fondo de reestructuracion ordenada bancaria (frob) capital ......mar 09, 2020 · summary of key...

PreliminaryYPFSDiscussionDraft|March2020

FondodeReestructuracionOrdenadaBancaria(FROB)CapitalInjections(SPGFC)

PriyaSankar1

March9,2020

Abstract

The Spanish government created the Fund for the Orderly Restructuring of the BankingSector(FROB)in2009toperformtemporarycapitalinjectionsthatfacilitatedmergersandacquisitionsofstrugglinginstitutionsandrestructuringprocesses(BdE2017p.117).TheFROBusedpreferredshares,andlaterordinarysharesandcontingentconvertiblebondstorecapitalizestrugglingSpanishcredit institutions(SeeKDD6).TheFROB issued€54.353billionoftotalcapital injectionsinthreerounds(BdE2017p.247).FROBI inearly2010mergedinsolventregionalsavingsbanksorCajasintolarger,moresolventbanksthroughthesubscriptionofpreferredshares.FROBIIin2011-2012recapitalizedstrugglingbanksusingordinaryshares,andFROBIIIin2012-2013recapitalizedbanksthathadfailedastresstestbysubscribingsharesandpurchasingcontingentconvertiblebonds.TheFROBgainedpowersofresolution,andwassupplementedwithanassetmanagementcompany,Sareb,ofwhichitowns45%,in2012(Ley9/2012).AsofDecember2018,theFROBstillhas€50.634billion outstanding in a variety of institutions (Appendix 9). The FROB’s timely capitalinjectionshelpedcapitalizeSpanishbanksandpreventasystemicallydamaginginsolvency,butitisexpectedtoexperiencelosses,especiallyfromitsstakeinSareb.Keywords:Spain,CapitalInjections,FROB,Sareb,GlobalFinancialCrisis,Recapitalizations,Resolution

1PriyaSankar,ResearchAssociate,YaleProgramonFinancialStability([email protected])


AtaGlance

TheglobalfinancialcrisishitSpain’seconomyandrealestatesectorin2009.Concernsabouttheregionalsavingsbanksector,orcajas,andtheir exposure to real estatewere realized inthe failure of Caja Castilla-La Mancha. ThisspurredtheSpanishgovernmenttoimplementthe Fondo de Reestructuración OrdenadaBancaria(FROB),knowninEnglishastheFundforOrderlyBankRestructuring.

In2010,theFROBpurchasedpreferredsharesin many cajas, facilitating their mergers andsales,whichresultedinlarger,morestable,andmoresolventinstitutions.Thissetofinjectionsis known as FROB I. The passage of RealDecreto-ley 2/2011 allowed the FROB torecapitalize insolvent institutions through thepurchase of ordinary shares. The FROB couldalsorequirethemtosubmitplanstomaintaincompliancewithcapitalrequirementsandrepurchaseshares.Injectionsmadein2011-2012adheredtothislawandthenewBaselIIIcapitalrequirements,andconstitutedFROBII.In2012,theSpanishgovernmentgavetheFROBpowerstorestructurethroughthepurchaseofcontingentconvertiblebonds(CoCos)aswellaspreferredandordinaryshares.SpainalsomadeFROBaresolutionauthority,andestablishedtheassetmanagementcompany,(alsoknownasa“badbank”)Sareb.ThesepolicieswerepursuanttoaMemorandumofUnderstandingbetweenSpainandtheEuropeanCommission,which recommended plans for resolution and asset management in Spain’s financial stabilityframework. It also required an independent consultant to perform stress test onmajor Spanishbanks,andgroupthemintocategoriesofsolvency.TheFROBmadeaseriesofcapitalinjectionstobanksthatfailedthisstresstestin2012-2013(FROBIII)usingsharesandCoCos.

SummaryEvaluation

TheFROBultimatelymadeapproximately€54.353billionincapital injections,ofwhichrelativelylittlehasbeenrecovered(Appendix9).Italsoholdsa45%stakeinSareb,theSpanishbadbank.TheFROB’scapitalinjectionsweregenerallysuccessfulincapitalizingandstabilizingthebankingsectorandpreventingaseriousdestabilizinginsolvencyinthebankingsector(PonceHuerta;Strauch).TheFROB’s current form, which includes the ability to resolve institutions in line with the SingleSupervisoryMechanism,ispartofwhatisviewedarobustsystemicriskpreventioninfrastructure.However,theFROBfaceschallengesinrecoveringsomeofitsinjections,particularlythoseinSareb.Inaddition,SpainfaceseconomicchallengeswithunemploymentandslowgrowththatmayprovetobeissuesfortheFROB.

SummaryofKeyTerms

Purpose:FROBwillexecutetheresolutionprocessesoffailingcreditinstitutionsandinvestmentfirms.

AnnouncementDate June27,2009

OperationalDate June27,2009EndofIssuance

WindowNoexplicitwindow

LegalAuthority Initial:RealDecreto-ley9/2009Current:Ley11/2015

PeakUtilization €54.353billion(BdE2017p.247)

Participants SeveralAdministrators BankofSpain;Deposit

GuaranteeFunds;MinistryofEconomyandFinance

FROB (SP GFC)


ContentsI. Overview...........................................................................................................................................1

Background........................................................................................................................................................1ProgramDescription.....................................................................................................................................1Outcomes............................................................................................................................................................3

II. KeyDesignDecisions....................................................................................................................61. TheFundfortheOrderlyRestructuringoftheBankingSector(FROB)capitalinjectionspowerwasinitiallynotpartofapackage,butwasupdatedtoincludeanassetmanagementcompany(Sareb)andresolutionpowers,aswellasaresolutionfund(NationalResolutionFund).............................................................................................................................62. Initially,RealDecreto-ley9/2009(RoyalDecree-law9/2009)gaveFROBthepowertocarryouttemporarycapitalinjections,thoughlaterlawsaddedtoitsauthority.............73. ThefirstlawcreatingtheFROBwasadvertisedasanefforttopreventsystemicriskfromfailingSMEsinanotherwisestrongbankingsectorbutlaterlawshowsmoreurgencyindealingwiththefinancialcrisis..............................................................................................84. TheMinistryofEconomyandFinanceappointedFROB’sGoverningCommission,composedofrepresentativesfromtheBankofSpainandDepositGuaranteeFunds..........85. TheFROBhadinitialfundingof€9billionfromtheGeneralStateBudgetandDepositGuaranteeFunds,towhichitmayaddthroughfinancingoperations......................................116. InstitutionseligibleforFROBwerecreditinstitutionsthatcouldbemergedandrecapitalizedtobecomelarger,morestableinstitutions................................................................11FROBI&II.......................................................................................................................................................11FROBIII............................................................................................................................................................12

7. FROBissuedthreemajorroundsofsupportfirstthroughconvertiblepreferredshares(FROBI),thenthroughcapitalinjections(FROBII),andfinallyanothersetofcapitalinjectionsandCoCos(contingentconvertiblebonds)(FROBIII)................................13FROBI...............................................................................................................................................................13FROBII..............................................................................................................................................................14FROBIII............................................................................................................................................................15AfterFROBIII................................................................................................................................................16

8. Therewerenoexplicitindividualparticipationlimits............................................................179. TheacquisitionofsharesorquotasbytheFROBrequiredthecancellationofpreemptivesubscriptionrightsofexistingshareholdersorquotaparticipants..................1710. FROBexitedfromthecapitalinjectionprogramthroughrepurchaseofsharesandsaleofsharestoathirdparty......................................................................................................................19


11. Laterin2012FROBgainedauthoritytoresolveunviableinstitutionsandcreateanearlyactionprogramtoimprovetheirhealthpriortothemrequiringgovernmentintervention.........................................................................................................................................................19

III.Evaluation......................................................................................................................................21IV.References.....................................................................................................................................24V. KeyProgramDocuments..........................................................................................................27

SummaryofProgram.................................................................................................................................27Legal/RegulatoryGuidance.....................................................................................................................27PressReleases/Announcements..............................................Error!Bookmarknotdefined.MediaStories.................................................................................................................................................27Reports/Assessments................................................................................................................................27

