Spanish banks will need close to €60-billion ($77.24-billion U.S.) in new capital, according to the results of an independently conducted stress test of the country's 14 largest lenders that Madrid hopes will dispel investor doubts over the true extent of losses in the sector.
Seven out of the 14 Spanish banks under review failed, according to the results of the three-month so-called "bottom up" review, which involved the individual assessment of 115,000 loans making up 11 per cent of the value of the sector's total credit assets.
While the bulk of the failing banks were institutions already nationalized or that had taken state aid, Banco Popular, Spain's sixth biggest bank by assets, will need to raise €3.2-billion according to the test, just below its €3.58-billion market value - meaning it will probably need state aid to survive.
Madrid hopes the tests, conducted by the consultancy Oliver Wyman aided by the Big Four auditors under the supervision of the European Central Bank and International Monetary Fund, will finally restore confidence among investors that no more surprises lurk in the Spanish banking sector.
"It was an extreme exercise, it has credibility," said one senior Spanish bank executive. "The IMF, the European Banking Authority, Oliver Wyman were all involved. Only the army wasn't there."
In June Spain requested €100-billion in European aid to recapitalize its banks, for which the test results will be used to justify finally distributing the funds to lenders that failed the process and are unable to convince the Bank of Spain they will be able to raise the shortfall on their own.
Bankia, Spain's fourth-largest lender which requested €19bn in state rescue money in May, will now need to take more than €20bn in capital, while Banco Sabadell, the fifth biggest by assets, just passed as healthy.
The tests, however, provided a ringing endorsement of Spain's biggest three banks by assets, with Banco Santander, BBVA and La Caixa not requiring any new capital even under the most adverse scenario.
Those close to the process hope that the detailed work involved and a tougher recapitalization requirement of more than €20-billion for Spain's most troubled lender, Bankia, will help restore the faith of international markets in the country and its banking sector.
"Finally we have an independent assessment of the health of Spain's banks," said one senior European official. "I'm very positive on this going forward, even if up to now it's been a rather negative experience."
While the €58-billion headline figure came in as expected, with Luis de Guindos, finance minister, having flagged on several occasions a figure around the €60-billion mark in recent weeks, the number of failing institutions rose from five to seven, compared with the earlier an "top down" pre-assessment in June.
That earlier study, which did not involve loan by loan examination, concluded Spanish banks would need between €51-billion and €62-billion in capital.
Analysts however said there remained widespread scepticism about the validity of the exercise.
Daragh Quinn, Spanish banks analyst at Nomura in Madrid, said that despite similar international supervision from the IMF and ECB as for an equivalent exercise in Ireland two years ago, the Spanish stress scenarios were inexplicably weaker, modelling for total losses of about 17 per cent rather than 24 per cent in Ireland.
"That doesn't make sense to me," Mr. Quinn said. "Most people concluded some time ago that a €60-billion recapitalization of Spain's banks isn't enough to change investors' view of the sector."