- Entities may create Institutional Protection Mechanisms, a consolidation and self-protection formula
The Council of Ministers has approved a Royal Decree-Law on urgent measures in financial matters whose objective is to reform the legal regime of credit cooperatives. The sector accounts for 6% of the credit system and is highly relevant in financing smaller economic agents in the agricultural, industrial and professional sectors, such as SMEs, the self-employed or entrepreneurs. With this norm, processes that contribute to the strengthening and increasing the resistance of these entities are favored, specifically, through the constitution of the so-called Institutional Protection Mechanisms (IPM). This completes the cycle of financial system reforms that the Government began in 2012 and that have allowed the sector to contribute to the recovery of the Spanish economy.
The norm recognizes credit cooperatives the possibility of constituting an IPM as a mechanism designed for mutual self-protection and which can be of two types, reinforced or normative. Reinforced IPMs 100% mutualize the benefits and risks and have a parent entity that directs practically all of the group's decisions (it is considered a consolidable group). Regulatory IPMs do not have to 100% mutualize the benefits and risks and are characterized by the constitution of a private guarantee fund financed ex ante by the member entities of the group that will be used to face possible needs of the entities' own resources who participate in the MIP.
Incentives are also established to establish these MIPs. The entities that make it up have a lower risk profile as their solvency increases, which will allow reducing the minimum requirements of liabilities capable of absorbing losses for the purposes of an eventual resolution and the contributions that the entities that make up a MIP must make to the Deposit Guarantee.
Additionally, RD-Law foresees a series of measures to enhance the proper functioning of IPMs. Thus, the operations carried out by a cooperative with the other member entities of the MIP of which it is a part will not count for the purposes of the limit for active operations with third parties of 50% of the total resources, specified in the Credit Cooperatives Law. In other words, the cooperatives of the same IPM may have greater exposures to each other, not limited.
Furthermore, the private guarantee fund will also have no limits when it comes to investing in the capital of one of the cooperatives that are members of the MIP. Lifting this limitation makes it easier to use the fund when a participating entity needs it. However, an action plan must be submitted to the Bank of Spain for its approval in order to guarantee the viability that contains concrete measures aimed at allowing divestment in the credit cooperative, under suitable conditions for all the member institutions of the MIP .
Along with the reform of the Legal Regime of Credit Cooperatives, this RD-Law creates a new category of liabilities that can be issued by all credit institutions: ordinary non-preferred credit or senior non-preferred debt. This is a new category of financial instruments for regulatory purposes in order to facilitate the fulfillment of the minimum requirement of own funds and admissible liabilities by entities. The idea is that this new instrument has an order of priority (in case of resolution or bankruptcy) lower than the rest of ordinary credits but higher than the subordinated debt.
Thus, an adequate legal framework is given to credit institutions that are forced to start issuing this type of liability. Both internationally and in the European Union, the regulation on bank resolution requires credit institutions and investment services companies to have a number of liabilities that can absorb losses in the event that a resolution process is initiated, the so-called minimum own funds requirement and admissible liabilities (MREL).
In accordance with the new standard, an ordinary loan can only be considered as non-preferred if it satisfies a series of requirements that guarantee that, in the event of a resolution, the instrument will be able to absorb losses: having issued with an effective maturity of equal or greater maturity To one year; not have the characteristics of derivative instruments; and that they include a clause establishing that they have a lower bankruptcy priority over the rest of ordinary credits.
Likewise, the Securities Market Law is amended to consider these debt instruments as complex financial instruments.
