On Thursday, the European Commission (EC) approved a Spanish scheme a “for banks aimed at enhancing the strength and solvency of credit institutions so that they are able to provide credit normally and that confidence in the national financial system can be maintained.” The EC expressed confidence that the measures adopted provide “enough incentives to redeem the state participation over time.” The EC also noted that the measures require market-oriented remuneration and will terminate on June 30, 2010.
It is anticipated that the Spanish scheme will permit the Fondo de Reestructuración Ordenada Bancaria (FROB) to “subscribe to convertible preference shares that would qualify as Tier 1 in the regulatory capital of the beneficiaries.” The FROB is a fund created by the Spanish government in connection with the financial crisis for the purpose of managing the restructuring of credit. Banks wishing to participate in the scheme will be required to draft an integration plan outlining the “specific measures and commitments to be implemented in order to achieve an increase of efficiency and solvability.” The plan will then have to receive the approval of the Bank of Spain before it is presented to the FROB. Prior to each individual bank recapitalization, the FROB must communicate to the EC certain information regarding “the results of an assessment of the beneficiary's risk profile by the Bank of Spain.” This information will permit the EC to better assess each situation and “indicate the necessary follow-up, such as the need to provide a restructuring plan, to pay an adequate remuneration on the convertible preference shares or the need for a ban on coupon payments on hybrid instruments.”
The EC determined that the “commitments made by Spain constitute an appropriate means to restore confidence in the creditworthiness of Spanish credit institutions and to stimulate lending to the real economy.” EC Competition Commissioner Neelie Kroes noted that “[t]he Spanish recapitalisation scheme will strengthen confidence in the Spanish banking system and, above all, encourage lending to the real economy." She also recognized that "the scheme establishes sufficient safeguards to limit disproportionate distortions of competition."
In December 2008, the EC approved a Spanish scheme to support the financial sector by providing guarantees to eligible financial institutions.