5 February 2012


Royal Decree-law 2/2012 of 3 February, on the banking sector reform (the “Royal Decree”), entered into force and was published in Spain’s State Official Gazette on 4 February 2012.  This new reform of the banking system is one of the key features, together with the budget and the labour reform, of the new government’s structural reforms programme.

The announced purpose of the Royal Decree is to strengthen the balance sheets of credit institutions to increase confidence and reliability, and to reinforce the Spanish financial system, with a view to allowing access to capital markets and restoring their main role of channelling savings into the real economy.

The main changes introduced by the Royal Decree are the following:


The coverage requirements for certain real estate assets in the balance sheets of credit institutions as at 31 December 2011 have been increased.  In particular, the new reinforcement measures affect financings and asset foreclosures or assets received as payment of debts from the real estate sector in Spain.  The requirements are to be implemented by combining three regulatory techniques; two are accounting-related (general and specific provisions) and one relates to equity (capital buffers):

  • Specific provisions: The specific coverage is increased for those assets mentioned above that are classified as substandard or doubtful, above the thresholds established in Annex IX of the Circular of the Bank of Spain 4/2004.  Therefore, two different provisioning mechanisms will coexist: one for the mentioned assets, and another one for all other assets (including real estate loans granted since 1 January 2012 and pre-existing unimpaired loans).
  • ”General” provision: A new one-off 7% coverage is created to be applied on the outstanding balance of real estate financings classified as normal.  If they are reclassified as substandard or doubtful, any impairments can be allocated to the general provision.
  • Capital buffer: Specific provisions for problematic credit assets and asset foreclosures are supplemented with additional principal capital requirements.

The Royal Decree provides a deadline to comply with these requirements: 31 December 2012.  However, it allows entities that undergo integration processes during 2012 to benefit from a 12-month extension from the date the transaction is authorised.  Only integrations that require structural changes (e.g., mergers, demergers), or involve the acquisition of institutions in which the Fondo de Reestructuración Ordenada Bancaria (Fund for Orderly Bank Restructuring, “FROB”) currently has a majority stake, may benefit from such extension.  In addition, among other requirements, the total balance sheet of the resulting entity must be at least 20% (10% in exceptional circumstances) higher than the total balance of the business in Spain of the largest institution in the integration.

Moreover, to benefit from the extension, the resulting institution must comply with the corporate governance rules established in Royal Decree-law 9/2009 for institutions receiving aid from the FROB.

The above should be considered in connection with the resolution of the Governing Committee of the FROB of 17 January 2012, which was published on Friday 3 February.  The resolution states that institutions that receive aid (provided that it does not exceed 2% of their risk-weighted assets) are now exempt from the prohibition to expand by acquiring other institutions.

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The new law amends Royal Decree-law 9/2009 to introduce minor changes in the subsidies system involving the acquisition of shares and to reinstate the so called “FROB I”, which consists of the subscription of instruments convertible into capital of any credit institution (not only cooperatives) that is about to integrate and needs to reinforce its solvency.

The specific characteristics of the FROB’s new convertible instruments are still to be developed by the FROB.  This is a key issue especially after the government announced that they will qualify as contingent capital.

Another novelty of the new FROB aid system is that the FROB may facilitate the subsequent sale of shares or convertible securities of credit institutions that have not been intervened before to third parties by providing support measures, such as, asset protection schemes.

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The Royal Decree also amends Law 31/1985 and Royal Decree-law 11/2010 concerning the governing bodies of savings banks to lighten their structure and make the operation of savings banks conducting business indirectly more flexible.

The most significant novelties are as follows: (i) the obligation that savings banks implement the same structure as that of their management bodies in the banks in which they have contributed their financial activity is removed; (ii) the savings banks’ discretion to make disbursements (including ordinary expenses) unrelated to the community welfare project is limited; and (iii) from now on, savings banks must become special foundations not only when they lose control of the bank in which they have contributed their financial activity, but also when, even though they still hold control, they have less than 25% of the voting rights in the new bank.

The Royal Decree provides that the State will supervise special foundations through the Protectorate of the Ministry of Economy and Competitiveness, provided that the main scope of action of the bank through which the financial activity is carried out covers more than one autonomous region.  This confirms the inclusion of these special foundations in the framework of the distribution of functions between the State and the autonomous regions, as provided under Law 50/2002 on foundations.

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 4. remuneraTION

The Royal Decree establishes significant restrictions to the remuneration of directors, general directors and senior executives, in institutions receiving public aid, by imposing more stringent requirements for institutions in which the FROB has a majority stake.  These restrictions apply to fixed and variable remuneration, and may even affect certain pension benefits.

In the case of integration processes in the context of the Royal Decree, the latter provides that these restrictions will apply only to directors of the institution giving rise to the need to seek public aid, and that the Minister of Economy and Competitiveness may modify the limits applicable to the directors of such institution.

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  • Institutions may seek permission from the Bank of Spain to defer, for a term not exceeding 12 months, interest payment of preferred shares and mandatory convertible bonds into shares issued before the entry into force of the Royal Decree in the event they do not have enough distributable profits or reserves, or there is a shortfall of equity as a consequence of the implementation of the reinforcement measures.  This possibility should be carefully assessed by institutions with issues subject to different laws, or which are ranked differently, as the deferment could enter into conflict with the holders of other issues or capital instruments.
  • Savings banks in an Institutional Protection Scheme (“SIP”) that contribute their business to the main institution are subject to the indirect financial business system established under Royal Decree-law 11/2010.
  • A transitional term of nearly two years (until 1 January 2014) is established during which bancassurance operators of institutions participating in integration processes within the context of the Royal Decree must carry out the necessary actions (merger, assignment of mediating positions, etc.) in such a way that, at the end of the said term, the resulting credit institution’s network is made available to a single bancassurance operator.
  • The FROB’s capital is increased by 6 billion euros, however, its leverage is reduced to six times its capital.  The available funds are thus set at 90 billion euros.
  • The requirements that necessarily convertible bonds into shares must comply with to be considered core capital have been amended.  The reform: (i) extends the maximum conversion term until 2018, (ii) allows for a variable conversion rate (although there is a limit to the number and face value of the shares to be delivered) and, consequently, no longer requires that they be accounted for as net equity, and (iii) requires their conversion in the event of a solvency ratio deficit.

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The information contained in this newsletter is general information and does not constitute legal advice. This newsletter was drafted on 5 February 2012. Uría Menéndez does not assume any undertakings concerning the update or review of its contents.