Government to raise minimum bank capital requirements

As part of the Spanish government's stepped-up reform drive to restore the investment community's faith in its solvency, Economy Minister Elena Salgado on Monday announced the minimum capital requirements for the country's banks would be raised.

The so-called Tier 1 core capital ratio will be increased to eight percent from six percent of their risk-weighted assets at present. Salgado estimated this would involve injecting some 20 billion euros. Any of the liquidity-strapped savings banks — or cajas as they are known in Spanish — that fail to reach the minimum level by September and are unable to show that they can do so through private funding will automatically be transformed into a commercial bank so that the Fund for Orderly Bank Restructuring (FROB) can inject capital into them, implying their partial nationalization. The FROB would hold stakes in the cajas for a maximum of five years, Salgado said.

The new rules will be introduced by means of a decree, with the banks given until December to comply with them. The eight-percent minimum is the same as that included in the so-called Basel III international statutory requirements for banks, which are not due to come into effect until 2013.

Salgado said that non-listed banks without a significant presence of private investors and funding needs of over 20 percent of their assets will be required to have even higher minimum capital ratios.

The minister added that the changes are aimed at "lifting any doubt about the solvency of the Spanish financial system and its ability to resist even the most unlikely adverse scenarios."

The government had flagged its intention of forcing all of the country's savings banks to set up parallel commercial banks to control their businesses in order to facilitate access to funding. A number of them have already done so through mergers but others have shown themselves reluctant to do so.

Moody's Investors Service said in a note released Monday that any moves to restore market confidence in the savings banks "would also help to improve market perception of the government's own credit profile, now weighed down by the continued concern about potential banking-sector liabilities."

Meanwhile, the government is still hoping to reach an agreement with the unions to raise the retirement age from 65 years to 67, but sources said it seems increasingly likely it would have to approve the increase at Friday's Cabinet meeting without the desired accord.