Spanish banks' bad loans rose to 10.5 per cent of their outstanding portfolios in August, reaching a fresh record high, Bank of Spain data showed today.

The figure increased from 9.9 per cent a month earlier. The value of loans in arrears increased by €5.3 billion in August to €178 billion.

Non-performing loans on the books of the country's banks have risen steadily since a decade-long property boom ended four years ago, with the country now in its second recession since 2009 and one in four Spaniards out of work.

Spain is setting up a bad bank to siphon rotten property assets off lenders' balance sheets to recapitalise banks and free credit flow to families and businesses in an effort to alleviate a recession made worse by Europe-imposed spending cuts.

The country has opened the door to the possibility of including defunct consumer loans in the bad bank, although Economy Ministry sources yesterday said this would only be in the worst cases.

Bankinter, the first Spanish bank to report nine month results, said bad loans as a percentage of total loans rose to 4.0 per cent at the end of September, up from 3.9 per cent in the previous quarter.

The bad bank will be designed to hold up to €90 billion of assets, but Spain expects the final size to be much smaller.

It is still not known at what price assets will be transferred to the bad bank. The price will be determined next month.

Reuters