Spain raises banks capital reserve requirement

MADRID, Spain — Spanish banks will need euro20 billion (US$27 billion) in new capital to meet new reserve requirements aimed at strengthening their finances and quelling fears the country might be Europe’s next to need a bailout, the government said Monday.

MADRID, Spain — Spanish banks will need euro20 billion (US$27 billion) in new capital to meet new reserve requirements aimed at strengthening their finances and quelling fears the country might be Europe’s next to need a bailout, the government said Monday.

Finance Minister Elena Salgado said a government fund that has been lending billions for mergers among troubled cajas, or savings banks, might eventually buy stakes in the entities that cannot meet the new criteria by raising capital on the open market.

For that to happen, banks will have to be listed on the stock market and become full blow banks, Salgado said. The savings banks are not now listed.

Worries about Spain’s banking system have been an aggravating factor in the government debt crisis plaguing the eurozone. Cajas have been particularly hard hit by exposure to a collapsed real estate sector in Spain.

Salgado said it won’t be known until the fall which savings banks the government fund, called the FROB, might buy into.

At a hastily called news conference, Salgado said the overriding goal of the restructuring of the Spanish banking sector is to “dissipate any doubt about the solvency of lending entities, about their capacity to resist under difficult circumstances, in adverse scenarios, as unlikely as these scenarios might be.”

The new core capital ratio will be eight per cent compared with the current six per cent and might be even higher for savings banks, and this will be decided over the next few weeks, she said.

Salgado said the euro20 billion needed in new capital for the banking system will not be financed entirely by the government and it will be a few months before it is known how much public money is needed.

She said the new core capital requirement will take effect in December. Spain is essentially moving up the new bank reserve rules, called Basel III, that were decided last year by major banks meeting in Switzerland.

Spain’s share of the Europe sovereign debt crisis has died down a bit due to successful bond auctions recently, and thanks to EU statements that the bloc is looking at ways to beef up its mechanisms to handle crises.

But Spain’s banks are a risk because if they need money that could hit already hard-pressed government finances, already sapped by spending to compensate for a jobless rate that is at nearly 20 per cent and on stimulus measures.

The burden of saving troubled banks helped push Ireland to the verge of bankruptcy and forced it to accept an EU and IMF rescue package late last year.

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Associated Press Writer Daniel Woolls contributed to this report.