Spain finance sector may need more clean-up: central bank

Spain may need more far-reaching reforms to its banking sector to ensure economic recovery, the head of its central bank warned on Thursday.

The Bank of Spain’s governor Miguel Angel Fernandez Ordonez warned that “additional measures” may be needed for the troubled banking sector, on top of labour reforms and deficit-cutting already in the pipeline.

“Some doubts still persist about the degree of clean-up of the balance sheets of our banks,” he said in a speech to a financial think-tank.

“Although the clean-up has been very intense, unsatisfactory economic development could make additional measures necessary in the future,” he said, according to a text of his speech published online.

A new conservative government due to take charge in Spain on December 22 has promised deep spending cuts and labour reforms to lower Spain’s deficit and its 21.5 percent unemployment rate.

Spain’s lenders, especially its regional savings banks which account for about half of all lending in the country, have been heavily exposed to bad debt since the collapse of the property sector at the end of 2008.

The government and Bank of Spain have forced a wave of consolidation in the sector this year and are requiring banks to quickly increase the proportion of core capital they hold to above international norms.

“It would be a grave error to set rigid criteria and close the door to the possible use of new tools of financial restructuring that the changing circumstances may demand,” Ordonez said.

Some economists have suggested setting up a so-called “bad bank” to hive off lenders’ toxic loans and clean up their balance sheets.