Spanish banks must raise an additional euro50 billion ($65.5 billion) to cover their exposure to toxic real estate loans and assets accumulated during a construction boom that went bust with the financial crisis, according to new regulations unveiled Thursday.
Banks unable to meet the new provisions to cover troubled holdings will have the option of presenting merger plans to the government by May and could get government assistance from an existing bailout fund that will be strengthened with an addition euro6 billion, said Economy Minister Luis de Guindos.
Cleaning up the festering holdings of Spain's ailing banking system is a key issue in the drive by the new center-right government to restore investor confidence in the eurozone's fourth largest economy, and prevent Spain from being forced into a bailout like Greece, Ireland and Portugal were forced to take. Banks that want to meet the new provisions without merging will have until the end of the year to do so, de Guindos said.
Spanish banks have about euro175 billion in troubled holdings, and de Guindos said the new rules would prompt many banks to reduce the value of their property holdings. That would lead to further price drops for real estate that saw stunning increases from the mid-1990s until the crisis hit in 2008 but still have not declined as much as experts believe they should.
The reform plan is similar to a 2009 push that forced banks to increase provisions against real estate holdings and bad loans to 30 percent and set off a wave of mergers, but de Guindos said the new rules to protect banks from losses will boost that figure to as much as 80 percent.
The cabinet of Prime Minister Mariano Rajoy plans to approve the measures Friday. They will be sent to Parliament for final approval, but passage is guaranteed because Rajoy's Popular Party has an absolute majority.
The last banking reform plan under Spain's previous Socialist government saw the number of smaller banking chains called 'cajas' dwindle from 42 to 15, and de Guindos offered no prediction of how many will remain after the new rules are put into place.
"I don't know how many will be left after the process, but the aim is to have a banking system with stronger and healthier institutions and better corporate guidance," he told reporters.
Fernando Fernandez, an economist at Madrid's IE Business School, said the rules are so tough that many of those left will be forced into mergers because they won't be able to meet the new provisions to cover toxic holdings.
But Spain's much larger international banks _ Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA _ will be able to meet the provisions with less profit for their shareholders, he added.
Many Spanish banks have refused to lower the value of foreclosed property on their books, and Fernandez agreed with de Guindos that the new reform could force them to start unloading real estate at firesale prices.
"This reform is aimed at putting homes on the market at reduced prices," de Guindos said.
It's also aimed at freeing up credit that has been drying up for businesses and individuals, he said, and should "improve the transparency and the perception of strength of the Spanish (financial) entities, entities will be able provide more financing."
The bank reform plan came less than a week after Spanish unemployment shot up to 22.9 percent, maintaining its ranking as the highest among the 17 nations that use the euro. The rate for adults under age 25 is an astonishing 48.5 percent.
Rajoy's government is expected later this month to enact a controversial labor reform plan that will make it cheaper for businesses to fire workers, and for them to negotiate with unions at a company level instead of with entire sectors.
Under the current system, people who are laid off or fired must be paid between 20 to 33 days of salary per year worked, and companies can't negotiate directly with their unionized workers because they must adopt wage deals set for entire sectors.
The government last week also unveiled a budget-discipline law that will allow the government to impose penalties on debt-laden regional governments if they run deficits after 2020. Spain's regions _ like states or provinces _ must bring their spending under control by that year or face possible fines of 0.2 percent of regional gross domestic product.
Government spending cuts and income tax increases were imposed several weeks after Rajoy took power.
Daniel Woolls in Madrid contributed to this report.