UPDATE 1-EU, IMF offer thumbs-up to Spanish bank reforms

Mon Sep 30, 2013 12:53pm EDT

* ECB, EU Commission says Spain's bank reform on track

* IMF urges strict reform of savings banks

* No call for immediate boosting of solvency rates

* Weak economy, lower lending seen as risks

* Madrid yet to decide if will tap more euro zone aid for banks

By Sarah White and Martin Santa

BRUSSELS/MADRID, Sept 30 (Reuters) - Spain's banks remain comfortably solvent, the bodies monitoring the country's international aid programme said on Monday, offering guarded optimism about its financial and economic reforms.

As Madrid decides whether to tap more aid for its battered lenders, the European Commission and the European Central Bank said the reforms were broadly on track though the country's slack economy and a fall-off in loan activity posed a risk.

The verdict, while broadly positive, highlights the delicate task facing Europe's leaders as they attempt to put five years of financial crisis behind them by restarting economic growth and reforming of the financial system.

Unlike a handful of its euro zone peers, Spain has not sought a sovereign bailout from the EU, ECB and International Monetary Fund.

But banks in the bloc's fourth largest economy were granted 100 billion euros ($135 billion) of euro zone assistance last year, of which they have drawn down 41 billion euros.

They were among the most exposed to the effects of the crisis, saddled with billions of euros in soured loans and assets from a property bubble that burst in 2008.

The government has yet to formally decide whether to take more of the money or extend the programme beyond 2013, though officials maintain the lenders need no more emergency funds.

But a Europe-wide health check of banks in 2014 could expose further weaknesses, and Spanish banks have also been under strain this year after they were told to reclassify many refinanced debts as bad debts.

RISKS

The Commission and the ECB, which concluded their fourth review of the country's reforms earlier this month, said on Monday that while Spanish banks' access to market funding had improved, risks remained.

They said there were signs the downturn had hit its lowest point but the weak economy continued to weigh on the banks.

"Lending to the economy is still contracting substantially, in particular against the backdrop of weak demand," the report said, adding that the need to reduce public and private debt would further weigh on bank profits.

They did not instruct the banks to boost their solvency rates, and neither did the IMF in a separate message.

In its role as an independent monitor providing technical assistance to the Spanish bank aid programme, the Fund however said that as the banks continued to strengthen their solvency, they should do so without further cutting credit.

Rigorous supervision should continue, in particular to ensure loan losses were recognised, the IMF said.

It said a planned savings banks reform, which is making its way through parliament, should not be watered down.

Years of political meddling in the savings banks resulted in bad investments that nearly felled many of them when the economy turned sour.

Some political parties in Spain have suggested amendments to the new law, which could reduce the burden on charitable foundations linked to banks to create reserve funds for future shocks.

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