Spain's economic problems could tempt its banks to cut lending further, but they need to resist this and boost their capital ratios by cutting cash dividends or issuing new shares instead, The International Monetary Fund said. The IMF, which is monitoring Spain's banking reforms after a European bailout last year, said in a report on Monday the lenders' solvency had improved.
But economic problems including record unemployment had left the sector mired in a deepening credit crunch.
That pressure could push banks, whose profits will likely suffer, to further cut lending as they shore up capital, hitting growth and potentially forcing the government to rethink its plans for restructuring the sector.
"Financial sector dynamics still contribute to recessionary pressures, with credit contraction accelerating, lending standards tightening, and lending rates to firms rising," the IMF said, in its third progress report on the sector.