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Spain prepares new plan to help savings banks

MADRID, Jan 21, 2011 – Spain said Friday it is drawing up a new plan to restructure regional savings banks, the weak link in its banking system and a major cause of concern over public finances amid the ongoing eurozone debt crisis.

"The government is preparing a plan the aim of which is to increase the solvency and the credibility of the savings banks," Deputy Prime Minister Alfredo Perez Rubalcaba told a news conference following a cabinet meeting.

The plan is being drawn up in conjunction with the Bank of Spain and the Spanish Confederation of Savings Banks (CECA), said Rubalcaba, who is also interior minister. The details will be announced once it is finalised.

Spain\’s regional savings banks, the weak link in its banking system and which account for about half of all savings in the country, loaned heavily to the property sector before the housing bubble collapsed in 2008 and plunged the country into recession.

Forty regional banks, from a total of 45, are now in the process of merging or forging operating alliances as part of a restructuring led by the Bank of Spain.

All eight major Spanish banks passed European Union bank stress tests conducted in July on their ability to weather a crisis but five out of 19 regional lenders examined failed.

But European Union finance chiefs, prompted by Ireland\’s banking catastrophe, promised this week they would soon launch new, more stringent tests across the bloc to check bank liquidity levels.

Spain\’s Fund for Orderly Bank Restructuring, the FROB, outlined a scenario in which it could take a stake in the savings banks, in a presentation published online.

The FROB presentation — which was accompanied by a separate note stressing that the content referred only to "working hypotheses" — was widely reported in the media Friday.

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In it, the FROB said new measures could strengthen the requirements on banks\’ solvency and capital quality so they can meet the most stringent international standards and future stress tests.

New capital could be obtained from three sources, it said:

— From private investors in market conditions;

— Temporary support granted by the FROB to help the entities to raise funds from private investors;

— And "in the last instance, the FROB could provide the funds directly, taking a stake on the entity on a temporary basis."

The FROB presentation, which carried a January 18 date, said other measures could include speeding up the separation between financial and social activities of the savings banks to improve management.

It also outlined possible legal reforms to make it easier for savings banks to access financial markets and to encourage private investment with greater transparency, thus imposing market discipline.

A report in Spanish daily El Pais on Friday said there was some internal wrangling in the government over the next step for the savings banks, with the finance ministry arguing there was no need for legislative changes but the prime minister\’s office and the Bank of Spain in favour.

Latest data Tuesday showed Spanish banks\’ non-performing loans ratio rose in November to the highest level since January 1996, as property-related losses weighed on balance sheets.

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Total bad debt held by the banks rose to 104.78 billion euros (140.50 billion dollars) for a ratio of bad debt to total loans of 5.68 percent, up from 4.98 percent in October 2009, the Bank of Spain said.

Credit rating agency Moody\’s last month issued a negative outlook on Spain\’s banks and warned that their total economic losses could reach 176 billion euros. It expected bank capital, profits and access to finance to remain weak.

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