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Could Spain’s Banks Be Saved by Letting Some Go Bust?

Spain’s banking sector is the focal point for worries about its economy, and the only part of the Spanish economy to request a bailout from the rest of the euro zone so far.

Spain, Euro coin
Philippe Huguen | AFP | Getty Images
Spain, Euro coin

Now under new rules being drawn up, the state may be able to intervene and shut down troubled banks, potentially setting shareholders up for hefty losses (Read more: New Spanish Banking Laws).

Some of its smaller, weaker, more property-focused banks should be allowed to bite the dust to stop the size of the country’s bailout escalating even further, according to Ralph Silva, managing director of Silva Research Network.

“People are getting into worse and worse positions month after month in the property market, and most of these smaller lenders are just mortgage lenders,” he told CNBC Europe’s “Squawk Box” Friday.

“Spain needs an orderly disbanding of these financial institutions or the amount of money it would need would be enormous. This is the first regulator in Europe that’s saying this isn’t working, let’s work out another way of doing it.”

The euro zone has already committed around 100 billion euros ($125 billion) to bailing out Spain’s banks, many of whom have run into trouble as the clouds over the Spanish property market failed to dissipate.

“The whole point of the bailout cash is to maintain the banks as a going concern – why let them go bust?” Moorad Choudhry, head of treasury for the corporate banking division at RBS, asked.

Silva argued that the ultimate bill could be much larger if banks are not allowed to collapse.

He believes the Bank of Spain will manage to limit the bill to around 200 billion euros by using similar tactics to U.S. mortgage lenders Freddie Mac and Fannie Mae, which were put into conservatorship by the government at the height of the credit crisis.

He argued that “good” customers like individual savers could be moved to “good” banks so that individual customers could be protected from a bank’s collapse.

Spain is not expected to ask for official assistance to help its economy, which has not turned around in the way many hoped, until at least the September 14 Eurogroup meeting (Read more: Spain's Economy).

The country has suggested that it would want the European Central Bank (ECB) to commit to unlimited bond buying – one measure which has been proposed to help limit the damage to Spain and Italy in the bond markets - before officially requesting assistance (Read more: Will Spain Seek a Bailout?).

Written by Catherine Boyle, CNBC. Twitter :@catboyle01.

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