Palma.—Spanish banks' bad loans, a major source of concern to the financial markets, surged to the highest level for 16 years in May, the Bank of Spain said today. Bank loans considered to carry a risk of non-recovery amounted to €117.59 billion, or almost 6.5% of total assets, in May - the highest ratio since June 1995, the central bank said in a report. That compared to a bad loan ratio of 6.36% in April.

Investors are concerned about the state of Spanish banks, hard hit by the collapse of property bubble in 2008, an ensuing recession and a steep rise in the cost of raising money on financial markets in past months. The government and Bank of Spain have forced a wave of consolidation in the sector and are requiring banks to quickly increase the proportion of rock-solid core capital they hold to above international norms. The European Banking Authority (EBA) said on Friday that five Spanish banks had failed strict new stress tests.

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