Spain’s weak banks need about €40 billion ($50 billion) in new capital to strengthen against severe financial shocks, the International Monetary Fund has said.

Stress tests performed by the IMF on the country’s battered banking sector showed the top two banks were solid — BBVA and Banco Santander.

But the rest of the banking sector could not measure up to official banking capitalisation standards in the case of continuing severe stress in the country.

“Under the adverse scenario, the largest banks would be sufficiently capitalised to withstand further deterioration, while several banks would need to increase capital buffers by about €40 billion in aggregate to comply with the Basel III transition schedule,” the IMF said in a statement yesterday.

But that would not be enough to cover other restructuring costs and loan portfolio downgrades, the statement said.

“Going forward, it will be critical to communicate clearly the strategy for providing a credible backstop for capital shortfalls — a backstop that experience shows it is better to overestimate than underestimate,” said Mr Ceyla Pazarbasioglu, Deputy Director of the IMF’s Monetary and Capital Markets Department and leader of the IMF’s stress test team.

But speaking on background, an IMF official said the banks would likely need a lot more to ensure there was a “credible backstop” in worst-case scenarios.

“In our view the stress tests are a good indicator but they are basically a floor of what is needed,” the official said.

Often, the official said, in order to convince markets of the strength of the banks they would need a buffer of 1.5-2 times the level of new capital mandated under the stress test.

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