VI.Appendix........................................................................................................................................29Appendix1:FROBProgramsbetween2009-2012andSAREB’sAssetPurchase................29Appendix2:ChronologicalSummaryofSpanishInterventions2008-2011..........................29Appendix3:FROBIInvolvements.............................................................................................................30Appendix4:SavingsBankSectorandFROB/FGD..............................................................................31Appendix5:FROBIIInjections...................................................................................................................31Appendix6:FullFROBInjections..............................................................................................................32Appendix7:VisualizationofMergersTimeline..................................................................................33Appendix8:FROBlosses...............................................................................................................................34Appendix9:FROBBailouts...........................................................................................................................35Appendix10:FunctionsofFROB...............................................................................................................36Appendix11:Specificinformationyearbyyearoncapitalinjections......................................36Appendix12:TimelineofSpanishBankingSector............................................................................37Appendix13:TimelineofFROBactivities.............................................................................................37Appendix14:FROB2009-2016finances...............................................................................................38Appendix15:StressTestplansforFROBIII.........................................................................................39Appendix16:FullsummaryofFROBpurchasesanddivestments.............................................40


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I. Overview

Background

Priortotheglobalfinancialcrisis,theSpanisheconomywasdealingwithprivatesectordebt,weakcompetitivenessandotherimbalancesthatwereslowlybeingresolved(IMFTechnicalNotep.7).Inearly2009,Spanishbanksbegantofeelstressfromtheglobalfinancialcrisiswith liquidity shortages and real estate asset deterioration (Real Decreto-ley 9/2009 p.53194). The resulting credit tighteningwas especially difficult on SMEs and households,whichwerealreadysufferingfromthedeteriorationoftheinternationalcrisis inOctober2008.Priortothis, financial institutionshadassumedthe first impactof thecrisis in late2007 and early2008without encountering seriousproblems (BdE2017, p. 127).As thecrisisworsened,Spaininitiallyestablishedatemporarystateguaranteeschemeandcreateda Financial Asset Acquisition Fund (FAAF) of up to €50 billion to purchase high qualityfinancial assets to support medium-term bank funding (Mayer Brown). The FAAFguaranteed the financing of credit institutions and increased the amount guaranteed byDepositGuaranteeFundstocontainthecostsofthefinancialcrisis(RealDecreto-ley9/2009p.53194).FAAFwasdiscontinuedinJanuary2009(IMFTechnicalNotep.8)In2009,theSpanishrealestatesectorwashitandthedomesticeconomyenteredasevererecession,withbankssufferinggreatly(IMFTechnicalNotep.8).Specifically,therewasagrowingfearthatthenationalnetworkofregionalsavingsbanksorCajas,weresufferingfrombadloansanddidnothaveenoughcapitaltodealwiththem(MayerBrownp.4).InMarch2009,CajaCastilla-LaMancha(whichhadabalancesheetof€24billion)failedtomeetits capital requirements, and the Bank of Spain replaced its directors,while the DepositGuaranteeSchemeprovided€7billionofliquiditybeforesellingthebankandgrantinganassetprotectionscheme(PonceHuerta28).Giventhepossibilityoffurtherbankfailures,theBankofSpaincontacted15internationalinvestmentbanks(GonzaloAlconada).Itsoughttoacceleratetherateatwhicharecapitalizedentitycouldbepurchased.However,itwasclearthatthisframeworkwassufficientonlyforidiosyncraticcrises,nottheimpendingsystemiccrisis(PonceHuerta28).ProgramDescription

InJune2009,inthefaceofamorewidespreadcrisis,theSpanishgovernmentcreatedTheFondodeReestructuracionOrdenadaBancaria(FROB), inEnglishknownastheFundforOrderly Bank Restructuring. The FROB was created in an effort to maintain SpanisheconomicconfidencebysupportingfinancialinstitutionswithoutdisruptingpreviouscrisistreatmentmechanismslikeDepositGuaranteeFundsforCreditInstitutions(RealDecreto-ley9/2009p.53194).TheFROBhadtwoobjectives:tomanagetherestructuringprocessesof credit institutions that could not independently address their weaknesses, and toreinforcetheresourcesofcreditinstitutionsparticipatinginmergersandacquisitions(BdE2017p.117).Capital injectionsthroughtheFROBhappened in threephases:1)searching foraprivatesolution,2)adoptingmeasurestoaddressweaknessesthataffectsthecreditinstitutionwith


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theparticipationofDepositGuaranteeFunds,whointurngotfundingfromtheFROB,andfinally3)restructuringthroughFROBintervention(RealDecreto-ley9/2009p.53194).TheFROB’stemporaryacquisitionofpreferredconvertibleshares,wasastimulustotheprocessofamergeroracquisitionandfacilitatedthestreamliningofcreditinstitutionstoimprovetheirefficiency(BdE2017,p.118).Therecapitalizedcreditinstitutionwouldrepurchasetheshares from the FROB as soon as possible and if they could not, the shares would beconvertedintocommoncapital,ashappenedwiththemajorityofFROBcapitalinjections(p.118-119).FROB I, which extended from 2010 to 2011, was mostly focused on the merger andacquisitioncapacity,andacquired€9.674billioninpreferredsharesfromthesavingsbanksector,whichresultedintheconsolidationsofsavingsbanksfrom46entitiesto15entitiesbetween2007-2011(BdE2017,p.119).TheBankofSpainsoughttocreatemergedentitieswithassetsexceeding€50billionwithoutanypermanentpublicfinancialsupport(GonzaloAlconada). It merged savings banks to clean up their balance sheets while achievingefficiency gains through reducing the number of branch offices and employees (de JuanChapter5.4).In2011,Spainsoughttostrengthenthesolvencyofitsfinancialinstitutions,inlinewiththedevelopmentsofwhatwouldlaterbeBaselIII(BdE2017,p.123).RealDecreto-ley2/2011established new capital requirements that conformed to international regulations andestablished the second set of FROB injections known as FROB II, which extended itscapabilitiestoshareholderparticipation,andallowedittobettersupportthoseentitiesinconformingtothenewcapitalrequirements.FROBIIacquiredcommonsharesofentitiesthatdidnotmeetcapitalrequirements(BdE2017,p.124).TheFROBacquiredthesesharesatmarketvalue.FROBIIintroducedtheideaofprincipalcapital,whichneededtoequal8%ofrisk-weightedassetsofacreditentity,or10%ofthesameiftheentitywasunlikelytoraisequalitycapital.Principalcapitalissimilartothedefinitionofcommonequitycapitalgiven inBasel III (OECDp.65).However, this requirementwashigher than theBasel IIIrequirement,whichwascommonequitycapitalof4.5%ofrisk-weightedassets,andaCET1(includingacapitalconservationbuffer)of7%.ThisrequirementhadtobemetbyMarch2011(onemonthafterthelawwaspublished),withthepossibilityofextendingthedeadlinetoSeptember30byestablishingastrategy,subjecttotheapprovaloftheBankofSpain(BdE2017,p.124).Itallowedtimeforcreditinstitutionstoreachminimumcapitalrequirementsbyattractingprivate investors,goingpublic,usingcorporateoperationsorseekingFROBassistance.ForinstitutionsthathadmettheircapitalrequirementsthroughFROBaid,theBankofSpaincouldrestrictdividenddistribution,shareissuance,andmanagementbonusesiftheydefaultedonanamountofupto20%oftheirrequiredcapitalratio.TheseFROBIIparticipationsrequiredexitbysaleofsharestothirdpartiesortorepurchasewithinfiveyears(RealDecreto-ley2/2011p.6).FurtherlegaldecreesestablishedtheFROBandBankofSpain’ssupervisorycapacityofrecapitalizedbanksandunifieddepositguaranteefunds,aswellasencouragingtransparencyonrealestateexposure(BdE2017,p.125;Appendix2).FROBIIIwaslaunchedin2012undertheEuropeanStabilityMechanismprogramandRealDecreto-Ley9/2012.FROBIIIhadtheauthorityofresolutionandcreatedanearlyactionprogram thatwouldallowFROB tomonitor institutions thatwere strugglingbutnotyetinsolventenoughtorequireintervention(Ley9/2012).ItalsoallowedFROBtorecapitalize


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institutionsnotonly throughpreferredandordinary shares,butalso throughcontingentconvertiblebonds(FROBIII).Itaimedtominimizesystemicdamagetotheeconomyandtheuse of public funds in order to save institutions. It also established Sareb, the assetmanagementcompanyforbankingrestructuring,andenumerateditspowersandpurpose.MoredetaileddiscussiononSarebcanbefoundin[TamSareb(ESPGFC)19-08-12].Ley11/2015,whichwas theSpanish transpositionof theBankRecoveryandResolutiondirective or BRRD built upon FROB III and formalized the processes of resolutionwhilebroadening the institutions eligible for assistance. It establishes competent supervisors(BankofSpain,EuropeanCentralBankorNationalSecuritiesMarketCommission)thatcanhelp internally recover institutions that fail to meet capital requirements through earlyaction(Article6).Outcomes

ThetotalamountofFROBaidamountedto€54.353billioninavarietyofcapitalinstruments(BdE2017p.247).FROBIintegrated25cajasintosevennewbanksandinjected€9.7billionviapreferredshares (IMFp.18).FROB IIpurchased€5.181billion2of commonshares torecapitalizefourbankinggroups(ofwhichthreewerealreadymergedviaFROBI)(PonceHuertap.30).

