'Stress test' aids Europe's bank system

"The stress tests clearly show the European banking system is solid and is capable of withstanding shocks," Gonzalez-Paramo said yesterday.

He said positive signals had enabled some Spanish banks to return to markets to issue large amounts of debt with relatively long maturities.

However, the Spanish banking sector must do more to complete key reforms that had seen the merger of many of the country's savings banks.

Spain fared least well in last month's publication of regulatory tests on 91 of Europe's banks, which revealed five of the country's smaller savings banks needed to raise close to e2bn in extra capital.

Gonzalez-Paramo said that restructuring, the publication of stress tests, and the commitment to allow savings banks to issue shares had advanced the sector enormously, but "the adjustments to the panorama of the Spanish banking sector have not finished".

He urged Spain's banks and savings banks to recapitalise to help get credit flowing again to the wider economy. He recognised that lending to homes and businesses had fallen, though said that a large part of it was down to falling demand rather than banks tightening lending conditions.

That was not as bad as many investors had feared though and signs of improvement in the broader European economy have helped to ease concerns over the scale of problems facing Spain's public finances and financial sector in a severe economic downturn.