* Caja Madrid to seek listing for its new bank
* BFA proforma core capital 7.04 percent at end-2010
* Savings bank group Civica also explores listing
* Banco Sabadell hikes capital to improve core ratio
* Analysts estimate BFA needs 2 bln euros capital
(Adds Banco Sabadell capital hike, details from Caja Madrid press conference, analyst estimate of BFA capital need)
By Judy MacInnes
MADRID, Jan 31 (Reuters) - Spain's Caja Madrid plans to float newly created bank BFA -- the country's third largest -- on the stock market to meet tougher government capital rules, echoing a move by rival La Caixa to list last week.
Regional savings banks, or cajas, are seen as a weak link in Spain and the government has forced them to merge and raise capital from private investors to reassure debt markets that they won't need a bailout.
The government has put the overall capital shortfall in Spain's banking sector at around 20 billion euros ($27 billion), some way below analysts' expectations of 25-50 billion euros.
Caja Madrid overtook Barcelona-based La Caixa as Spain's biggest unlisted savings bank when it merged with others in the sector last year to create Banco Financiero y de Ahorros.
"We are taking the steps to set up an institution which can be listed ... But we need to see the full details of the new reform before setting a date," Chairman Rodrigo Rato said on Monday at a presentation of Caja Madrid's 2010 results.
Analysts estimate that based on its 200 billion euros of risk-weighted assets, BFA will need to raise about 2 billion euros to reach the government target.
In a statement to the securities regulator, the new bank said it would begin the paperwork for its listing in February and has already attracted institutional investor interest.
BFA is owned by Caja Madrid and other cajas including Bancaja, but its ultimate owners include regional and local governments and trade unions.
To implement its merger with six other savings banks, Caja Madrid was granted 4.5 billion euros by the government's restructuring fund, the biggest loan made to any savings bank.
"I don't think BFA is as easy a sell as La Caixa. It has 41 billion euros of real estate loans on its balance sheet," a bank analyst at a Spanish brokerage said.
Rato, a former IMF head and Spanish economy minister, said BFA is considering moving toxic assets such as bad loans to developers to another entity, mirroring a similar move already announced by La Caixa.
"That's undoubtedly a possibility for us, just as others have done," he said.
CAJA CONCERNS
Caja Madrid said BFA had pro forma core capital of 7.04 percent at the end of 2010. That is below the 8 percent core capital ratio the Socialist government has demanded all banks meet by the end of September to avoid partial nationalisation.
Rato said the additional capital required is expected to be raised on the stock market, but the bank's industrial holdings would be "rationalised".
Many of the savings banks hold stakes in Spanish industrial companies, which some analysts have suggested they might begin to sell off to help raise capital.
BFA's portfolio includes about 20 percent of Iberia, 15 percent of Mapfre and stakes in property group Realia and infrastructure firm Globalvia.
La Caixa set the pace last week by moving all of its bank assets into its already listed Criteria unit, raising hopes it could take over weaker savings bank rivals battered by the country's real estate lending crash.
Spanish retail bank Sabadell said on Monday it planned to hike capital by 15.8 million euros, or 10 percent, to raise it core capital to 8.8 percent from 8.2 percent. And Banca Civica, another group of merged cajas, said it could float. Its core capital was 8.05 percent at the end of 2010.
Concerns over the cajas have weighed on Spain's sovereign debt as investors see a risk that the country will follow Ireland into an expensive international rescue.
The risk premium of benchmark Spanish bonds over German 10-years narrowed on Monday by about six basis points from Friday's settlement, to 213 bps.
Caja Madrid said BFA -- third in Spain behind giants Santander and BBVA -- had proforma net profit was 440 million euros in 2010, as provisions of 9.2 billion euros against loan losses weighed on the bottom line.
Bad loans at the bank rose to 6.34 percent of the total loan book at the end of December. (Additional reporting by Jesus Aguado; Writing by Fiona Ortiz; Editing by Alexander Smith) ($1=.7342 Euro)