Spain's government Friday approved tough new rules that require the country's troubled savings banks to boost their core capital in a bid to shore up confidence in its battered economy.
The move came as the central bank said Spanish banks' non-performing loans ratio, a key indicator of their financial health, jumped to its highest level since 1995.
Spain's regional savings banks are weighed down by loans that turned sour after the collapse of a housing bubble in 2008 and are at the heart of fears the country could need a much bigger rescue than those granted by the EU and International Monetary Fund to Ireland and Greece last year.
The government last month announced measures that would oblige banks to increase their core capital ratio to 8.0 percent and force many unlisted institutions to convert into traditional listed banks, to give them a bigger cushion against economic difficulties.
Finance Minister Elena Salgado said that the cabinet had approved the measures on Friday.
"The financial sector continues to raise some doubts in the markets and so we are presenting this plan to strengthen the solvency and credibility of our financial sector," Salgado said. "It will be easier to obtain financing."
She added that the core capital ratio would be raised to at least 10 percent for unlisted banks or those which have private investment of less than 20 percent and who depend on the wholesale markets for more than 20 percent of their funding.
"The additional requirements will take effect on March 10, 2011," she said.
Savings banks that are not able to meet the higher level of capital must present financial stability plans by the end of March, the minister added.
The banks would have to find the necessary capital by September or be listed on the stock market.
But some savings banks may "exceptionally" be allowed until March 2012 to be listed on the stock market and until December 2011 to open their capital to private investors, she said.
Those unable to recapitalise in time will be nationalised with funds from state-backed Fund for Orderly Bank Restructuring for a period not exceeding five years, the minister said.
By requiring the banks to keep a high level of capital immediately available, the government is hoping that they will be able to cope with any new emergency and so not require hugely costly government help -- the Achilles' heel that sank the Irish banking system and then the public finances.
All eight major Spanish banks passed European Union bank stress tests conducted in July on their ability to weather a new crisis, but five of the regional saving banks failed.
Credit rating agency Moody's in December issued a negative outlook on Spain's banks and warned that total economic losses could reach 176 billion euros.
The Bank of Spain said Friday that total bad debt held by the banks soared to 107.173 billion euros ($145.17 billion), a ratio to total loans of 5.81 percent, up from 5.68 in November and 5.66 percent in October.
The rate, which was 4.98 percent in October 2009, is the highest since December 1995, according to calculations by Spanish media.
The Spanish economy, the European Union's fifth biggest, slumped into recession during the second half of 2008 as the global financial meltdown compounded the collapse of a labour-intensive construction boom.
It emerged with meagre growth rates in the first half of last year and posted a contraction of 0.1 percent for all of 2010.
Source: AFP Global Edition