Bad bank is part of ambitious new banking law Spain’s conservative government promises will save ailing finance sector

Spain will inject emergency capital into the country’s biggest ailing bank, Bankia, as it puts into place reforms to allow loss-making banks to receive eurozone bailout money.

The move came after Bankia admitted losing more than €4bn (£3.168bn) in the first half year and as the conservative government of prime minister Mariano Rajoy delayed a decision on losses to be absorbed by small investors in bailed out banks.

The Fund for the Orderly Bank Restructurin (Frob) said Bankia’s restructuring plan should be ready by October, allowing eurozone rescue money to arrive in November. “While the restructuring process is completed, the Frob intends to inject capital shortly,” it said. This would be an advance on the eurozone money.

The Spanish government passed an ambitious banking law on Friday pledging once more that this would be the definitive shakeup for its finance sector that needs up to a €100bn (£80bn) bailout.

“This brings reform of the finance system to its crowning point,” the deputy prime minister, Soraya Saenz de Santamaría, said as the government presented its third reform in six months.

A so-called “bad bank” will swallow large amounts of the toxic real estate that has brought down several Spanish banks and threatens several more. The property is left over from the housing construction bubble that burst in 2008, just as the credit crunch happened, and which lies at the root of Spain’s double-dip recession and 25% unemployment.

The bad bank will receive building plots, unfinished developments and possibly tens of thousands of unsold homes from developers who went bust or are struggling to repay loans. It will be expected to sell this stock at a profit over the next 10 to 15 years. “It will be viable and will not post losses,” the finance minister, Luis de Guindos, said.