21 February 2011




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:


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).


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.


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).


  • 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.


The information contained in this newsletter is of a general nature and does not constitute legal advice. This newsletter has been prepared as of 21 February 2011 and Uría Menéndez does undertake any commitment to update or revise of its contents hereof.