A €90 billion (£76.9 billion) bailout fund for healthy as well as struggling Spanish financial institutions is expected to be approved tomorrow.
The fund, to help banks to restructure, is likely to be supported by the Spanish Cabinet at one of its regular Friday meetings, according to reports.
Cadena Ser radio, which cited a copy of the proposal, said that banks without capital shortages may have access to the fund if they need extra liquidity to improve efficiency.
The bailout plan is not expected to encounter opposition in the Spanish Parliament.
If banks use the fund, they should be open to possible mergers. Government approval to use the fund would be called for only if more than €27 billion were necessary.
As financial institutions crumbled around the world in the credit crunch, Spanish banks managed to avoid toxic debt thanks to careful regulation by the Bank of Spain.
But Spain’s Socialist Government has been forced to launch a rescue fund to save its ailing savings banks, whose bad loans have risen after the collapse of Spain’s decade-long building boom.
Spain’s savings banks have suffered most from the collapse of the property sector after years of lending to property developers and homeowners.
With the construction sector stagnating, many savings banks cannot access private markets and their options for raising capital are limited.
Unusually, local authorities own a large stake in savings banks which critics say stops mergers.
The bailout fund will start with a war chest of €9 billion (£7.6 billion) but could receive an extra €90 billion if necessary.
The move comes after Moody's Investors Service recently downgraded the ratings of 30 Spanish banks and savings banks, citing Spain's economic downturn and a big rise in non-performing loans.
The country's two largest banks, Banco Santander and BBVA, retained their B rating in financial strength and Aa1 rating for long-term debt, but both were placed under review for a possible downgrade in both categories.
Elena Salgado, Spain's Economy Minister, said: “The fund will allow the State to temporarily buy holdings with voting rights.”
Mrs Salgado said that under the rescue plan, the Bank of Spain would have the final say in how public money was handed out and local authorities could not veto mergers.
“This fund would be a last resort,” she said. “First we would call on the banks to use private means to boost capital. Failing that, they would need to use the [private] guarantee fund. Only then would public aid be available.”
Mrs Salgado said no financial institutions were in immediate need of help.
In March, the Bank of Spain was forced to takeover the Caja Castilla La Mancha.
Francisco Gonzalez, the chairman of BBVA, Spain’s second-biggest bank, said that the move was long overdue, with many “zombie” institutions being kept alive artificially, harming the country’s economic growth. “Any short term recovery in lending is made more difficult while in the medium and long term there is a lower potential for economic growth,” he said.
Spain is struggling to cope with its worst recession in decades. The Organisation for Economic Cooperation said this week that the Spanish economy will shrink by 4.2 per cent this year with unemployment rising to 20 per cent in 2010.
Unemployment stands at 17.4 per cent and the Government predicted the economy will contract 3.6 per cent this year.
Profits in the banking sector fell 21.5 per cent in the first quarter of 2009, compared with the same period last year.
Moody's said the non-performing loan rate stood at 4.27 per cent at the end of the first quarter, compared with 0.9 per cent in December 2007.
Maria Jose Mori, Moody's assistant vice-president, said: "The extra cushion ... which has so far protected their earnings and capital bases is becoming increasingly thin."
Moody's downgraded the financial strength ratings of 30 banks and savings banks, eight of them by a full four notches.
A third of the total are now at the D-level or lower.
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