Spain’s weak banks need 40 billion euros - IMF

US: Spain's weak banks need at least 40 billion euros (US$50 billion) in new capital to strengthen against severe financial shocks, the International Monetary Fund said late Friday.

Stress tests performed by the IMF on the country's battered banking sector indicated the top two banks, BBVA and Banco Santander, were solid.

But the rest of the banking sector could not measure up to official banking capitalization standards in the case of a sharp continuing contraction of the Spanish economy.

“Under the adverse scenario, the largest banks would be sufficiently capitalized to withstand further deterioration, while several banks would need to increase capital buffers by about 40 billion euros in aggregate to comply with the Basel III transition schedule,” the IMF said in a statement.

But that would not be enough to cover other restructuring costs and loan portfolio downgrades, the statement said.

“Going forward, it will be critical to communicate clearly the strategy for providing a credible backstop for capital shortfalls -- a backstop that experience shows it is better to overestimate than underestimate,” said Ceyla Pazarbasioglu, deputy director of the IMF's Monetary and Capital Markets Department and leader of the IMF's stress test team.

Speaking on background, an IMF official said the banks would likely need a lot more to ensure there was a “credible backstop” in worst-case scenarios.

“In our view the stress tests are a good indicator but they are basically a floor for what you would probably need,” the official said.

Often, the official said, in order to convince markets of the strength of the banks they would need a buffer of 1.5 to two times the level of new capital mandated under the stress test.

“Usually you come up with a buffer ... large enough to convince markets so that people don't say, oh well, what if this happens, what if the growth is even worse?” The stress test results were originally scheduled to be released on Monday, but were moved ahead as European diplomats said Spain was likely move Saturday to begin crafting a deal for an EU rescue of its banks.

AFP