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The IMF claims that the state of Spain’s banks is so troubled that they will need bailout capital of over 40 billion euros. Spain’s own deficit and GDP problems are so severe that the nation will not be able to provide the capital. Spain enterered a second recession in the first quarter, and unemployment is currently 25%–although many economists believe the number is much higher.

The report:

Ceyla Pazarbasioglu, Deputy Director of the IMF’s Monetary and Capital Markets Department of and head of the team that conducted the Financial Sector Assessment Program (FSAP) review of Spain

The FSAP included stress tests of the banking sector, conducted to provide an assessment of vulnerabilities, including under a severe deterioration in economic conditions, and based on confidential and detailed bank-by-bank data. These stress tests are not intended to establish a definitive number for capital needs, but rather to identify critical weaknesses in some segments and particular institutions. The findings indicate that while the core of the system appears resilient, vulnerabilities remain in some segments. Under the adverse scenario, the largest banks would be sufficiently capitalized to withstand further deterioration, while several banks would need to increase capital buffers by about EUR 40 billion in aggregate to comply with the Basel III transition schedule (core tier 1 capital of 7 percent). Capital needs in these banks would be larger than this, as they would also include restructuring costs and reclassification of loans—for instance for lender forbearance— that may be identified in the recently launched independent valuations of assets. “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,” Ms. Pazarbasioglu said.

In addition, the FSAP assessed Spain’s financial sector oversight framework. It concluded that supervisory agencies have highly experienced and respected professional staff, and are supported by good information systems. However, in recent years a gradual approach to taking corrective action allowed weak banks to continue to operate to the detriment of financial stability. The processes and the accountability framework for effective enforcement and bank resolution powers therefore need to be improved.