Source:PonceHuerta,p.30TheFROBborrowed€41billionundertheEuropeanMechanismtofundFROBIII(IMFp.18).AMemorandumofUnderstandingbetweentheEuropeanCommissionandSpainmadethisaidcontingentonastresstestoftheSpanishbankingsystemconductedbyindependentconsultants (MoU). Oliver Wyman, Nomura, and Roland Berger conducted independentassessmentsofSpanishbankstodeterminetheircapitalshortfalls,andFROB’sparticipation(Fontevecchia).InMarch2011,theBankofSpainidentified13institutionsthatdidnotmeettheir capital requirements, and required them topresent their recapitalization strategies(BdE2017,p.13).Fourentities(Novacaixagalicia,CatalunyaCaixa,CajadeAhorrosUnióndeCajasdeManlleu,SabadellandTarrasa[UNNIM]andCajadeAhorrosdelMediterráneo 2Differentsourcesdiffer.€5.7onIMFp.18;€4.751fromBdE2017p.135.


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[CAM])requestedFROBIII support,whichwasgiven through theacquisitionofordinaryshares,obligatingthebeneficiaryentitytohavethestatusofabank(BdE2017,p.131).Ituseddirectrecapitalization,aswellasassetprotectionschemes(EPAs)andprotectionsagainstcontingentliabilitiestotransferfailinginstitutionstoproperbuyers.Italsoinvested€2.1billioninSareb(Spain’s“badbank”)in2012,whichamountedto45%ofSareb’sequityandsubordinateddebt.TheFROB’sresultinglossesasof2017wereabout€44billion(IMFp.19).Thisrequireditsrecapitalizationthroughdebtconversionfor€27billionin2012(IMFp.19).InJune2017,theSpanishgovernmentconvertedabout€3billionofstateloanstoFROBintoequity.TheFROB’slossesresult inpartfromthefailureofAbanca(formerlyNCG),Bankia,CatalunyaCaixa,andValencia,amountingtoabout€38billion.AsseeninTable1below,bytheendof2016,FROBstillheldabout€11billionininvestments(IMFp.8).FROBsupported8outof13mergerprocessesthatconsolidated40institutions,mostofwhichwereCajas.

Table1:LegacyAssetsandStateContingencies,end-2016(inbillionsofeuros,unlessindicatedotherwise)

Source:IMFp.8Between 2008-2011, the savings bank sector in Spain changed radically; 42 of the 45institutionsexistingattheendof2007receivedcapitalinjectionsfromtheBankofSpainandweremergedto15entities(BdE2017p.132,135).FROBwasresponsibleforsevenofthesemergers during FROB I, though the deposit guarantee funds also contributed financialsupport.TheFROBaccepted€38.8billioninEuropeanassistanceforrecapitalizationin2012,andisrepayingit;theremainderoutstandingis€23.7billionor57%asofearly2019(EC2019p.6).TheFROBhasrecovered€5.911billionofaiditdispersedasof2019,ofwhich€4.477billionhascomefrombanksalesandcapitalinstrumentrepayments,and€1.434billioncomesfrominterestrepayments(PonceHuertap.34).Thisdoesnot includethe€2.8billionreceived


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fromBankiabywayofdividendsortheproceedsfromsellingsharesofBankiafor€2.122billion.

Source:PonceHuerta,p.35

Table3:SummaryofIntegrationandRestructuringProcesses


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Source:PonceHuertap.29

II. KeyDesignDecisions

1. The Fund for the Orderly Restructuring of the Banking Sector (FROB) capitalinjectionspowerwasinitiallynotpartofapackage,butwasupdatedtoincludeanassetmanagementcompany(Sareb)andresolutionpowers,aswellasaresolutionfund(NationalResolutionFund).

ThefinancialsafetynetinfrastructurethatexistedinSpainin2009includedFROBaswellasthreedepositguaranteefunds,andtheBankofSpain(RealDecreto9/2009p.53202;IMFTechnical Note p. 4). Though these organizations worked in tandem, they were not apackage,asthedepositguaranteefundswerecreatedin1977undertheadministrationofthe Bank of Spain (Real Decreto 3047/1977). In November of 2011, the three depositguaranteefundsweremerged;theresultinginstitutionwasknownastheFondodeGarantíadeDepósitos(FGD)(BdE2017p.114).Ley9/2012,whichexpandedtheFROB’spowers,also


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established Sareb, Spain’s government-owned assetmanagement company (Ley9/2012)Sareb was responsible for managing assets transferred to it by Spanish institutionsrecapitalizedbytheFROB.Ley9/2012alsoestablishedtheFROBasaresolutionauthority.In2015,incompliancetotheEuropeanSingleResolutionMechanism,Ley11/2015detailedthe FROB’s resolution powers, and established the National Resolution Fund to fundresolutionsoffinancialentities(Ley11/2015Article53).

2. Initially, Real Decreto-ley 9/2009 (Royal Decree-law 9/2009) gave FROB thepower to carry out temporary capital injections, though later laws added to itsauthority.

The FROB was created in June 2009 to manage the restructuring processes of creditinstitutionsandcontributetothestrengtheningoftheirresources(RealDecreto9/2009p.53200)byRealDecreto-ley9/2009.RealDecreto-ley2/2011allowedFROBtohelpentitiesmeetBaselIIIcapitalrequirementsof8-10%risk-weightedassets(RealDecreto-ley2/2011p.5).

Ley9/2012establishedthepossibilityoftheresolution,notjusttherestructuringofacreditinstitutionthatwasnotviableandestablishedFROB’sroleinsuchprocesses,aswellasearlyactiontoprevent the failureofa financial institution.3FROBcouldvalue institutions,andrestructure institutions that require public financial support to maintain viability whileminimizingthepublicresourcesusedtomaintainfinancialstability(Article13).

Thecurrentempowermentof theFROBexists inLey11/2015,whichestablishedamoreformalandcomprehensiveregimeofsystemicriskpolicy(Ley11/2015).Itaimedtoclarifyresolutionpowersthatavoidedconflictsofinterest,continuingtheentitywhileresolvingthepartsthatareunviable.Theearlyactionandpreventativephasesaremeanttobeintegratedintotheordinaryoperationsofanentity,reducingtheriskofinsolvencyandfacilitatingtheresolutionof theentityor specificassets ifneeded.Thismayalsohelpshift the financialburdenofresolutiontothefinancialindustryitselfratherthanpublicresources(a“bailin”).The lawcreated resolutionplans forentities that theFROBdidnot supervise,devisingascenarioinwhichnopublicsupportwasavailable(Article13).Thisestablishedanoptionforresolution that would not cause systemic problems. This law also empowered FROB to 3DefinitionsofactionsfromLey9/2012Article2:Early action: The procedure applicable to a credit institution when, in accordance with the provisions ofChapterII,itfailsorthereareobjectiveelementsthatarereasonablyforeseeablethatcannotmeetthesolvency,liquidity,structurerequirementsorganizationalorinternalcontrol,butisinapositiontoreturntocomplianceby itsownmeans,withoutprejudicetotheexceptionaland limitedpublic financialsupportprovidedfor inarticle9.f)ofthisLaw.Restructuring: Theprocedure applicable to a credit institutionwhen, in accordancewith the provisions ofChapterIII,requirespublicfinancialsupporttoensureitsviabilityanditisforeseeablethatsuchsupportwillbereimbursedorrecoveredinaccordancewiththeprovisionsofchapterV,orwhenitsresolutioncouldnotbecarriedoutwithoutseriouslydamagingeffectsonthestabilityofthefinancialsystem.Resolution:Theprocedureapplicabletoacreditinstitutionwhen,inaccordancewiththeprovisionsofChapterIV,itisunfeasibleorforeseeablethatitwillbeinthenearfuture,andforreasonsofpublicinterestandfinancialstabilityitisnecessaryAvoidbankruptcysettlement.


