IMF asks for non-viable Spanish banks to be wound down

After a 10-day review in Madrid, the European Commission, the IMF and the European Central Bank (ECB) have given a favorable opinion of the Spanish government’s efforts to clean up the banks that were nationalized in order to save them from going under.

In the next few weeks the amount of funding to be injected into Bankia, Catalunya Banc, NCG Banco, NCG Banco and Banco de Valencia to restore their balance sheets to health will be announced. Spain has signed a memorandum of understanding with its European partners for a bailout of up to 100 billion euros to fund the recapitalization.

An audit by consultant Oliver Wyman estimated the Spanish banking sector will need additional capital of 53.745 billion euros to shore up balance sheets because of its exposure to the moribund real estate sector. Bankia requires 24.743 billion euros, Catalunya Banc 10.825 billion, NCG Banco 7.176 billion for NCG Banco and Banco de Valencia 3.462 billion under an adverse economic scenario.

In a statement issued Friday, the IMF recommended that “non-viable banks [need to be] promptly wound down” in order to ensure the successful clean-up of the financial system.

“I warmly welcome today's positive assessment of the implementation of the Spanish financial sector programme,” the European Union’s commissioner for economic and monetary affairs, Olli Rehn, said in a separate statement. “This is another step towards the thorough repair and reform of the banking system in Spain, which is in turn an essential building block for a return of investor and consumer confidence.”

“In the coming weeks, the European Commission will proceed with the assessment of the recapitalisation and restructuring plans of Spanish banks, which should pave the way for the first disbursements for entities in need of public support,” the statement added.

The EC, the IMF and ECN inspectors were in Madrid for the period October 15-26 in which they also analysed Spain’s economic situation and the financial markets in the wake of the ECB’s pledge to buy sovereign debt in the secondary market.

“Financial market conditions have improved since the announcement of the ECB’s Outright Monetary Transactions program, though they remain fragile, and the economy and banks face headwinds,” the IMF said.

The IMF said a push would be needed to ensure the bad bank being set up to absorb the banks’ toxic assets is fully operational by the end of this month.