January 9, 2013 / 8:34 AM / 5 years ago

Bank of Spain to toughen up supervision of bank sector

MADRID, Jan 9 (Reuters) - The Bank of Spain said it plans to tighten up banking supervision in line with European recommendations, putting permanent inspectors in 16 of the country's banks and not just the biggest players.

Spain's banking system was undermined by a decade-long housing boom fuelled by cheap credit, which went bust and forced the country to seek a European bail-out for its weakest lenders.

One of the conditions for getting European aid was an internal revision of the Bank of Spain's supervisory procedures.

The new regime will allow the regulator to keep a closer eye on more of the country's banks, not just the two biggest Santander and BBVA, which already had permanent Bank of Spain inspectors.

Many of Spain's small and medium-sized lenders, mostly unlisted regional savings banks, lent recklessly to property developers and were used by local politicians to fund pet projects during the boom years.

The banks were left with a huge capital shortfall which led to a European bail-out of 39 billion euros ($51 billion) and the creation of a 'bad bank' to take over the banks' toxic real estate assets. ($1 = 0.7654 euros) (Reporting By Sonya Dowsett. Editing by Jane Merriman)

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