MADRID: Spain yesterday said its rescue of problem lender Bankia would cost at least nine billion euros ($11bn), as the government tries to clean up a banking system that threatens to drag the country deeper into the euro zone crisis.

Losses at Spain's fourth largest bank are central to investors' fears that the country's fragile financial system, already vulnerable to rising default rates in a recession, could push Spain to seek an Irish-style bail-out.

Bankia's new management team will undertake a complete assessment of the lender's capital needs and will present its plan in mid-June, Economy Minister Luis de Guindos said in a presentation to a congressional committee.

The government will recapitalise Bankia's parent group BFA using the state-backed bank restructuring fund, the FROB, and then will fund Bankia through a capital increase including preferential shares for existing shareholders, he said.

He said the Bankia rescue would include 7.1bn euros in provisions for losses from bad loans and 1.9bn euros in capital buffers, as well as address valuations flagged by Bankia's auditors.

The clean-up of Bankia and BFA, which account for 10 per cent of deposits in Spain, would take care of most of the problems in the country's banking system, he said.

"I insist BFA-Bankia is a specific case and it's not correct to extrapolate its problems to the rest of the Spanish financial system," he told lawmakers.

Bankia was partially nationalised earlier this month when it became clear it could not handle losses stemming from a 2008 property crash. But economists said the focus had now moved on the banking sector as a whole.

"The market has moved beyond Bankia. How much Bankia will get in aid is not going to make a big difference," said Martin van Vliet, senior economist at ING.

"The question is now about the long-term solvency of parts of Spain's banking system, especially what is going to happen with mortgage loan default. This concern is not being addressed," he added.

Prime Minister Mariano Rajoy yesterday reiterated that Spain would not seek external funds to bail out its banks.