Introduction
Compliance requirements
Preliminary views of the ECB
Action by non-compliant banks
Comment
On March 10 2011 the Bank of Spain made public its calculations of the additional capital that a number of banks and savings banks will need in order to comply with the provisions of Royal Decree-Law 2/2011 (of February 18 2011) on the strengthening of the Spanish financial system. The list comprises 12 banks that must increase their capital to a total aggregated amount of €15.15 billion; these include two Spanish banks, two subsidiaries of foreign banks (in particular, Spanish units of Deutsche Bank and Barclays Bank) and eight Spanish savings banks.
However, in the opinion of certain independent analysts, Spanish banks still need much more capital. For example, Moody's Investors Service estimated that the eventual cost of the bank restructuring will far exceed the calculations, leading to a further increase of the overall costs to nearer to €40-50 billion.
Royal Decree-Law 2/2011 has two goals:
- to dispel any doubts about Spanish credit institutions' solvency by establishing a demanding capital requirement; and
- to accelerate the final phase of the restructuring processes of Spanish saving banks using the framework established by Royal Decree-Law 11/2010 (on savings banks' governing bodies and other aspects of their legal regime).
The new law demands an 8% minimum core capital ratio for listed banks, which jumps to 10% for unlisted banks that fail to attract private funds for more than 20% of their equity.
The 12 institutions not fulfilling these requirements must now submit a compliance strategy and schedule to the Bank of Spain, together with a recapitalisation plan if they intend to receive support from the Fund for the Orderly Restructuring of the Banking Sector set up by Royal Decree-Law 9/2009 on bank restructuring and reinforcement of a credit institution's own funds. These institutions must aim to comply with the capital requirements by September 30 2011 or, subject to the regulator's authorisation and based only on justifiable reasons, by the end of 2011. If an initial public offering is planned, the deadline is extended to the first quarter of 2012.
On March 9 2011 the European Central Bank (ECB) made public its preliminary views on the new law, welcoming the implementation of measures that follow Basel III as "a step in the right direction" and underlining the fact that the regulation seemed to be in line with the conclusions and recommendations of the International Monetary Fund published during mid-2010.
However, the ECB emphasised that the opportunity offered by the law should be used to dispel the remaining doubts about valuations of the asset side of credit institutions' balance sheets, given that until now, the Bank of Spain has taken a conservative approach to such valuations (especially for assets related to the real estate sector). On the other hand, the ECB suggested that the anticipation of at least two years in the calendar for the implementation of Basel III could result in stress for such institutions and may increase the risk of adverse effects to the real economy, especially given the delicate economic situation in Spain.
Actions by non-compliant banks
A breach of capital requirements is treated as a serious or very serious infringement of Law 26/1988 on the discipline and intervention of credit institutions. Some non-compliant entities have already announced that they envisage, as a first option, raising funds from investors amounting to at least 20% of their capital. They would then comply with the new law, as their applicable core capital ratio would be reduced from 10% to 8%.
In addition, banks may adjust their capital ratios by means of extraordinary operations that are expressly contemplated under the new law (sales of branches, strategic holdings or asset portfolios), which would reduce the need to obtain new capital. Other institutions have announced their intention to place new issues in the markets, so that the volume of capital finally injected into the Spanish financial system may be increased by the amount of such issues.
As a last option, the Fund for the Orderly Restructuring of the Banking Sector is committed to subscribing to the necessary capital that institutions may request. However, Spanish savings banks applying for recapitalisation via the fund must transfer their financial activities to a commercial bank and take into account that the fund's investments must be carried out using competitive recapitalisation plans based on specific goals to reduce structural costs and comply with good corporate governance practices.
The next step in the roadmap set out by the first transitory provision of the new law, after the relevant financial entities submitted details of their respective capitalisation plans at the end of March 2011, is for the Bank of Spain to approve the plans or demand modifications. It has until April 14 to do so, as the recapitalisation plans must be approved by April 28 2011.
For further information on this topic please contact Jose Luis Lorente Howell at Bird & Bird by telephone (+34 91 790 6000), fax (+34 91 790 6011) or email ([email protected]).