Big Deadline Facing Spain's Nervous Savings Banks

New rules capital requirement for banks in Spain come into force on Thursday, March 10, and Spain's vulnerable savings banks are looking around for any extra cash.

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Under the new capital requirements, all Spanish banks must increase their core capital ratio to a minimum of 8 percent.

The rules are even tougher for all unlisted savings banks, or those that have private investment of less than 20 percent, with a core capital ration of at least 10 percent.

The move comes as the non-performing loan ratio, a key indicator for Spanish banks' financial health, jumped to its highest level since 1995.

According to the Bank of Spain, total bad debt reached 107 billion euros ($143 billion) in Febuary, or a bad loan ratio of 5.81 percent. That’s up from 5.68 percent in November 2010.

While major banks like BBVA and Santander can cope with their bad real-estate and construction loans, there are some strong concerns that some cajas, as the savings banks are known, may not be able to do so.

This is the second stage of the government’s plan to restore confidence in the troubled Spanish banking sector.

After reducing the number of local savings banks to 17 from 45 last year, the government is now asking them to improve their solvency or face partial nationalization.

All the banks unable to boost their core capital ratio to the minimum requirement will have to turn to the FROB, the restructuring fund for the banking sector.

The FROB will inject fresh capital into these banks, and will hold a stake for a maximum of five years In January, Finance Minister Elena Salgado said she was confident that banks wouldn’t need more than 20 billion euros.

Since the new rules have been unveiled, two months ago, several cajas (including Caja Madrid, and Caixa) have transformed themselves into commercial banks. They have also turned to the market to raise some fresh capital.

On Tuesday, Bankinter was the last one to join the group, with a 3-year convertible bond auction aimed at raising 406 million euros.

Some analysts have already expressed concerns that this new plan won’t be enough to restore confidence.

But passing the new stress tests seems to be the first priority of the government. Last year, eight major Spanish banks passed the EU stress tests, but five regional savings banks failed.