UPDATE 2-Bad loans, deposits increase stress on Spain's banks
* Bad loans reach new record high at 9.9 percent * Deposit fell 2.6 percent in July * Deposit trend less worrying than it appears By Jesús Aguado and Sonya Dowsett MADRID, Sept 18 (Reuters) - Spanish banks, awaiting the first funds from a 100-billion-euro European credit line, are coming under increased stress as bad loans rose to a record high in July and deposits from domestic companies and Spanish residents dropped. Although the poor data may not affect the European banking aid, which is focused on cleaning up the toxic real estate assets from the lenders' balance sheets, it adds concern to the banking sector capacity to cope with a punishing recession, massive unemployment and waning confidence. Bank of Spain data showed banks' bad loans stood at 9.9 percent of their outstanding portfolios in July, the highest level on record and up from 9.4 percent a month earlier. Loans that fell into arrears increased by 960 million euros ($1.3 billion) from June, reaching 1.7 billion euros in July. Bad loans could rise further in coming months should an economic recovery fail to materialise, as many banks have refinanced debt owed by struggling companies to prevent them going bust. Deposits by Spanish households and companies fell 2.6 percent in July from a year earlier to 1.1 trillion euros, Bank of Spain data also showed on Tuesday. The figure does not include financial sector deposits. Overall, deposits, including non-residents, fell by 5 percent in July according to European Central Bank data published on Aug. 28. NO DEPOSIT WORRIES The deposit flight data is however less worrying than it appears, a Bank of Spain official told Reuters. The central bank official, who asked not to be named, said a lot of funds moved from deposits into commercial paper after the regulator penalised high-interest deposits to stop a deposit war between banks. He also said banks must book a deposit to balance out mortgage-backed securities and other securitised loans. Many of those deposits, which are an accounting mechanism, are now being cancelled out since the securitised instruments are maturing and not being replaced by others after mortgage lending has dried up in Spain. The official said that the trend should progressively begin to reverse because the central bank has removed the penalisation on high-interest deposits over concerns that consumers' investments in commercial paper are not guaranteed by the government as deposits are. The results of a final stress test on Spain's banks are due on Sept. 28. They will provide a basis for calculations as to which banks should receive European Union funds and how much they should receive to patch up the funding gap in the country's ailing banking system, brought low by years of bad property investments during a construction boom.
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