than doubling the average total assets per financial entity.

Mergers have cut costs and capacity, reducing branch networks by up to a quarter and staff by up to 18%, the central bank said. Banks have also recognised greater losses on deteriorating assets.

The restructuring of the savings banks has also led to more professional management, the Bank of Spain said. The cajas have been criticized for the presence of local politicians on their boards.

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