21 February 2011
MAIN
NOVELTIES INTRODUCED BY ROYAL DECREE-LAW 2/2011 OF 18 FEBRUARY, ON THE
STRENGTHENING OF THE BANKING SYSTEM
Royal Decree-law
2/2011 of 18 February (the “Royal Decree-law”), on the strengthening of the
banking system was approved by the Council of Ministers last Friday and
entered into force yesterday, 20 February 2011. The purpose of the Royal
Decree-law is twofold: (i) to strengthen the solvency of Spanish banking
entities, and (ii) to speed up the restructuring process initiated by saving
banks. The objective is to dissipate the fears that have arisen in the
markets in the last few months concerning the capacity of the Spanish banking
system to absorb the potential losses associated to the deterioration of
assets.
The most
significant novelties introduced by the Royal Decree-law are as follows:
1.
NEW CAPITAL RATIO: CORE CAPITAL (CAPITAL PRINCIPAL)
The solvency
requirements of banking consolidated groups, and banks, savings banks and
credit cooperatives that do not form part of a consolidated group, have been
made more stringent. On a general basis the Royal Decree-law requires a
so-called capital principal (that would be referred for the purposes
of this document as core capital) equal to or above 8% of their risk-weighted
assets.
For credit
entities which are highly dependant on wholesale markets (in other words, a
wholesale funding coefficient - to be set by the Bank of Spain - above 20%),
the core capital ratio is increased to 10%. As an exception, the 8% ratio is
maintained when the relevant entity has 20% or more of its capital or voting
rights placed among third parties, either in the stock market or among
private investors. The ratio may also be increased for entities that do not
pass the stress tests carried out by the Bank of Spain.
The concept of
core capital ratio is new, not only in connection with the levels required,
but also as regards quality. Core capital is formed by (i) common
shares, (ii) retained earnings (including share premiums of capital
instruments), (iii) other comprehensive income, (iv) minority
interests and (v) instruments subscribed by the Fondo de
Reestructuración Ordenada Bancaria (“FROB”); all of which minus treasury
stock, cumulative losses, unrealised losses recognised in other comprehensive
income and intangible assets (including goodwill).
For a
transitional period, subordinated debt instruments mandatory convertible into
common shares will be included in the core capital, provided that conversion
takes place before 31 December 2014. This includes instruments issued before
the entry into force of the Royal Decree-law and those issued subsequently
(in the latter case, the conversion ratio must be predeterminated). In any
event, these instruments must not represent more than 25% of the core
capital.
Although the new
capital requirements are in line with Basel III standards, they are specific
to the Spanish banking system. From a quality point of view, the core capital
ratio is less stringent than Basel III’s core capital. Certain deductions,
such as deferred tax assets and investments in the capital of financial and
insurance entities are not included, and certain convertible instruments are.
From a quantitative point of view, however, the level required is higher than
Basel III (8% or 10% as opposed to 7% - including the capital conservation
buffer - of Basel III).
2.
TERMS AND COMPLIANCE STRATEGY
Entities must
comply with the applicable core capital ratio before 10 March 2011, on the
basis of the risk-weighted assets as at 31 December 2010. However, there is
an adjustment period for entities that do not meet this deadline, which ends
on 30 September 2011. These entities must submit a compliance plan with their
strategy and timeframe to the Bank of Spain. Exceptionally, the Bank of Spain
may extend the compliance term up to 31 December and, for entities involved
in listing procedures, until the first quarter of 2012.
3.
SUBSCRIPTION BY THE FROB OF CAPITAL INSTRUMENTS
The Royal
Decree-law eliminates the possibility established in Royal Decree-law 9/2009
of the FROB providing support through the subscription of convertible
preference shares (participaciones preferentes convertibles). This
option is now restricted to credit cooperatives and, on a transitional basis,
to entities involved in restructuring processes which, at the time of entry
into force of the Royal Decree-law, had already started negotiations with the
FROB.
From the entry
into force of the Royal Decree-law, the FROB is authorised to buy ordinary
shares or to make capital contributions (in the case of credit cooperatives)
to the entities that so request. The subscription of these instruments will
cause the immediate inclusion of the FROB in the entity’s board of directors
and will be subject to the assumption by the entity of the following
undertakings: (i) at the request of the FROB, to reduce overheads; (ii) to
arrange its corporate governance in line with the standards applicable to
listed companies; and (iii) to increase financing to small and medium-sized
companies.
In the event that
the requesting entity is a savings bank, it must transfer its financial
activity to a bank, with the savings bank becoming to perform its business
activity indirectly or becoming a foundation. The same requirement will apply
to savings banks affiliated to an Institutional Protection Scheme (IPS) in
the event the assistance is requested by the IPS central entity. Moreover, if
the FROB had previously subscribed preference shares convertible into common
shares of the requesting entity, the latter may carry out its conversion
immediately, after a request by the FROB and by joint agreement.
For the purposes
of ensuring efficiency in the use of public resources, the FROB must divest
through the relevant public auction within five years. In addition, the issue
terms may state that, within a term of one year since the subscription of the
shares, entities may repurchase its shares or designate a third party to buy
them (this term may be extended to two years, making additional undertakings
to those mentioned above).
4. OTHER MATTERS
- Acquisitions
of control of listed companies arising in restructuring or integration
processes in which the FROB or a Deposit Guarantee Fund takes part,
shall not give rise to the obligation to launch a tender offer. This
exception applies to any process initiated after the entry into force of
Royal Decree-law 9/2009 (28 June 2009).
- Newly
chartered banks are released from complying with the temporary
limitations to carry out their activities provided that they are
subsidiaries of credit entities or have been incorporated by one or more
saving banks in the context of an IPS or by a total spin-off of their
financial activities.
- The
requirements of the IPSs relating to pooling of results and joint
solvency undertakings shall be construed as satisfied in those IPSs in
which the financial activity of the participating savings banks has been
contributed, as well as in those IPSs, in which various savings banks
acting in concert carry out their corporate purpose as banking entities
through the central entity.
- The
Corporate Income Tax Law is amended to allow savings banks within a
reinforced IPS to create a tax consolidation group for the purposes of
the Corporate Income Tax of the central entity. Certain measures to
ensure tax neutrality of transactions undertaken for the creation of the
IPS and the central entity have also been approved.
