IMF Says Spain Banks Must Bolster Capital as Risks Stay High

Spain should make banks bolster their capital while preserving their capacity to lend by issuing stock, reining in dividends and limiting cash payments for senior executives, the International Monetary Fund said.

“Risks remain that banks may face pressure to support capital ratios by further accelerating credit contraction,” the IMF said in its third progress report on reforms of the Spanish banking industry published today. “Supervisory actions to strengthen solvency and reduce risks should prioritize measures that increase nominal capital over ones that reduce lending.”

Spain sought a bailout for its banking system last year on concern that losses at former savings banks such as the Bankia (BKIA) group would contaminate public finances at a time when the government was seeking to bring down the country’s budget deficit. While reform of the industry as part of the 41.3 billion-euro ($53.8 billion) bailout process remains on track, “risks to the economy and hence to the financial sector remain elevated,” the IMF said in its report today.

Regulators should encourage banks to follow the recommendations on stock sales and restricting cash payouts by allowing those that comply to convert more of their deferred tax assets into transferable tax claims, said the IMF. Banks should also be rewarded for stepping up provisioning and disposing of soured assets, it said.

Spain should “focus supervisory actions to bolster solvency and reduce risks on measures that, while boosting banks’ capital situation, do not exacerbate already-tight credit conditions,” it said. “For banks with market access, new equity issuance is the fastest path toward capital-building and should be strongly encouraged.”

The Bank of Spain wrote to banks in June recommending they limit dividend payments and saying cash payouts should not exceed 25 percent of profit.

‘Strongly Implement’

The Bank of Spain must “strongly implement” a review of banks’ classification of their refinanced loans to ensure they are being covered properly, the IMF said. Lenders in Spain have restructured or refinanced 208.2 billion euros of loans, the Bank of Spain said in May.

The IMF also called on Spain’s bad bank, known as Sareb, to use more conservative assumptions for house prices in its business plan “as these are still falling sharply and further correction is likely.”

The IMF is publishing quarterly reports to monitor Spain’s banking reform program.

To contact the reporter on this story: Charles Penty in Madrid at cpenty@bloomberg.net

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

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