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preform capital increase or reduction operations, and amortize capital instruments orinternalrecapitalization(Article64).

3. ThefirstlawcreatingtheFROBwasadvertisedasanefforttopreventsystemicriskfromfailingSMEsinanotherwisestrongbankingsectorbutlaterlawshowsmoreurgencyindealingwiththefinancialcrisis.

RealDecreto-ley9/2009paintstheSpanishbankingsectorin2009asresilientandrelativelystrong (Real Decreto-ley 9/2009 p. 53194). However, it states that smaller strugglinginstitutions,could,enmasse,constituteasystemicrisk.

TheCongressofDeputies(lowerhouseof the legislature) inSpainvotedtoapproveRealDecreto-ley2/2011,allowingtherecapitalizationofSpanishentitiesby177to8,with157abstentions from the Popular Party and Basque nationalist party (Europa Press). ElenaSalgado,theSpanishdeputyprimeministerandformerministerofeconomyandfinance,describedthelawasbeingextremelyurgentandnecessarytogivethegreenlighttothemostrecentpackageoffinancialreformsarticulatedinthisdecree,andminimizetheglobalimpactof the financial crisis on the Spanish financial system. It helped to complete thereorganization of the financial sector, clear doubts in the markets and to guarantee asufficient flowof credit toencouragemaximumrecoveryand jobcreation.TheeconomiccoordinatorofthePeople’sParty,CristóbalMontoro,criticizedthereformforbeinglateandpoorlyfocused,andsuggestedthatitwouldmeanashorteningofcreditintheshortterm.ThiswouldputcreditinstitutionsandevenFROBinstressduetothedifficultyofobtainingcredit in the privatemarket. The People’s Party (PP or Partido Popular) also expressedconcernsaboutthepotentialfornationalizationinrecapitalizationefforts.

4. TheMinistryofEconomyandFinanceappointedFROB’sGoverningCommission,composedofrepresentativesfromtheBankofSpainandDepositGuaranteeFunds.

Aneight-memberGoverningCommissionappointedbytheMinistryofEconomyandFinanceoperated theFROBbeginning in2009 (RealDecreto9/2009p. 53202). Fiveof the eightmemberswereproposedbytheBankofSpain,whiletheSavingsBankDepositGuaranteeFund,DepositGuaranteeFundofBankingEstablishments,andDepositGuaranteeFundofCreditCooperativeswererepresentedbyonemembereach.Additionally,theMinisteroftheEconomyandFinanceappointedamemberfromtheGeneralInterventionBoardoftheStateAdministration, proposed by the General Auditor, as an additional representative to theGoverningCommissionwithvoicebutnotavote.

TheGoverningCommissionwasempoweredtomakeitsownrulesanddelegatepowerasitsaw fit (Real Decreto 9/2009 p. 53203). It had the power to approve external financingoperationslikebondissuancetofinanceFROB’sactivities.Atleasthalfthevotingmembersof theGoverningCommissionhad tobepresent toholdasessionandadoptagreements,whichhadtobeadoptedbyamajorityofmembers.TheSecretaryofStatefortheEconomyappearedquarterlytotheCongressofDeputiesFinanceandEconomyCommitteetoreportthe activities of FROB and the situation of the Spanish banking sector. The GoverningCommissionwouldapprove thisreport.ThePresidentof theGoverningCommissionalso


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reportedtothisCongressionalcommitteewithin30daysaftereachinjectionbythefund.TheGoverningCommissionwasalsoobligatedtokeeptheactivitiesoftheFundsecret.

By 2011, the Governing Commission was composed of nine members appointed by theMinistryofEconomyandFinance,ofwhichoneeachrepresentedtheMinistryofFinanceandBudgets,andtheMinistryofEconomy(RealDecreto-ley2/2011p.8).FourmemberswereproposedbytheBankofSpain,andthreememberswereproposedbytheDepositGuaranteeFunds.

In 2012, theGoverning Commission became comprised of ninemembers: fourmembersfromtheBankofSpain,ofwhichonewasthePresidentoftheGoverningCommission(Ley9/2012Article54).OneeachweretheSecretaryGeneraloftheTreasury,whoisalsotheVicePresident,inadditiontotheUndersecretaryofEconomyandCompetitiveness,thePresidentof the Accounting and Audit Institute, the Director General of Economic Policy and theGeneralDirectorofBudget.ADirectorGeneraloftheFROBwasappointedbyroyaldecreeoftheCouncilofMinisters,andhesupervisedandmanagedtheFROB(Article55).

In2015,theGoverningCommissionbecamecomprisedof11members:thePresidentoftheFROB, fourmembersof theBankofSpain,oneofwhomwas theDeputyGovernor, threemembersoftheMinistryofEconomyandCompetitiveness,theVicePresidentoftheNationalSecuritiesMarketCommission,andtworepresentativesfromtheMinistryofFinanceandPublicAdministration(Ley11/2015Article54).

TheTable2belowshowsthesummaryofmemberchangesfortheGoverningCommissionofFROB.


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Table2:DevelopmentoftheGoverningCommitteeoftheFROB(2009-Present)

Source:PonceHuerta,p.31


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5. TheFROBhadinitialfundingof€9billionfromtheGeneralStateBudgetandDepositGuaranteeFunds,towhichitmayaddthroughfinancingoperations.

OftheFROB’sinitial€9billion,athird(€3billion)wastobedisbursedwhenitsconstitutionwas formalized,definedby the time themembersof theGoverningCommissionwereallappointed(RealDecreto9/2009p.53201).TheGeneralStateBudgetsallocated€6.75billiontotheinitialfinancingoftheFROB.TheDepositGuaranteeFundscontributed€2.25billionandFROBhadauthority toobtainadditional financingby issuing fixed incomesecurities,takingloans,orparticipatinginanyotherdebtoperations,providedthattheydonotexceedthreetimesthepermanentfinancingthatexistsatanytime.OnlyafterJanuary1,2010,withtheauthorizationoftheMinistryofEconomyandFinance,theFROBcouldobtainadditionalfundingofmorethan10timesitspermanentfinancing.

AnyassetsownedbytheFROBthatwerenotcommittedhadtobeheldinpublicdebtorotherhighlyliquid,low-riskassets(RealDecreto9/2009p.53201).AnyreturnsfromtheseassetswereaddedtotheFROB’spermanentfinancing,whichpaidanyfeesincurredinthemanagementoftheseassets.TheGeneralStateAdministrationwasempoweredtoguaranteetheeconomicobligationsoftheFROBwithrespecttoitsissuanceoffinancialinstrumentstoobtainadditionalfunding,subjecttotheapprovaloftheMinistryofEconomyandFinance(RealDecreto9/2009p.53209).UntilDecember31,2009,theguaranteewaslimitedto€27billion; limits insubsequentyearsweredeterminedby thestatebudget. If theguaranteebecamenecessarywithin fivedaysof the financialobligation’sexpirydate, thestatepaidcompensationtotheownersofguaranteedsecurities.TheMinistryofEconomyandFinanceestablished the terms of guaranteed compensations, and the General Directorate of theTreasuryandFinancialPolicymadepaymentstoexercisetheguarantee.

In2012,theSpanishgovernmentrequestedfinancialassistancefromtheEuropeanUnionand IMF (MoUpp.1-2).Thiswas approved subject to stress tests conductedby externalconsultantsinordertoidentifythecapitalneedsofvariousinstitutions(MoUp.4).TheBankofSpainconcludedthattenbanksrequired€41billionofadditionalcapital,andwhiletwobanks found private solutions, the European Stability Mechanism financed the eightrecapitalizationsofFROBIII,whichamountedto€39billion(IMFp.8).

