IMF Praises Spain’s Banking Progress, Calls for Vigilance

The International Monetary Fund said Spain has made “major progress” in repairing its bank as the economy continues to pose risks to the financial system.

“The cleanup of undercapitalized banks has reached an advanced stage, and key reforms of Spain’s financial sector framework have been either adopted or designed,” the IMF said in a statement today following a monitoring mission to Madrid. “Going forward, it will be important to maintain this momentum with strong completion of initiated reforms and continued vigilant oversight, as risks to the economy and hence to the financial sector remain elevated.”

Investors’ concern the weak state of some lenders would contaminate Spain’s public finances led the government to seek a European bailout for the country’s banking system last year. The Washington-based IMF is monitoring the process as agreed last July with the European Commission and Spanish government.

The cleanup of the industry is a “major achievement” that should bolster confidence in the financial system, the IMF said. The report called for the country’s bad bank, set up to absorb the real estate assets of bailed out lenders including Bankia, to put together an “updated and comprehensive long-term business plan.”

A specific timetable should be drawn up for the Bank of Spain to strengthen its supervisory procedures, the IMF said. Spain needs to set “effective incentives” for former savings banks to sell off controlling stakes in commercial lenders, it said.

The IMF said it plans to pass a final report on Spain’s banking system reforms to the government and European Commission in early March. A third monitoring mission will take place in the second quarter of this year, it said.