MADRID Spain's efforts to fix its battered banking system have boosted liquidity and solvency, though deep economic problems still pose risks to the sector, the European Commission and the European Central Bank said on Monday.
The European authorities, which backed a 41 billion euro ($53 billion) rescue of Spain's weakest lenders last year, added that some reforms, including of the once-highly politicized savings banks, still needed work.
But they said Spain was largely on track with its overhaul of an industry crippled by a real estate crash in 2008 and which needed big capital injections in 2012.
"The process of bank restructuring is well underway," the EU authorities said in a statement following their third inspection of sector on a visit from May 21-31.
"Vigilance is required to help ensure these positive trends in the stabilisation of the Spanish banking sector can be maintained."
The European authorities warned economic woes in recession-hit Spain needed monitoring, and that ongoing problems in the country's real estate market were also affecting lending volumes.
Spain's economy shrank for the seventh straight quarter in the first three months of this year and is expected to remain in recession into 2014 with over a quarter of the working population out of a job and companies going to the wall on a daily basis.
The International Monetary Fund, which did not provide funds for the rescue but is helping to monitor Spanish banking reforms, also highlighted in a statement that economic risks in Spain "remain elevated."
It praised some reforms, including new rules laid out by the Bank of Spain that force banks to reclassify bad debts and hike provisions, though it added that these needed to be rigorously applied.
The IMF added that economic risks could be mitigated by timely implementation of the euro zone banking union and the continuation of low interest rates by the European Central Bank and strong financial supervision by Madrid.
Both the European authorities and the IMF said the creation of a 'bad bank' to take 51 billion euros worth of soured real estate assets out of rescued banks had bolstered solvency in the system, though the entity known as Sareb now faces other risks.
"Sareb now faces the major challenge of successfully managing and eventually disvesting the portfolio of assets against a backdrop of the still very difficult market conditions for Spanish real estate," the EC and the ECB said.
($1 = 0.7716 euros)
(Reporting By Paul Day and Sarah White; Editing by Fiona Ortiz)