Risks to Spain’s Banking System Remain High, EC Report Says

Spain must keep up the pace of banking reform as risks to the industry and the wider economy “remain high,” according to the European Commission.

Reforms must be speedily implemented “to enhance the viability of the Spanish banking sector,” the commission said in a report on Spain’s compliance with terms of its banking bailout, which was sent by Germany’s Finance Ministry to lawmakers and obtained by Bloomberg News.

Banks should generate additional capital by adopting prudent dividend policies, according to the report, which said there was no reason to think Spain would need more bank bailout funds for now.

Spain requested a European bailout for its banks last year as concern mounted that losses at former savings banks including the Bankia (BKIA) group would contaminate government finances. Under the program, Spain took 41 billion euros ($54 billion) to recapitalize lenders and help fund a “bad bank” to absorb the soured property assets of nationalized firms.

The government has complied or is close to complying with the main terms of the bailout, and has overhauled the governance of savings banks and reviewed supervisory procedures at the Bank of Spain, the report said. Coming up with a “sound business plan” for the bad bank, known as Sareb, is crucial to its success, the report said.

While the task is continuing, Spanish authorities “have made very tangible progress towards major and lasting reforms,” it said.

To contact the reporters on this story: Charles Penty in Madrid at cpenty@bloomberg.net; Brian Parkin in Berlin at bparkin@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net