In2017,theMinistryofEconomydecidedtoinject€3billionintotheFROBtostrengthenitsbalancesheet(Segovia).FROBhadbeenunabletorepayitsloanstotheEUandtheSpanishgovernment due to not recovering the money it had injected during earlier stages ofrecapitalization.

6. Institutionseligible forFROBwerecredit institutions thatcouldbemergedandrecapitalizedtobecomelarger,morestableinstitutions.

FROBI&II

Creditinstitutionsorgroupsthereofpresentingfinancialvulnerabilitiesthatjeopardizeitsviabilitywere to inform theBankof Spain (RealDecreto9/2009p. 53203-53204). Theysubmitted an action plan to strengthen equity and solvency or facilitate a merger oracquisitionwithasolvententitywithinamonth,whichhadtobeactualizedwithinthree


12

months. TheBank of Spain ensured that the organization andmanagement of the creditinstitutionhadnodeficiencies.IftheBankofSpaindeterminedthatacreditinstitutionhadweaknessesinitsfinancialsituationwithouthavingpresentedaplan,itrequiredthataplanto amend said weaknesses be submitted within a month. The Bank of Spain needed toapprovetheseplans,andcouldmodifyoraddnecessarymeasurestoensurethattheplanwassufficienttoovercomeanyfinancialweaknesses.Ifamonthpassedafterthesubmissionofaplanwithoutexplicitapproval,theplanwasapprovedanyway.

If a credit institution or group thereof did not present a required plan, presented aninfeasibleplan,rejectedBankofSpainadditionstoaproposedplan,declaredtotheBankofSpainthattherewasnoviablesolution,deviatedgreatlyfromtheplan,orhadaplanthatitsDepositGuaranteeFundobjectedto,FROBrestructuredit(RealDecreto9/2009p.53204-53205).Inthesecases,theBankofSpainprovisionedthereplacementoftheadministrativeormanagementbodiesofthecreditinstitutionaswellasanyotherregulationsitdeemedappropriateuntilarestructuringplanwascarriedout(RealDecreto9/2009p.53205).TheBankofSpainappointedtheFROBastheadministratorofthecreditinstitution,andFROBhadonemonthtocreateadetailedreportonitsviabilityandsubmitarestructuringplantotheBankofSpain.TheFROBalsosubmittedaneconomicimpactreportoftherestructuringtotheMinistryofEconomyandFinance,whichcouldopposeitwithintendaysofsubmission.Aslongasarestructuringplanwasprepared,theFROBcouldprovidefinancialsupporttothecredit institutionona temporarybasisbywayof financial supportmeasuressuchasfavorableloansorassetacquisition,orfacilitationsofmergersandacquisitions.InvestmentsmadebytheFROBwerenotsubjecttolegallimitationsappliedtoDepositGuaranteeFundsinCredit Institutions (RealDecreto9/2009p. 53206). In addition, theboardsof entitiesrequestingaidunderFROBIIhadbetweenfiveandfifteenmembers,ofwhichatleastonethirdwereindependentdirectors(RealDecreto-ley2/2011p.17).

FROBIII

Institutions that did not, but could potentially maintain viability and meet capitalrequirementsthroughtheirownmeanswereeligibleforearlyaction(Ley9/2012Article6).ThisentailedsubmittinganactionplantotheBankofSpain,which,withFROB’sinput,wouldmodify and approve it as appropriate. Thiswould help capitalize entitieswithout publicsupport,topreventthemfrombecominginsolvent.Institutionsthatrequiredpublicsupporttomaintaintheirviability,andwhoseresolutionwould likely cause detrimental effects to Spanish financial stability were considered forrestructuring(Ley9/2012Article13).TheseinstitutionshadtoinformtheFROBandBankofSpainoftheirstatusandwithinfifteendays,submitaplanofrestructuring,withaplannedexecutiondateofnomorethanthreemonthsafteritsapprovalbytheFROB(Article14).TheFROBcouldmodifytheplanbeforeitwassenttotheBankofSpainforapproval,whichhadtoapproveitwithinonemonthofreceivingit.The Memorandum of Understanding between Spain and the EU in 2012 established aframeworkthatcategorizedbanksintodifferentlevelsofeligibilityforaid(MoUp.4).Basedontheresultsofastresstestconductedbyanexternalconsultantandtherestructuringplansofbanks,banksweregroupedintofourcategories.


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“Group 0 will constitute those banks for which no capital shortfall isidentifiedandnofurtheractionisrequired.Group1hasbeenpre-definedas banks already owned by the Fund for Orderly Bank Restructuring(FROB)(BFA/Bankia,CatalunyaCaixa,NCGBancoandBancodeValencia).Group 2 will constitute banks with capital shortfalls identified by theStressTestandunabletomeetthosecapitalshortfallsprivatelywithouthavingrecoursetoStateaid.Finally,Group3willconstitutebankswithcapitalshortfallidentifiedbythestresstestwithcrediblerecapitalisationplansandabletomeetthosecapitalshortfallsprivatelywithoutrecoursetoStateaid(MoUp.4).”4

TheBankofSpainandtheEuropeanCentralBankcloselymonitoredtheliquiditysituationof banks that had capital shortfalls in the stress test (MoU p. 12). This informationwasregularlyreportedtotheEuropeanCommission,EuropeanCentralBank,andInternationalMonetaryFund.Thestresstestassessed14bankinggroupswhichrepresented90%oftheassetsoftheSpanishbankingsystemoverathreeyearperiod(BdE2017p.187).Thestresstestconcludedthat90%ofcapitalneedswereintheentitiesthatFROBhadalreadyinjected,andthatthecoreoftheSpanishbankingsystemwasrelativelyhealthy(BdE2017p.189).Ley11/2015expandedinstitutionseligibleforFROBsupportfromjustcreditinstitutionsandgroupsthereof;itnowpermittedinvestmentservicescompanies,andfinancialentities(otherthaninsuranceandreinsuranceentities)establishedinSpainthataresubsidiariesofcredit institutions or investment services companies to apply for support (Ley 11/2015Article1).ItalsoincludedfinancialholdingcompaniesbasedinSpainorofotherEuropeanUnionmemberstateprovidedthattheyaresupervisedbyacompetentsupervisor.5Spanishbranches of European Union entities were also eligible. Investment services companieswhose legally required minimum share capital is less than €730,000 or have specificactivitiesenumeratedinthelawwerenoteligible.7. FROB issued threemajor roundsof support first through convertiblepreferred

shares(FROBI),thenthroughcapitalinjections(FROBII),andfinallyanothersetofcapitalinjectionsandCoCos(contingentconvertiblebonds)(FROBIII).

FROBI

TheFROBwasallowedtomakecapitalinjectionstocertaininstitutionsthatdidnotsatisfysetconditions(SeeKDD6)butstillneededcapitalwithwhichtointegratethemselveswitheachother (RealDecreto9/2009p.53207).As a conditionof the capital injection, theseparticipatinginstitutionshadtoimprovetheirefficiency,administration,andmanagement,aswellasresizetheirproductivecapacity,preparingamergeroracquisitionplandetailingtheseprocessesthatwereapprovedbytheBankofSpain.TheseFROBcapitalinjectionswere

4SeeReference:“BottomUpStressTest”5 A competent supervisor is the Bank of Spain, European Central Bank, within the Single SupervisoryMechanism, responsible for the supervision of credit institutions, and the National Securities MarketCommissionastheauthorityresponsibleforthesupervisionofinvestmentservicescompanies(Ley11/2015Article2).


