MADRID (Reuters) - Spain will grant its central bank new powers to intervene more rapidly in struggling lenders, and the country’s bank rescue fund will gain more capacity to wind them down if they fail, two sources with knowledge of the matter said on Thursday.
The new decree would allow the Bank of Spain to take over even banks that met liquidity and solvency requirements, if it was “foreseeable” they could fail to meet such rules in future, the sources said.
Madrid is toughening its stance as part of conditions for receiving up to 100 billion euros ($124.7 billion) in euro zone aid for the troubled lenders.
The sources however cautioned that the regulation, a requirement of the Memorandum of Understanding Spain signed up for when it accepted the bank rescue last month, could still change before its expected approval on August 31.
The Economy Ministry and the Bank of Spain declined to comment on the pending new rules, reported on Thursday in Spanish newspapers.
The state rescued Bankia (BKIA.MC) in May, and three other banks - CatalunyaCaixa, NovaGalicia and Banco de Valencia - are currently nationalized. The results of an independent, bank-by-bank stress test of the 14 biggest Spanish lenders due in September are expected to identify other banks that need aid.
“The law is an answer to the problems we saw in the past when the Bank of Spain was accused of intervening in lenders too late,” said one of the sources.
Spain’s banking sector has been decimated by the collapse of a decade-long building and property boom in 2008, leaving lenders saddled with close to 200 billion euros in soured assets.
But the bank rescue alone may not be enough to put Spain back on track.
With the economy shrinking, borrowing costs soaring, around a quarter of the workforce unemployed and budget deficit targets under threat, the government is expected to soon seek financial support from the European Union, in what would become the fourth sovereign bailout since the euro zone debt crisis began.
Under the new regulation, the Bank of Spain would be able to demand that problem banks make plans to guarantee their viability within 10 days.
It would also have the capacity to formulate debt restructuring agreements with creditors on the banks’ behalf and remove top officials from their posts.
The new powers are in line with new European laws being discussed by EU member states and European lawmakers, set to be approved by mid-2013.
Any action by the Bank of Spain would be approved by the country’s bank rescue fund, the FROB, which would receive quarterly compliance reports. The FROB, in turn, would be placed under the direct supervision of the Economy Ministry.
After the first phase of help from the central bank, the FROB would take charge of the restructuring and “orderly resolution” of banks not able to return public aid in “a reasonable time”.
It would determine the value of the bank and transfer assets or liabilities to a “bridge bank”, which would be sold. It would also have the options of directly injecting cash into a bank, or transferring debt securities from the Treasury, itself or the European rescue fund.
If banks received aid from the FROB, shareholders and creditors would be forced to take the first losses, also in line with conditions contained in the MoU.
It was not immediately clear whether granting the new powers to the FROB and the Bank of Spain would be subject to parliamentary approval. But in any case the government has an absolute majority in the legislature and the decree would go into effect before being put to lawmakers.
($1 = 0.8021 euros)
Additional reporting by Clare Kane; Editing by Fiona Ortiz, John Stonestreet