1. Introduction

On June 25, 2012, the Spanish Government requested external financial assistance in the context of the ongoing process of restructuring and recapitalization of its banking sector. This assistance was agreed by the Eurogroup on July 20 and included in the Memorandum of Understanding (MoU). The key component of the program is a review of the vulnerable segments of the Spanish financial sector and consists of the following three elements:

  • Determination of the capital needs of each bank, by means of a general analysis of the quality of the assets of the banking sector and a stress test bank by bank before a hypothetical very adverse macroeconomic scenario;
  • Recapitalization, restructuring and / or orderly resolution of weak banks, based on plans that address the capital deficits detected in the stress test; and
  • Segregation of damaged bank assets that would require public support for their recapitalization without the aforementioned segregation and transfer to an Asset Management Company (SGA).

On August 31, Royal Decree Law 24/2012 was approved, which regulates the procedure and functions of the agencies involved in the process of preparing, approving and monitoring the plans for restructuring and resolving credit institutions. Likewise, with this standard, several of the commitments acquired by the Spanish Government in the aforementioned MoU are fulfilled.

2.- Results of the stress exercise and constitution of the SGA

On September 28, external consultant Oliver Wyman will have completed a stress test for each of the 14 banking groups that make up 90% of the Spanish banking system to determine their capital needs. However, these needs will not be equivalent to the public support that each entity needs. The difference will be given by the reduction in capital requirements derived from the disposals of assets made by the entities per se, by the transfer of assets to the SGA, by the carrying out of exercises of assumption of losses by the holders of hybrid instruments (voluntary or imposed by the authorities) or by raising capital that they could obtain privately in the markets.

In September the SGA will be established and both the perimeter of the company (assets to be transferred) and the transfer prices will be approved. In the month of November, the approval of the regulatory development of the SGA and service agreements with the assigning banks and third parties is foreseen. Full commissioning of the SGA is scheduled for early December.

3.- Restructuring plans / resolution and recapitalization of entities

Regarding the banks of the Group 1, the Spanish authorities have been working on the restructuring or resolution plans, in conjunction with the European Commission, since the end of July 2012. These plans will be completed in light of the results of the stress test and will be submitted in time. Enough for the Commission to approve them in November 2012. On this basis, state aid will be granted and the planned plans can be put into practice immediately. Before the end of the year, the transfer of the impaired assets to the SGA will have begun. Likewise, voluntary or mandatory loss-bearing exercises by holders of hybrid capital instruments will have to be carried out for Group 1 entities (in general, for all entities that require public aid).

Regarding the banks of the Group 2, the Spanish authorities must present a restructuring plan or resolution to the European Commission, no later than October 2012. Given the need to incorporate the results of the stress test, the approval process is expected to last until the end of December, when these banks will be recapitalized or resolved in an orderly manner. All Group 2 banks will have to contemplate in their restructuring or resolution plan the steps necessary to segregate their impaired assets to the SGA.

Regarding the banks of Groups 1 and 2, public support will be granted, as the case may be, as soon as the Commission approves the corresponding plans, following the procedure agreed in the Financial Assistance Facility (FAF). Thus, after requesting funds for each entity, the European Financial Stability Fund (EFSF) – or, after its launch, the European Stability Mechanism (ESM) – will verify that all the requirements for disbursement are met. and will submit its proposal in this regard to the Euro Working Group (EWG), for its approval, which will take into account the national specificities that are necessary for the provision of consent by each Member State. The Commission must carry out a review of compliance with the conditionality agreed in the MoU and submit a report, which will be what the EFSF takes into account for this purpose. This review will take place in the second half of October. Once the operation is approved, the EFSF / MEDE will transfer the corresponding bonds to the FROB so that it may inject them into the specific entity in exchange for the securities (ordinary shares or convertible bonds) that are determined.

To the banks of the Group number 3 that they project a significant capital increase Equivalent or greater than 2% of risk-weighted assets will be required, as a precautionary measure, to issue convertible bonds (COCOs) under the recapitalization plan no later than December 2012, in order to meet their capital needs. The FROB, using the resources of the program, will subscribe said bonds, which can be repurchased until June 30, 2013 if the banks manage to obtain the necessary capital from private sources. Otherwise, they will be recapitalized through the total or partial conversion of the bonds into ordinary shares. In this case, banks must present restructuring plans.

The banks of the Group number 3 who have a more limited capital increase, less than 2% of the risk-weighted assets, will have until June 30, 2013 to carry it out. If they do not achieve their objective, they will be recapitalized through state aid and must present restructuring plans.

Group 3 banks that, as of June 30, 2013, continue to benefit from public support under this program, must contemplate in their restructuring plans the transfer of their impaired assets to the SGA, unless it can be demonstrated, in the case of banks requiring less than 2% of risk-weighted assets in state aid, other means of achieving full segregation of such assets are less costly.

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