Spain will announce the names of two independent auditors entrusted with conducting an analysis of its banking sector, Soraya Saenz de Santamaria, the deputy prime minister, has said.
Santamaria announced the move on Friday after a government's weekly cabinet meeting.
The independent auditors, who are expected to begin their work on Monday, will assess how much cash Spain's banks are likely to need to rebuild their balance sheets.
The audit will start with a one-month stress test followed by a deeper analysis of assets in the financial sector, Santamaria said.
"On Monday you will have the name of the two entities, the two auditors, which will be in charge of the evaluation," she said.
"There will be two phases, the first, a very urgent and quick stress test within a month and then a more detailed analysis of the balance on each entity.
"The cost of this will be covered by the Bank of Spain which will be able to provide more information on this."
Surge in bad loans
Structural reforms and budget cuts would allow the economy to grow, Santamaria said.
Data from the Bank of Spain showed on Friday bad loans rose in March to their highest in 18 years, underscoring the problems facing the government as it attempts to clean up the sector and turn around the economy.
The Bank of Spain said bad loans rose to 8.37 per cent of the banks' outstanding loans, the highest since August 1994 and up from 8.3 per cent in February, which was also revised higher.
The figures, released hours after a mass bank downgrade by credit ratings agency Moody's, showed losses from loans made in Spain's housing bubble were still rising.
Troubled banks, along with overspending in indebted regions, are the two biggest risks for Spain's public finances.
Investors believe Spain needs to aggressively address these two issues to avoid a bailout.
A more immediate worry is if savers start to withdraw deposits. A report that Bankia, which was nationalised last week, had lost $1.3bn in deposits sparked a 30 per cent crash in its shares on Thursday.
Bankia's financial hole may reach $10.2bn on top of the $12bn it needs to set aside to cover potential losses on real-estate assets, the Expansion newspaper said.
'Message of calm'
In relation to Bankia, Santamaria reassured her audience.
"As a government we send a message of calm, we call for responsible action, it is now the management, the new board [of Bankia] that needs to present its plan which will set the objectives and needs," she said.
"On its part the government has done what it should in accordance with the two royal decrees, the first and second steps of the financial reform to re-establish credibility and confidence in all financial institutions."
Moody's on Thursday downgraded 16 Spanish banks, citing the recession, real estate crisis and unemployment, and the government's reduced ability to support troubled lenders.
The move had been expected and Spanish bank shares rose on Friday to trim losses at the end of a grim week.
Bankia - due to present a restructuring plan next week - has said it would need $5.9bn in capital to comply with the last banking reform.
The government last week forecast banks would need to find about $44.5bn more to cover potential losses, marking its fourth attempt to deal with a 2008 property market crash.