Junior debt holders in Spain's Bankia could lose as little as 10 percent of the face value of their investment as a condition for the nationalized lender to receive European aid, a source involved in the talks said.
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The likely loss will range from 10 percent to around 50 percent, a level that Reuters reported last week.
Many junior debt holders, who rank behind other creditors in Spain's state-rescued lenders, are retail clients who entrusted their life savings to the banks, making any loss they suffer as part of the bailout a hot political issue.
State-owned banks are negotiating with the European Union to receive funds from a 100 billion euro ($127 billion) credit line as part of an international bailout.
Economy Minister Luis de Guindos said on Monday the government would tap just around 40 billion euros of the European credit line, with the rescued banks accounting for the vast majority of that.
Enforced losses on junior bondholders will form part of recapitalisation plans put forward by the rescued banks - Bankia, NovaCaixaGalicia, Catalunya Banc and Banco de Valencia - as a condition of receiving the EU aid, alongside job cuts.
The Bank of Spain said on Tuesday it had approved the plans of the state-owned banks, without giving any details of what the measures entailed.
It said it expected the European Commission to give its definitive approval of the plans on Wednesday.
The source with knowledge of the Bankia talks said subordinated debt with fixed maturities was set to lose 10 to 20 percent of its face value, with a discount of 40 to 50 percent applied to perpetual subordinated debt and preference shares.
"A deal has been clinched on swapping these (debt)instruments with Bankia shares and the discount applied will depend on the instruments," the source said on condition of anonymity.
Spain's shrinking banks set for more mergers The source warned that last-minute talks could still change these figures.
Bankia, which sought a 23.5 billion euro bailout from the state in May, declined to comment. Bankia shares closed up almost 5 percent ahead of the expected approval of its plan. The lender has lost over half its value since it was taken over by the state in May.
The stock market regulator estimates retail customers account for almost all of the 5.5 billion euros in preference shares in circulation.
Bankia accounts for over half of these. Nationalized banks are bracing for thousands of job losses as a condition of receiving aid, with Bankia and NovaCaixaGalicia expected to cut up to a third of their workforce.
Both banks declined to comment.
Catalunya Banc and Banco de Valencia were put back on the block by the country's bank restructuring fund this month.
Spain's third biggest bank La Caixa will buy Banco de Valencia for the nominal fee of 1 euro it was confirmed on Tuesday.
The deal will see the country's bank restructuring fund pump 4.5 billion euros into the damaged nationalized bank.
The FROB will also assume up to 72.5 percent of losses on certain assets over a ten-year period in Banco de Valencia.