Spanish banks need $76b

Spain’s banks would need €59.3 billion ($76.3 billion) in extra capital to ride out a serious economic downturn, an independent audit of the country’s 14 main banks by consultancy Oliver Wyman showed on Friday.

The worst-case estimate, which does not take into account tax credits or future bank plans to raise their own capital, is based on a scenario of a 6.5 per cent contraction in Spain’s economy between 2012 and 2014.

The audit said half of the 14 banks have capital needs, with a €49 billion shortfall for banks that have already been nationalised.

The Bankia group, a nationalised lender, had a €24.7 billion capital deficit in the tests conducted. It also showed Banco Popular Espanol had a €3.22 billion shortfall. The stress tests of 14 lenders showed no capital deficit for seven banks, including Banco Santander, Banco Bilbao Vizcaya Argentaria and Banco Sabadell.

The results of the audit will help the Spanish government determine how much money it will tap from an up to €100 billion credit line already agreed with the European Union to recapitalise its ailing lenders.

Spain commissioned the independent stress test as part of the conditions agreed in July for a European bailout of as much as €100 billion for its banking system, which has been saddled with more than €180 billion of losses linked to souring real estate assets. The attempt to show how its banks would bear an extreme scenario in which the economy would shrink for three years in a row is part of the government’s drive to show it is fixing Spain’s economy as it considers whether to seek a further rescue package from Europe.

“These are important stepping stones on the way for Spain,” said Holger Schmieding, chief economist at Berenberg Bank in London, referring to the stress test. Even so, “there will always be people in the market who question the numbers,” he said.

Spain, the eurozone’s fourth largest economy, replaced Greece, Ireland and Portugal earlier this year as the main threat to the survival of the euro currency project.

Battered by a deep recession, mass unemployment, indebted regions and crippled banks after a decade-long boom fuelled by a property bubble ended abruptly in 2007, the country secured the €100 billion European lifeline for the banks in June, and has since then quietly laid the ground for a state bailout.

Both the 2013 budget presented on Thursday and results of the audit by Oliver Wyman are necessary steps for Madrid to request sovereign aid and trigger a bond-buying programme by the European Central Bank.