FINANCIAL CRISIS

IMF: Spanish bank restructuring may need more public funding

Fund identifies 10 “vulnerable” lenders and warns of possibility of hidden debt on books

The IMF believes the cost of rescuing Spanish banks with problems may be too much for the industry itself to bear and could require the injection of public funds.

In a report released late Wednesday, the IMF said that while the largest banks appeared sufficiently capitalized, it identified 10 lenders that have received state support as being "vulnerable." It did not name the banks, but identified them by saying five of them had been acquired by or merged with other banks, three are being auctioned off after being taken over by the Bank of Spain and two have submitted plans that have been approved by the central bank.

The IMF report also mentions the risk of “hidden” debts within the Spanish financial system.

The three banks that have been taken over are Novagalicia, CatalunyaCaixa and Banco de Valencia. Sources said the biggest player among the 10 mentioned is BFA-Bankia, which has submitted a plan to the Bank of Spain to strengthen its balance sheet. Bankia is Spain's fourth biggest lender with assets of 305 billion euros.

"Unless the weak institutions are quickly and adequately cleaned up, the sound banks will suffer unnecessarily by a continued loss of confidence," the report said.

The government wants the banks themselves to foot the bill for restructuring through the Deposit Guarantee Fund, with the funding role of the Orderly Bank Restructuring Fund limited by the need to rein in the budget deficit.

However, the IMF said: "To avoid resolution costs becoming too high for the industry to bear, especially in a reasonable time period, greater reliance on public funding may be needed."

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