Bank of Spain props up small bank's liquidity

The government has given its approval for the Bank of Spain to go to the aid of a small, regional bank, replacing its board of directors and injecting up to ??9 billion to bolster its liquidity, officials said Sunday.

Deputy Prime Minister Maria Teresa Fernandez de la Vega said the government had given its go-ahead for the country's central bank to guarantee a loan to Caja Castilla-La Mancha to protect its investors.

The government has approved a loan of up to ??9 billion ($12 billion) to Caja Castilla-La Mancha, Finance Minister Pedro Solbes said after an extraordinary cabinet meeting to discuss the financial problem Sunday.

Bank president Juan Pedro Hernandez Molto had been called in shortly after midday Sunday by the Bank of Spain to discuss the 17-year-old company's finances after the regional government of southern Andalucia had raised objections to a proposed merger with Malaga-based Unicaja bank.

While Spain's larger banks have so far been able to ride worldwide financial turbulence, it has long been feared that small, regional banks may have been too exposed to property-related loans.

Spain's real estate sector, once a major motor in the national economy, stalled and all but burst following the credit crunch.

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The move is the first major bank intervention in Spain since 1993 when the government approved the shoring up of Banesto to avoid a run on deposits.

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Solbes said the treasury guaranteed the loan, which was aimed at helping the bank overcome temporary economic difficulties.

"The net assets of the bank are positive, there is no black hole," Solbes said. He assured the bank's creditors and savers that it would meet all of its financial commitments.