Spain's conservative government launched a major clean-up of its troubled banking sector on Friday by approving a new banking law designed to restore investor confidence and inject credit into the county's sluggish economy.

In the second set of major reforms introduced since the government came to power in December, banks will now be obliged to set aside a financial safety net estimated at a total of 50 billion euros ($65 billion).

The new legislation also places a cap on the earnings of top bankers. Executives of banks that have received public aid may now not make more than 600,000 euros annually. Heads of banks that have been taken over by the state may only earn half that amount.

The cuts set a precedent for a society which had to "make sacrifices" during an economic crisis, Economy Minister Luis de Guindos announced after the cabinet meeting.

Outlining the details of the new law on Thursday de Guindos asserted that the reform aimed to "improve confidence and the credibility of the Spanish financial sector."

Spain's government has already announced stringent spending cuts and plans for a labor market reform in an attempt to boost growth and to cut the budget deficit, which was estimated at about eight percent for 2011.

The latest reform will almost certainly be approved by parliament, where Prime Minister Mariano Rajoy's People's Party (PP) has an absolute majority. Banks will then have a year to implement the necessary changes.

ccp/sb (AFP, Reuters)