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performedthroughacquisitionsofpreferredconvertiblesharesinparticipatoryquotasorportionsofsharecapital(RealDecreto9/2009p.53208).The first roundwas in aroundMarch 2010 in which the FROB issued €9.674 billion ofconvertiblepreferencesharesintheintegrationprocessesofUNNIM,CatalunyaCaixa,CEISS,Novacaixagalicia, Banco Financiero y deAhorros, BancoMareNostrum, BancaBase, andBanca Cívica, and the restructuring of Cajasur (PonceHuerta 28; BdE2017p. 135). Therestructuring consisted of purchasing €800million of equity units and providing a €1.5billionlineofcredit.Thissetofinterventionswerenotsufficienttoaddresstheproblemsinthesavingbanksector,likelyduetoanincompletewrite-offofcapital,thelimitedefficacyofconvertiblepreferenceshares,andageneraldownturnintheeconomy(PonceHuertap.29).In2010and2011,therestructuringofthebankingsector,andespeciallythesavingsbanksectorresultedinthemergingof42of45banksinto15institutions,throughthreeofthemergersoccurredwithoutFROBorDepositGuaranteeFundaid(Caixa-Girona,Unicaja-Jaén,andCaja3)(BdE2017p.135).FROBII

RealDecreto-ley2/2011authorizedFROBII,whichraisedcapitalrequirementsandallowedFROBtorecapitalizebanksusingordinaryshares(PonceHuertap.29).ThislawallowsFROBtotemporarilyacquireordinarysharesundermarketconditionstohelpentitiesthatcannotcapturecapitalthroughtraditionalmarkets(RealDecreto-ley2/2011p.5).FROBIIinjected€5.7billionin2011and2012toCatalunyaCaixa,Novacaixagalicia,UNNIM,andBancodeValencia(PonceHuertap.29;IMFp.18-19).FROB II required entities to adhere toBasel III standards of principal capital of 8% riskweightedassets(RealDecreto-Ley2/2011p.5).Thisstandardwas10%forthoseentitiesthathadmorethan20%oftheircapitalfromwholesalefinancingandhadless20%oftheircapital inthepossessionofthirdparties.ThisallowedtheFROBtoparticipatedirectly inrecapitalizedinstitutions’boardofdirectorsinproportiontoitspercentageofcapital(BdE2017,p.124).EntitiesrecapitalizedunderFROBIIthatwerenoncompliantbymorethan20%oftheprincipalcapitalrequirementhadtopresentrecapitalizationandbusinessplansthatcommittedtoreducingstructuralcosts,improvingcorporategovernanceandlimitingbonuses,andmodifyingcreditactivity.FROBacquisitionofordinaryshareswasconditionalonthebeneficiary’spreparationofarecapitalizationplanthat includesabusinessplanandcommitments toreducestructuralcosts, improve corporate governance and have better credit activity (Real Decreto Ley2/2011p.6,8).TheFROBreportedtotheMinistryofEconomyandFinancedetailingthefinancialimpactofitsacquisitionofcommonstock(p.13).TheFROBcouldbecomepartoftheBoardofDirectorsofrecapitalizedentitiesinproportiontoitssharepercentage.Itcouldalso still acquire convertible preferred shares, as allowed inRealDecreto9/2009. FROBcontributionsweremadethroughcashinjectionsorthedeliveryofsecuritiesrepresentingpublicdebt(i.e.treasuries)orsecuritiesissuedbyFROBitself(RealDecreto-Ley2/2011p.9).Conditions for recapitalization under FROB II included submitting a business plan andcommitting to reduce structural costs, improving corporate governance and increasingfinancingtosmallandmediumsizedcompanies(RealDecreto-ley2/2011p.16).IfaFROB


15

II applicant had issued convertible preferred shares to FROB I, they could request animmediate conversionof those shares intoordinary sharesor contributions to the sharecapital.PreferredsharessubscribedpriorRealDecreto-ley2/2011wastobegovernedbythelawineffectwhentheywerepurchased(RealDecreto-ley2/2011p.19).Independentdirectorswerenotallowedtoremainintheirpositionsformorethan12continuousyears.The board had to create an internal Commission or two separate committees ofappointmentsandremuneration.Theformerassessedthecompetenciesandexperiencesoftheboardanditsmembersandevaluatecandidatestofillvacancies,whilethelatterensuredcompliance with the remuneration policy established by the company for directors,executivesandothermanagers.Whena companyacquiredanentity through thehelpofFROBorDepositGuaranteeFunds,itdidnotneedtomakeapublictenderoffer,aswouldnormallyberequiredaccordingtoSpanishlaw(RealDecreto-ley2/2011p.17).FROBIII

FROBIIIoccurredafterthepassingofLey9/2012,whichestablishedFROB’spowersasaresolutionauthority,andallowedittoperformcapitalinjectionsnotonlythroughpreferredandordinaryshares,butalsothroughcontingentconvertiblebonds(PonceHuertap.30).About€41.27billionwasinjected,ofwhich€39.078billionwasusedtorecapitalizeeightcreditinstitutionsforrestructuringorresolution,and€2.192billionwasusedtopurchaseFROB’s stake in Sareb, the asset management company for bank restructuring (PonceHuerta,p.31; IMFp.19)6. FROB IIIwas financed throughEuropeanStabilityMechanismfunding(IMFp.8).Sarebacquiredtroubledrealestateassets,whichreducedfinancialsectorrecapitalization requirements by €1.3 billion and restored confidence in financialinstitutions(PonceHuertap.30).Shareholdersandsubordinatedcreditorsincurredlossesofabout€14billion,70%ofwhomwereretailinvestorswhohadacquiredpreferencesharesinsomewhatopaquetransactions.TheMemorandumofUnderstandingbetweentheEUandSpainin2012formedastrategytostrengthen the Spanish banking sector (MoU p. 3). TheMoU specified that a stress testconducted by independent consultants would determine capital shortfalls of individualbanksand the systemoverall (MoUp.4).This stress test categorizedbanksaccordingly:Group0bankshadnocapitalshortfallandrequiredno intervention,Group1bankswerealready owned by the FROB (these were BFA/Bankia, Catalunya Caixa, NCG Banco, andBancodeValencia),Group2bankshadcapitalshortfallsthatrequiredpublicsupport,andGroup3bankshadcapitalshortfallsthatcouldbemetprivately(MoUp.4).SpanishauthoritiespreparedrestructuringplansforGroup1banksinconjunctionwiththeEuropeanCommission(MoUp.6).TheseincludedBFA-Bankia,NCGBank,CatalunyaBank,andBancodeValencia,whichwererecapitalizedonDecember26,2012foratotalof€36.968billion(BdE2017p.190).7TheyalsopresentedplansforGroup2byOctober2012totheEuropeanCommission(MoUp.6).Bothinvolvedmovingimpairedassetstoanexternalassetmanagementcompany(Sareb).Group2banksincludedBancoMareNostrum,Caja3,andLiberbank,andtheywereinjectedwith€1.261billiononMarch12,2013(BdE2017p.190).Both Caja3 (which received€407million) and Liberbank (which received€124million) 6SeeAppendix1fordetailsonFROBIIIinjections7SeeAppendix15fordetailsonamountperentity


16

were recapitalized using contingent convertible shares, while BancoMare Nostrumwasrecapitalizedwith€730millionworthofshares(BdE2017p.190;192).BancoCEISSwasalsoaGroup2bank,butwasresolvedthrough€407millionofCoCos(BdE2017p.192).Group3banksthatwereplanningasignificantequityraise(ofmorethan2%risk-weightedassets)issuedcontingentconvertiblesecurities(CoCos)toFROBtomeettheircapitalneedsbyDecember2012.TheywereredeemableuntilJune2013,ifthebanksucceededinfindingthenecessarycapitalfromprivatesources;ifnot,theFROBwouldconvertthemintoequityandrecapitalizethestrugglingbank.Group3banksplanningasmallerequityraisewereabletodosountilJune2013.Iftheyfailedtheywererecapitalized.Group3bankswhobenefittedfromFROBsupportwererequiredtotransferbadassetstoSareb(MoUp.7).BancoPopularandIbercajawereGroup3banks(BdE2017p.192).Restructuringwasdonethroughfinancialsupport,thetransferofassetsorliabilitiestoanassetmanagementcompany(Sareb),oracombinationofbothstrategies(Ley9/2012Article15).ConvertibleshareinstrumentswereissuedwithconditionsthatincludedrepurchaseoftheshareswithinfiveyearsandtheexerciseofconversionuponFROB’sdiscretionoftheentity’ssolvency(Article32).ThisacquisitionwaspricedrelativetotheeconomicvalueoftheentityminusadiscountinaccordancewithEUStateAidregulation(Article30).FROBpurchased them with cash, public debt securities, or securities issued by the EuropeanFinancial Stability Facility, European Mechanism of Stability or FROB itself. The FROB’svotingrightsandboardparticipationwasdeterminedbytheproportionofsharesitacquiresin an entity (Article 31). The FROB alsomanaged hybrid capital and subordinated debtactionsmeanttosupporttherecapitalizationplansofcreditinstitutions,includingofferstoexchangeitforcapitalinstruments,offerstorepurchaseissuedsecurities,reductionofthenominalvalueofdebtandearlyamortizationofdebtatavalueotherthanthenominalvalue(Articles 39-40, 43) FROB III also created and asset management company to which totransferbadassets(Sareb)(Ley9/2012Article35).8TheFROBsoldsharesorothercapitalinstruments,aswellasassetsandliabilitiestothirdpartiesthroughatransparent,speedy,andimpartialprocessthatavoidsconflictsofinterestwhilemaximizingsalepriceandminimizingtheuseofpublicresources(Ley9/2012Article26).

