IMF Wants ‘Rigorous’ Steps to Strengthen Spanish Banks

Bloomberg: The International Monetary Fund said Spanish and euro-area authorities must do more to strengthen the country’s financial system and pressed for “rigorous” steps to ensure banks can cope with losses on loans.

“Risks to the economy and hence to the financial sector remain elevated as Spain continues to undergo a difficult process of correcting large pre-crisis imbalances,” the Washington-based IMF said in a report today on Spain’s compliance with the terms of a banking bailout. In a separate statement, the European Commission and European Central Bank said Spain’s banking system still requires “close monitoring.”

Spain sought aid for lenders last year on concern that losses at former savings banks such as the Bankia (BKIA) group would damage the finances of the government. While the IMF, the ECB and the commission said today the government is meeting the terms of the program and market sentiment has improved, they all highlighted that risks remain.

Spanish banks continue to face challenges as the country’s economic slump grinds on into a sixth year, sapping demandfor credit and driving up bad loans. Spanish lenders have refinanced or restructured 208.2 billion euros ($270 billion) of loans, the Bank of Spain said last month.

The IMF said it welcomes the Bank of Spain’s recent clarification of criteria for determining the classification of refinanced and restructured loans. It said the central bank must use these to ensure losses are covered properly.

Refinanced Loans

“Rigorous application of these criteria should help ensure adequate provisioning for loan losses,” it said. In their statement, the ECB and the commission said an “ongoing diagnostics of evolution of asset quality, the solvency situation and resilience of Spanish banks remains important.”

At the same time, regulators should also make sure efforts to bolster banks’ solvency don’t further restrict the already-tight credit conditions in Spain, according to the fund.

Europe can help alleviate the risks facing the Spanish economy and its banks by pushing through rules on banking union and keeping monetary policy sufficiently loose to foster growth, the IMF said.

Luis de Guindos, Spain’s Economy Minister, has ruled out enacting more decrees to make banks recognize losses by accelerating provisions for souring assets as he did twice last year for real estate.

reporter on this story: Charles Penty in Madrid