Spain's conservative government Friday launched a major clean-up of the country's troubled banks, approving a law that obliges them to set up a financial safety net totalling 50 billion euros ($65 billion).

It also moved to heal another weak point in Spain's economy, the debts of its regional governments, approving a 10 billion-euro credit line to help them pay suppliers, Economy Minister Luis de Guindos said after a cabinet meeting.

Following a budget law, it was the second set of major reforms by the government since it took power in December, aiming to ease the economic pains Spain has suffered since the collapse of its property market in 2008.

"This reform aims to improve confidence and the credibility of the Spanish financial sector," de Guindos said when he outlined the banking law on Thursday, on the eve of the meeting.

He added on Friday: "Doubts about the valuation of the real estate assets were causing uncertainty for the financing of banks on the inter-bank lending markets," which facilitate lending to the broader economy.

This in turn was causing "a contraction of credit", meaning fewer loans for businesses and individuals, he told reporters.

He added that the new law would cap the salaries for the heads of banks that have received public aid at 600,000 euros a year. For four banks taken over by the state, the salaries will be capped at half this amount.

Spain's banking sector is weighed down by a mountain of soured loans and property assets that are losing their value after the bursting of the property bubble, which coincided with the start of a global downturn in 2008.

According to the Bank of Spain, the sector had 176 billion euros in problem loans and seized real estate in June 2011 -- a figure which has probably increased since, as the economy has weakened.

The sector has undergone a major restructuring since 2008 but the government considers it still at risk.

The new reform aims to "generate mergers to form viable entities" out of struggling ones so that "the clean-up will be quick and deep", De Guindos said on Thursday.

From now on the level of provisions must increase to 80 percent of the total value of assets for some troubled banks and a general provision requirement of 7.0 percent will be imposed on others.

"This process must be carried out in one year," without any new public aid except possible contributions from an existing banking bailout fund, he added.

The banking reform is one in a series by the conservative government, which took power in December promising to cut Spain's deficit and rein in an unemployment rate which has reached nearly 23 percent.

De Guindos said the cabinet extended to the regions a credit line of 10 billion euros which can be extended to 15 billion euros, on condition that each region submit deficit-reduction plans to the central government.