MADRID (Dow Jones)--The Spanish government Friday approved legislation that will bolster the solvency of its ailing savings banks and force many of them to convert into traditional banks, a key part of its strategy to shore up investor confidence in its troubled economy.
"The [legislation] aims to reinforce the solvency and also the credibility of our financial sector," Finance Minister Elena Salgado told journalists after the government's weekly cabinet meeting.
The details of the new rules are in line with what the government had announced in January. All banks will be required to hold minimum regulatory capital of 8% of assets. Unlisted, mutually owned lenders that get more than 20% of their funding from wholesale markets, must have capital ratios of no less than 10%. This higher capital requirement is expected to force many of Spain's unlisted savings banks known as cajas to transform themselves into traditional banks. Because of their complicated governance structures, these institutions have faced growing difficulties financing themselves on international markets.
Spain's central bank will provide calculations of capital shortfalls at Spanish banks on March 10, though Salgado reiterated the government doesn't believe the total amount will surpass EUR20 billion.
As previously announced, banks will get six months, to the end of September, to raise capital, before the state would inject capital into those lenders that remain below the new minimums, though Salgado said the government will allow for some flexibility for institutions that are in the process of raising money from private investors.
Salgado said lenders that are negotiating a partial sale to private investors will have until the end of December to complete such deals. And on a case-by-case basis, the central bank can allow lenders that are planning stock market listings to do so before the end of the first quarter of 2012.
Juan Pablo Lopez, banking analyst at Banco Espirito Santo, said that apart from the "somewhat weakened deadline" for the recapitalizations, the details of the new legislation were in line with expectations. However, he noted that Spain's risk premium--as measured by the spread of the 10-year Spanish bond over its German equivalent--continues to rise, largely as a result of deepening financial problems in neighboring Portugal.
Investor concerns over high debt levels and low growth prospects have forced Portuguese borrowing costs to levels where it might be forced to follow in the footsteps of Greece and Ireland and request a bailout from the European Union and International Monetary Fund.
Spain has similar problems to these countries, though it has taken steps in recent months to slash a double-digit budget deficit and reform its economy. Salgado said these measures have gone a long way toward reassuring investors, though she said "our banking system, a part of our banking system, continues to raise concerns on financial markets."
According to Friday data from the Bank of Spain, non-performing Spanish loans rose to 5.81% of the total in December, its highest level since the beginning of the crisis. Yet many private sector analysts fear the true amount of bad debt in the system is likely to be much higher as Spanish banks grapple with a housing bust and 20% unemployment.
Source: Bloomberg