AfterFROBIII

Ley 11/2015 added to FROB’s recapitalization arsenal the ability to orchestrate internalrecapitalization of an insolvent entity (Article 25). In response to the European SingleResolutionMechanismof2014,thelawalsocreatedtheSingleResolutionBoardandSingleResolutionFund,whichhelpedsynchronizeSpanishresolutionpolicieswiththatofEuropeas a whole (BdE 2014, p. 83-84). This allowed FROB to require that losses are borneinternallythroughthewrite-downorconversionofcapitalinstruments,orbail-inbyothereligibleliability(BdE2014,p.83-84;Ley11/2015Articles35-44).Tomakesurethefirstis

8See[TamSareb(ESPGFC)19-08-12]


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sufficienttoabsorblosses,resolutionauthoritiessetaminimumrequirementforownfundsandeligibleliabilitiesforeachinstitution.8. Therewerenoexplicitindividualparticipationlimits.

9. The acquisition of shares or quotas by the FROB required the cancellation ofpreemptivesubscriptionrightsofexistingshareholdersorquotaparticipants.

WhentheFROBacquiredparticipatoryquotasofbank,ithadtherighttorepresentationintheGeneralAssemblyequivalenttothepercentageofequitytheyown(RealDecreto9/2009p.53206).ThisrightwasmaintainedthroughouttheFROB’spossessionofthesesecurities,andwasnottransferredtoanysubsequentacquirers.Similarly,theFROB’svotingrightsinthe assembly of a credit union to which it has contributed were proportional to itscontributionswithrespecttothetotalcapitalstockofthecreditunion.Thecancellationofshareholderrightshappenedatthetimeoftheadoptionofthecapitalincrease or quota issuance agreement (Real Decreto 9/2009 p. 53206). The status ofdifferentpartiesandhowtheybearlosseswasestablishedinLey9/2012ChapterIArticle4.Theywereasfollows:

a) Theshareholdersorpartnersoftheentitieswerethefirsttobearlosses.b) The providers of subordinated debt bore losses arising from restructuring or

resolution after shareholders, according to the order of priority established inbankruptcy legislation, though the exceptions established in this law tookprecedence.

c) Creditors of the same rank were treated the same unless this Act indicated anexception.

d) Acreditordidnotbearalossgreaterthanthelosshewouldhaveborneiftheentitywereliquidatedinabankruptcyproceeding.

e) Ifanentitywasresolved,itsadministratorswerereplaced.f) The administrators of the credit institutions were liable for damages caused, in

proportiontotheirparticipationandtheseverityofthedamages.FROB was not included as a shareholder in allocations of losses or protections forshareholdersorpartners.If a credit institution was resolved, FROB was permitted to transfer shares or capitalinstrumentstoathirdpartywithoutobtainingtheconsentoftheshareholders(Ley9/2012Article26).ThesalepricedeductedtheadministrativeandotherexpensesincurredbyFROBincluding the costs of financial support instruments thatwere previously reimbursed toFROB.Ley11/2015latermodifiedthislossstructureasfollows(Article4).

a) Theshareholdersorpartners,asappropriate,oftheentitieswerethefirsttobearlosses.


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b) The creditors of the entities bore, where appropriate, losses arising from theresolutionaftertheshareholdersorpartnersandinaccordancewiththeorderofpriorityestablishedinthebankruptcylegislation,withtheexceptionsestablishedinthisLaw.

c) CreditorsofthesamerankweretreatedinanequivalentmannerunlessotherwiseprovidedinthisAct.

d) Noshareholderorcreditorborelossesgreaterthanwhattheywouldhaveborneiftheentitywereliquidatedinthecontextofabankruptcyproceeding.

e) Thedirectorsandgeneralorsimilardirectorsoftheentitywerereplaced,unless,on an exceptional basis, its maintenance was considered strictly necessary toachievetheobjectivesoftheresolution.

f) The directors and general or similar directors of the entity had to provide allnecessaryassistancetoachievetheobjectivesoftheresolution.

g) In accordance with the provisions of bankruptcy, commercial and criminallegislation,theadministratorsoftheentitiesandanyothernaturalorlegalpersonwereliableforthedamagescausedinproportiontotheirparticipationandtheseriousnessofthose.

h) Guaranteeddepositswerefullyprotected.i) The resolution measures adopted were accompanied by the corresponding

guarantees and safeguards provided for in this Law and its developmentregulations.

Since Ley 11/2015 also formalized the writedown of capital and bail-in mechanisms, itdelineatesthetreatmentofshareholdersinthecaseofinternalrecapitalization(Article47).The FROB could amortize existing or transfer them to creditors capital instruments andeligibleliabilitiesoftheentityatareducednominalvalue.Thesequencetowhichcapitalorliabilitieswereamortizedwasasfollows(Article48):

a) The elements of level 1 ordinary capital proportional to the losses and as far aspossible.

b) The principal amount of the level 1 additional capital instruments to the extentnecessaryandtotheextentpossible.

c) Theprincipalamountoflevel2capitalinstrumentstotheextentnecessaryandtotheextentpossible.

d) Theprincipalamountofthesubordinateddebtthatisnotadditionalcapitaloflevel1or2.

e) The principal amount or the outstanding amount of the admissible liabilities, inaccordance with the priority of the credit rights provided in the applicablebankruptcyregulations.

Capitaloreligibleliabilitiesofthesamerankhadlossesequitablydistributedamongstthem.Itmayalsoreorganizetheactivityoftheentity(Article49).OnlyafterthesemethodshavebeenexercisedcouldtheNationalResolutionFundcontributetotheentitytocoveranyloss


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thatremainsoracquiresharesorothercapitalinstrumentsinordertorecapitalizeit(Article50).10. FROBexitedfromthecapitalinjectionprogramthroughrepurchaseofsharesand

saleofsharestoathirdparty.

InthecaseswheretheBankofSpainhasallowedtheFROBtoreplacethemanagementofthecreditinstitution,FROBisresponsiblefordeclaringbankruptcy(RealDecreto9/2009p.53210).TheFROBdivestedfromtheseparticipationsbyeitherrepurchaseofsharesbytheissuingentityortransferenceofsharestothirdparties(thismustnotdistortcompetitionandmustbedonewithinfiveyearsofthedateofcomplianceoftheintegrationplan)(RealDecreto9/2009p.53208).TherecapitalizedentitymustissuequarterlyreportsonthemergeroracquisitiontotheBankofSpain;ifitcannotfulfillsaidplan,theFROBmodifieditsterms,andextended its repurchase terms by up to two years. Credit institutions that fulfilled therequirementsofeligibleinstitutionsabove,butfailedtoperformtheirmergerplansarestilleligibleforFROBaid(RealDecreto9/2009p.53209).ForordinarysharesassociatedwithFROBII,divestmentoccuredwithinamaximumtermoffiveyears(RealDecreto-ley2/2011p.6).TheFROBwereallowedtoresellsecuritiestotheissuing entity or third parties proposed by the beneficiary entitywithin one year of theacquisition.Thismaximumtermmaybetwoyears,inwhichcaseitmayrequirebeneficiarytoadheretoadditionalterms.Theconditionsofresalemustensureefficientuseofpublicfundsandbecarriedoutundermarketconditions,whilecomplyingwithSpanishandEUregulations,especiallythatconcerningStateAid.However,thedivestmentofcontributionstocapitalstockwasnotsubjecttoanylegalorstatutorylimitations(RealDecreto-ley2/2011p.15).TheseparticipatinginstitutionshadtocommittorepurchasingthepreferredsharesheldbytheFROBassoonas theywereable. If fiveyearspassedwithoutarepurchase, theFROBcouldrequestconversion intocommonshares,participatory fees,ordividendswithinsixmonthsafterthefive-yearmark.TheFROBcouldalsoconvertsharesearlierifrepurchaseseemedunlikely,andthecreditinstitutionhadtofollowallotherconditionsinthemergeroracquisitionplan.11. Laterin2012FROBgainedauthoritytoresolveunviableinstitutionsandcreate

anearlyactionprogramtoimprovetheirhealthpriortothemrequiringgovernmentintervention.

