EU challenges Spain for hindering BBVA's Sabadell bid

MADRID (Reuters) -The European Commission officially challenged the Spanish government on Thursday over its attempts to hinder Spanish bank BBVA's hostile bid for smaller rival Sabadell.

A letter of formal notice, which opens an infringement procedure, was sent to Madrid after the government last month said BBVA would not be allowed to integrate its operations with Sabadell for at least three years as one of the conditions imposed on the more than 13 billion-euro ($15.05 billion) offer.

The letter said that, in the Commission's view, provisions in Spanish banking and competition laws granting the government unrestricted powers to intervene in mergers and acquisitions "impinge on the exclusive competences of the European Central Bank and national supervisors under the EU banking regulations".

The Commission's letter, which comes after a warning in May not to hinder the bid, also said that it considered Madrid's broad discretionary powers as unjustified restrictions on the freedom of capital movement.

An economy ministry spokesperson said the regulations have been in force for several years and applied on several occasions, and the government intended to explain and clarify any legal or technical differences as part of constructive cooperation with the EU institutions.

Spain has now two months to respond and address the shortcomings raised by the Commission.

In the absence of a satisfactory response, Brussels may decide to issue a reasoned opinion and urge Spain to comply and could ultimately refer Spain to the Court of Justice of the European Union.

Euro zone banking supervisors have called for banking consolidation to strengthen the sector, but deals have been scarce as politicians have sought to preserve jobs and protect home-grown lenders.

The Commission also said consolidation was essential for achieving a bloc-wide banking union.

BBVA decided to proceed with its bid despite the condition imposed by the government and the deal is now waiting for approval from Spain's stock market supervisor.

BBVA and Sabadell declined to comment on the European Commission's move.

($1 = 0.8639 euros)

(Reporting by Jesús Aguado; additional reporting by Bart Meijer in Brussels and David Latona in Madrid; editing by Andrei Khalip, Kirsten Donovan)