Bank of Spain asks banks to monitor state-backed loans

By Jesús Aguado and Emma Pinedo

MADRID (Reuters) - Spanish banks must carefully monitor the performance of state-backed loans granted during the COVID-19 pandemic to identify risks and any potential rise in bad debts, the central bank's deputy governor said on Thursday.

Last year, the government approved up to 100 billion euros in so-called ICO liquidity lines, where Spain guaranteed up to 80% of the loans that were channelled through banks to small and mid-sized companies and the self-employed.

"The evolution of these portfolios will have to be monitored over the coming months ... because the few remaining waivers ... have expired and also because of the performance of ICO-backed exposures," Bank of Spain deputy governor Margarita Delgado told a financial event.

Delgado said assets under special surveillance, or considered subject to heightened credit risk, had increased in recent quarters but were still at a "relatively low level", including in the hard-hit areas such as tourism.

The deputy governor urged lenders to continue strengthening their capital buffers and not ease up on provisions to cope with a potential rise in bad loans.

"There should be no rush to reverse last year's provisions until there is full confidence that the loan portfolio is performing as expected," she said.

So far, bad loans have not risen in Spain due to guarantees and moratoriums but could climb once those protections are withdrawn, analysts say.

In July, non-performing loans at Spanish banks stood at 4.39%, its lowest level since March 2009.

Several Spanish banks have merged to cope with the effects from ultra low interest rates and a potential rise in bad loans.

Delgado said there appeared to be more limited scope for mergers after a wave of consolidation that has number of Spanish lenders to 10 from 55 before the financial crisis in 2008.

(Reporting by Jesús Aguado; Editing by Emma Pinedo and Edmund Blair)