BRUSSELS (Reuters) - One of Europe's top bank watchdogs has warned European Union officials that Spain's Banco Popular POP.MC may need to be wound down if it fails to find a buyer, an EU official told Reuters.
Elke Koenig, who chairs an EU body that winds down troubled banks, recently issued an "early warning", the official said.
Koenig's Single Resolution Board (SRB) initially declined to comment on Banco Popular, but following publication of the Reuters story said it never issued warnings.
Such a move would highlight growing concerns about Spain's sixth-largest bank, although there is no suggestion that winding down Popular is inevitable.
Popular's problems come some five years after Madrid spent more than 40 billion euros ($45 billion) rescuing lenders hit by the financial crisis. The sector has since consolidated, leaving just 14 banks out of 55 in 2008.
Popular, which has been unable to sell off 37 billion euros of soured property loans quickly enough, is seeking a buyer after Spanish Economy Minister Luis de Guindos ruled out a state bailout. The bank says it could extend a deadline of June 10 for binding offers.
"Koenig has said ... that the Single Resolution Board is following the (Banco Popular) procedure with particular attention with a view to a possible intervention," the EU official said, adding the bank's merger bid "may be fruitless".
"General preparations are under way although no concrete steps have yet been taken," a second source said.
In a statement issued after publication of the Reuters story, the SRB said it could not confirm "the interpretations regarding alleged quotes made by the chair of the SRB".
Popular's troubles, although isolated in Spain's largely robust banking sector, could rattle investors.
If Popular were to run out of other options and be closed, it could be the first case in Europe using new rules to impose losses on bondholders. That could in turn make funding more expensive for other Spanish banks, undermining one of the euro zone's largest countries.
The European Central Bank declined to comment, while a Banco Popular spokesman said it was working on several plans including a merger, a capital hike and asset sales.
But the European watchdog fears these could prove difficult, while the ECB, which supervises the bank, is also watching closely, a third person said.
As head of the SRB, Koenig can push for the bank's liquidation, but could face opposition in Spain in the same way as Italy, which has grappled with similar problems, has resisted measures such as closing a large bank.
The European regime to shut banks, introduced after the financial crash, has yet to be used and Koenig would, in practice, require ECB and European Commission backing, as well as the tacit support of euro zone countries.
One euro zone official said that finance ministers had not discussed any winding down of Popular. The bank could sell fresh shares, although shareholders would balk at injecting further money into a stock which has slid in recent years to a tiny fraction of its earlier worth.
Spain's biggest bank Santander (SAN.MC) and state-owned lender Bankia (BKIA.MC) are seen as the most likely to step in to save the lender and several bankers in Spain said the process was still under way..
In the meantime, Popular continues to grapple with loans at risk of non-payment, which amount to more than 40 percent of the total credit it has given.
And it now has a capital cushion that is thin compared to its peers. Its chairman, Emilio Saracho, has said it likely needs more, after a multi-billion-euro loss last year.
If its situation deteriorates and European authorities demand it be shut, Spain would face the possible imposition of losses on bondholders.
That could make it harder and more expensive for Spanish banks as well as the country itself to raise money. Some small Spanish lenders plan to raise funds in coming months.
Additional reporting by Jesus Aguado in Madrid; additional reporting and writing by John O'Donnell; Editing by Alexander Smith and Mark Potter