Big Spanish banks will demand some kind of government-backed insurance against losses before buying into troubled savings banks

Big Spanish banks will demand some kind of government-backed insurance against losses before buying into troubled savings banks that have failed to capture interest from private investors, market players say.

The Bank of Spain is testing interest from larger banks in Caja Mediterraneo (CAM) (CAHM.MC), Spanish media reported on Friday, after the troubled savings bank failed to go through with a state-driven merger with three other regional banks.

CAM said later in the day it would seek 2.8 billion euros ($3.96 billion) state funds via the state-backed bank restructuring fund, or FROB, to boost its capital. It added that it would encourage new partners if they could help with its future plans.

Spain's mainly unlisted regional savings banks are scrabbling to find ways to raise capital by stock market listings, private equity investment or state funds after the government demanded they increase reserves to tough new levels.

"If Santander or BBVA buy CAM it is only because the Bank of Spain has begged them to do so and they have a guarantee," said one Madrid-based legal source.

Spain is overhauling the unlisted savings banks, or 'cajas,' to distance itself from fellow indebted euro zone members like Ireland which on Thursday unveiled a 24 billion euros funding gap on banks' balance sheets.

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