The European Union has approved a cash injection of €1.87 billion into four former Spanish savings banks, the second phase of the overhaul of the country's banking sector.

In return for the funds, the four lenders, which ran into trouble when a decade-long property boom burst five years ago, will reduce their balance sheets by up to 40 per cent by 2017.

The cash injection means two of the banks - BMN and CEISS - will be nationalised through the subscription of ordinary shares by the Spanish state, while Liberbank and Caja 3 will receive temporary aid through contingent convertible bonds, also known as Cocos.

The European Commission said the Spanish authorities committed to sell CEISS and have BMN and Liberbank listed before 2017. Caja 3 will cease to exist as a standalone entity and will be integrated into bigger lender Ibercaja.

"The restructuring plans of BMN, Caja3, Banco CEISS and Liberbank will make these banks viable again, thereby contributing to restoring a healthy financial sector in Spain, while minimising the burden for the taxpayer," EU competition commissioner Joaquin Almunia said in a statement.

An independent audit showed in September Spain's banking system needed around €60 billion to weather a serious downturn of the economy.

Spain has already received €39.5 billion of European funds to prop up nationalised lenders Bankia, CatalunyaBanc, Novagalicia Banco and Banco de Valencia and to set up a so called bad bank.

Separately, two banks - Banco Popular and Ibercaja - raised money by themselves to cover their needs, while seven out of the 14 lenders tested were considered by the audit to be well enough capitalised.

Transfers of distressed property assets into the "bad bank" and losses imposed to shareholders and junior bondholders have reduced the final amount of public cash needed by around €20 billion.

The rescued banks have also committed to sell a number of industrial stakes and subsidiaries and to limit the remunerations of the executives.

Reuters