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Madrid to Get Power to Close Troubled Banks

Miles Johnson in Madrid
Thursday, 23 Aug 2012 | 10:37 PM ET

The Spanish government is finalising new rules to allow the state to intervene in troubled lenders and shut down banks that refuse to draw up adequate survival plans.

Spain
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Spain

Ahead of a weekly meeting of ministers on Friday, a government official said that Madrid was working on legislation to toughen the powers of the Bank of Spain in its regulation of lenders, as was agreed under the terms of the €100bn rescue deal the eurozone will provide to the Spanish banking system.

The inability of the government of Mariano Rajoy, the prime minister, to restore confidence in Spain’s banks, which amassed about €200bn of bad property loans during a decade-long bubble, forced Madrid to accept a string of regulatory conditions in return for outside assistance for the sector.

One of the main areas to be overhauled under the agreement is the regulatory powers of the Bank of Spain, which was widely criticised for having failed to step in early enough after the €23.5bn nationalisation of Bankia in May, the largest in Spanish history.

While the draft regulation could change before being approved, it is expected that the Bank of Spain will be granted the power to demand lenders that have fallen into difficulties outline plans to guarantee their future within 10 days.

Also the Frob, Spain’s state-funded bank bailout fund, which would come under the full control of the Ministry of Economy, would in the future force shareholders and creditors in any rescued bank to take losses before state aid was provided.

Under the terms of the rescue, small savers who bought preference shares in Spain’s four rescued banks – Bankia, CatalunyaCaixa, NovaGalicia and Banco de Valencia – are likely to incur losses, with negotiations continuing between Brussels and Madrid over how large the losses will be.

The nationalised banks, which have been effectively cut off from any form of external financing, are yet to receive the first €30bn tranche of the European aid.

Meanwhile, a Spanish official denied reports that the government was in negotiations over the terms of a full bailout involving the European state bailout fund buying up its debt.

After seven months in power denying the possibility of a rescue to bring down Spain’s borrowing costs, Mr Rajoy notably changed tone this month by for the first time admitting his government would consider requesting aid, but only once the eurozone had made clear what conditions would be attached.

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