The Council of Ministers has approved the Royal Decree Law on Restructuring and Resolution of Credit Institutions, a regulation that will be an essential tool in the crisis management processes of credit institutions. To this end, the necessary crisis resolution instruments are strengthened, both with regard to the role of public institutions and the procedures and tools available. The ultimate objective is to safeguard the stability of the financial system as a whole, beyond the problems of a specific entity.
With this decision, the Government complies with its commitments of a legal nature within the program of financial assistance to Spain for the recapitalization of the banking sector, agreed by the Eurogroup on July 20 and included in the Memorandum of Understanding. Not only are the aspects that had to be incorporated before August 31 included, but others are anticipated such as the modification of the organizational structure of the Orderly Bank Restructuring Fund (FROB), the strengthening of protection for retail investors and the transfer of powers in sanctioning matters and authorization of new banks from the Ministry of Economy and Competitiveness to the Bank of Spain.
The standard includes six types of measures:
- A new reinforced crisis management framework for credit institutions that will allow for its effective restructuring and orderly resolution if necessary.
- A new FROB regulation that defines its competences and significantly strengthens the intervention tools in all phases of crisis management.
- Strengthening protection for retail investors.
- A legal framework for the constitution of an Asset Management Company (SGA).
- A system of distribution between the public and private sectors of the cost of the restructuring processes derived from intervention in the entities.
- Other aspects such as the reinforcement of capital requirements that entities must have (both in definition and level), new limits on the remuneration of managers of entities with grants and the transfer of powers to the Bank of Spain.
The Royal Decree Law establishes a complete legal regime for the treatment of situations of entities with problems, which involves advancing in Spanish regulations some of the aspects included in the draft of the future European Crisis Resolution Directive. Three types of measures are established: early intervention (minor difficulties), restructuring (transitory weaknesses that can be solved through the injection of public funds) and orderly resolution (unviable entities).
The early action measures are foreseen for entities that may be viable by their own means but that may require exceptional and transitory help through instruments convertible into shares (Cocos), to be returned within two years.
The restructuring cases are foreseen for the entities that present transitory weaknesses that can be overcome through the injection of public funds. The entity may obtain guarantees, loans, recapitalization through shares or Cocos, etc.
In the event of orderly resolution, the sale of the business, the transfer of assets or liabilities to a "bridge bank" or the transfer of assets or liabilities to an asset management entity will proceed. The FROB must dispose of the ordinary shares or participations in the capital stock of the entities within a maximum period of five years. Regarding instruments convertible into capital, the FROB may request their conversion within six months from the fifth year from their subscription. This period may be extended up to two years, depending on the entity's situation.
The other great block of the royal decree law is the one that reinforces the powers of the FROB that is configured, together with the Bank of Spain, as the public institution in charge of restructuring and resolving credit institutions. It will have an allocation from the State Budgets and may be financed with third parties with a limit that for 2012 is set at 120,000 million euros. It will have a governing commission made up of representatives from the Ministry of Economy and Competitiveness, the Treasury and Public Administrations and the Bank of Spain, and will have a general director with full executive functions.
The regulation also addresses the distribution of the costs of the restructuring of entities, establishing the mechanism by which the holders of hybrid capital instruments (preferred shares and subordinated debt) may be forced to assume part of the losses of an entity in crisis. The aim is to reduce as much as possible the cost to the taxpayer of the restructuring, as stipulated in the European regulations on State aid. In accordance with this regulation, the FROB may impose a certain swap exercise, if it considers that the absorption of losses by creditors has been insufficient.
These operations may consist of exchange offers for capital instruments of the credit institution; repurchase by direct cash payment or conditional on the subscription of capital instruments or any other bank product; reduction of the nominal value of the debt; and early amortization at a value other than nominal. These actions must take into account the market value, applying a discount on the nominal in accordance with European regulations.
At the same time, a series of restrictions are placed on the marketing of these products in the future as a fundamental part of the standard that is approved today. It is about ensuring the protection of retail investors and increasing transparency in the marketing of these products. From now on, a minimum 50% tranche for professional investors and a minimum investment of 100,000 euros will be required in the case of unlisted companies and 25,000 euros in that of listed companies. The powers of the National Securities Market Commission (CNMV) are reinforced and unsuitable retail clients will be asked to write in their own handwriting that they have been warned that the product is not convenient for them.
The role of the Asset Management Society (SGA) is outlined in the standard at the expense of further detailed regulatory development. The SGA may adopt the form of a corporation or trust fund. This instrument will allow certain problematic assets of entities that receive public support to be removed from the balance sheet, thus facilitating their consolidation and viability. Therefore, it has a temporary vocation. The FROB will have the capacity to compel the transfer of these assets to the entities with aid.
Another relevant aspect contained in this royal decree-law is the modification of the principal capital requirements with which the entities and consolidable groups that the Royal Decree-Law 2/2011, of February 18, establishes must comply for the reinforcement of the Finance system. Specifically, the current requirements of 8% and 10% (8% in general, and 10% for entities with difficult access to capital markets and for which wholesale financing predominates), will become a single requirement of 9 % to be met by all entities as of January 1, 2013. Not only is the level of the principal capital requirement modified, but also its definition to adapt it to that used by the European Banking Authority in its recent recapitalization exercise. This modification does not de facto imply a significant alteration of the requirements already demanded of the entities.
The Royal Decree-Law also contributes to making a clear separation between the functions attributed to the Bank of Spain and the Ministry of Economy and Competitiveness in matters of authorization and sanction of credit institutions. The Bank of Spain is entrusted with those functions on the matter that previously corresponded to the Ministry of Economy and Competitiveness. The Bank of Spain will be competent in the authorization of entities and in the imposition of very serious sanctions.
Lastly, a new lowered ceiling is established on the fixed remuneration for all concepts of CEOs, CEOs and directors of entities that, without being majority-owned by the FROB, receive financial support. This maximum limit goes from the current 600,000 euros to 500,000 euros.