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:
1.
INCREASED COVERAGE REQUIREMENTS For REAL ESTATE ASSETS
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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2.
AID PROVIDED BY frob
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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3.
NOVELTIES IN THE CORPORATE STRUCTURE OF SAVINGS BANKS THAT CONDUCT
BUSINESS INDIRECTLY
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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5.
OTHER MATTERS
- 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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