Friday's moves are the government's latest attempt to restore confidence in a sector that's at the heart of the Spanish economy's slump and fears the country might need a bailout like Greece, Ireland and Portugal.
Economy Minister Luis de Guindos also announced measures for banks to place their non-performing real estate assets into separate entities, which would then be charged with selling them at market prices.
The new money banks will have to set aside will cover loans that are not yet considered problematic but could sour if the recession proves deeper than expected. Until now, the government had ordered banks to set aside provisions on loans that had already soured.
Spain is one of the hotspots in the eurozone debt crisis. After the property market collapsed in 2008, banks have been saddled with massive amounts of bad loans.
The biggest fear is that if banks start failing the government will be overwhelmed by the cost. But saving the Spanish government could prove too expensive for Europe's bailout funds, threatening the existence of the 17-country euro currency bloc.
Investor confidence in Spain's government finances remained low on Friday. The yield on the benchmark 10-year government bond — a measure of investor wariness of a country's finances — stood at an uncomfortably high 5.92 per cent.
Against the expectations of many, the government Friday did not announce any loans or aid for Bankia SA, the troubled lender it nationalized this week. Bankia holds a whopping €32 billion in real estate assets that are considered problematic.
Nor did de Guindos order banks to set aside more provisions for real estate assets that have already soured. This may be because the government might want to wait for the results of the audits of bank debt loads.
De Guindos said that as Spain faces one of the toughest moments of its modern history, with the economy in recession and unemployment at nearly 25 per cent, confidence in the banking sector is capital.
"It's imperative that authorities take continuous steps to guarantee the solvency and total absence of doubt concerning the profitability and solvency of our banks, and that is what the government has done today," the minister said.
The new provisioning requirements are tough. Under the last bank reform plan, banks had to provision healthy, performing real estate loans at a rate of 7 per cent of the asset amounts. That now goes up to 30 per cent.
Guindos said this means about €30 billion more in protection against potential losses, because there are fears in international markets that performing loans could turn sour as the economy weakens. Spain's forecast is for the economy to contract by 1.7 per cent this year. The EU on Friday forecast a 1.8 per cent contraction.
The minister said banks that cannot meet the new requirements can request money from a government bailout fund. Those loans will be granted at an interest rate of nearly 10 per cent. So the cost to the taxpayer is zero, de Guindos maintained.