In2012,theFROBgainedauthoritytoresolveunviableinstitutionsandcreateanearlyactionprogram to improve their health prior to them requiring government intervention. ThisoccurredundertheEuropeanStabilityMechanismandLey9/2012(Ley9/2012).ItgavetheFROBpowerstovalueinstitutions,aswellasrestructurethosethatrequiredpublicfinancialsupport to maintain viability, but it was mandated to minimize the amount of publicresources used to maintain financial stability (Article 13). It also established an assetmanagementcompanyforbankrestructuring,Sareb(seeTamSareb2019).


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TheFROBusedfourtoolsindividuallyorjointlytofacilitateresolutionofacreditentityandtheyare:thesaleoftheentity’sbusiness,thetransferofassetsandliabilitiestoabridgebank,thetransferorassetsandliabilitiestoanassetmanagementcompany,orfinancialsupporttothepurchaserstothebusiness(includingthebridgebank9orassetmanagementcompanymentionedintheprevioustools)(Ley9/2012Article25).The2015lawtransposingtheBankRecoveryandResolutionDirective(BRRD)toSpainbuiltuponthe2012lawformalizingtheprocessesofresolution(Ley11/2015).TheFROBcouldnowworktowardsanentity’ssurvivalwhileresolvingtheunviablepartsofit.InaccordancewiththeEuropeanSingleResolutionMechanism(SRM),the2015lawalsoestablishedtheNationalResolutionFund,whichwasresponsibleforfinancingtheresolutionprocessesoffinancialentities(Article53).TheNationalResolutionFundisadministeredbytheFROBandmust constitute at least one percent of guaranteed deposits of all entities (Ley 11/2015Article53).Tofundit,theFROBwillcollectannualordinarycontributionfromentitiesandbranchesinSpainofEUentitiesproportionaltoitsliabilities,relativetothetotalliabilitiesofallentities,anditsspecificriskprofile.Ley11/2015alsoprovidedforanearlyactionmechanismthatmonitoredbanksinordertohelp internally recover institutions that were likely to fail capital requirements. ThesupervisorsofthisprocesswouldbetheBankofSpain,EuropeanCentralBank,orNationalSecurities Market Commission (Article 6). This preventative action was intended tostreamlinetheoperationsofanentitytoreduceriskofinsolvencyandfacilitateitsresolutionif needed, while shifting the burden of financing from the government to the financialindustryitself.To ensure that bank failureswouldn’t cause systemic issues, the2015 lawalso requiredcontingent resolution plans for entities not supervised by FROB in a scenariowhere nopublicsupportwasavailable(Article13).ThislawalsoempoweredFROBtopreformcapitalincrease or reduction operations, and amortize capital instruments or internalrecapitalization(Article64).The resolution of a credit institutionwas pursuedwhen two criteria existed: the creditinstitution was inviable or soon would be inviable, and it is in the public interest andconveniencetoresolvetheinstitutiontomaintainfinancialstability,protectcreditorsandlimit external damage (Ley 9/2012 Article 19). A credit institution was inviable in thefollowing circumstances:when it breached solvency requirements, its required liabilitiesexceededitsassets,oritcouldnotfulfillitsenforceableobligationsinatimelymannerand

9Abridgebankforthepurposesofthisarticlecanbeacreditinstitution,includingtheentityitselfinresolutioninwhichtheFROBparticipates(Ley9/2012Article27).Thebridgebankmustcomplywithregulationsandsupervisionapplicabletocreditinstitutions.Thetotalvalueofliabilitiestransmittedtothebridgebankmaynotexceed thevalueofassets transmitted fromtheentityor fromanyothersource including the financialsupportitreceived.TheFROBmayexercisethisclausemorethanonceinfavorofmorethanonebridgebank,aswell as transfer assets and liabilities to third parties. The FROBwillmanage the bridge bankwith theobjectiveofsellingitoritsassetsandliabilitieswithinfiveyearswhenconditionsareappropriate.Thissalewillbedoneunder competitivemarket conditions.Thebridgebankwill cease toexist afteroneyear fromFROB’sexit,orafterallassetsandliabilitiesaresold.Thismustthereforeoccurwithinsixyearsofitsfounding,orFROBwillliquidateit.


21

it could not remedy these circumstances by use of its own means, private markets, orrestructuringaid(Article20).Resolutionproceededwhentheentitydidnotpresentarestructuringplanordemonstrateditsownunviability,presentedan inadequateplan,ordidnotexecuteaspectsof theplanwithin the timeframeestablishedby theBankofSpainand theFROB.TheBankofSpainbegan resolutionprocesses reporting its decision to the FROB,Ministry of Economy andCompetitiveness, and where appropriate, the European Union and European BankingAuthority (Article21).TheBankofSpaindesignatedFROBasadministratorof theentity(Article22).Withintwomonths(theBankofSpainmayextendthistosixmonths)theFROBprepared a resolution plan for the entity to be approved by the Bank of Spain; the planincluded the reason for resolution, the resolution instruments to be implemented, thecommitmentsadoptedtominimizetheuseofpublicresourcesanddistortionofcompetition,the financial support measures to be implemented by the Credit Institution DepositGuaranteeFund,theeconomicvaluationoftheentityanditsbalancesheet,themanagementactionsofthecapitalandsubordinateddebtinstrumentstobecarriedout,andthemaximumexecutionperiod(Article23).TheBankofSpaincouldimposeadditionalrequirementsonentitiesunderresolutionprocesses.Thecriteria for theresolutionofanentityunderLey11/2015wassimilar to that inLey9/2012withtheadditionthatanentitythat isunviablemaybedefinedbyanentitythatneedsextraordinarypublicfinancialassistance(Article20).AfterFROBIII,theFROBalsoresolvedCajaRuralMotadelCuervo,SociedadCooperativedeCréditodeCastilla-LaMancha,asmallruralcreditcooperativethatheldlessthanonetenthousandthoftheassetsintheSpanishbankingsystem(about€82.55million)(Huerta,p.33).Thiswasdonein2014bysellingittoGlobalcajainanemergencyprocedure,withoutanypublicfunds,tomaintainconfidenceinthesector.In2015,duetoconcernsaboutmoneylaundering in an Andorran institution, BPA, the FROB considered intervening in itssubsidiary,BancoMadrid,whichhadabalancesheetof€1.3billion.TheFROBconcludedthataresolutionofrestructuringprocesswasinappropriate,andthisresultedintheonlyexercise of the Deposit Guarantee Scheme in Spain during the recent financial crisis.However,thecourtthatwasintendedtoadvisevoluntaryinsolvencyproceduresforBancoMadridstillhasnothandeddownaruling(Huertap.34).

III. Evaluation

TheoverallassessmentofFROBanditsactions,especiallyafter2012,areseenaspositiveandcontributivetoastrongereconomy,morestablefinancialsector,andreducedrisk.Inparticular, the additions of bail-in restructuring processes, banking reforms, corporategovernancereplacements,andoveralleconomicreformsareseenassuccessful.However,itstillfacesthechallengesoflossestoSarebandgeneraleconomicissueslikenationaldebt.Inaddition,theFROBactionsandlegislationmaybeimprovedbyprovidingaquickerwaytodiagnosesolvencyissuesinbankinginstitutions,andresolvingtheminamoretimelyandimpartial way. Regardless, it played a significant role in restructuring and resolving theSpanishbankingsystem(IMFp.18).


22

TheEuropeanStabilityMechanism(ESM),whichdisburseda€41.3billionloantotheFROBin 2012-2013, sees FROB’s subsequent actions as well-prepared to define the scope ofnecessarymeasures to repair the banking sector (Strauch). This was done by includingstrategiessuchasimprovingbankgovernance,transparency,andsupervision,aswellasthecreationofSareb,inadditiontocapitalandfundingpolicies.AlsotobelaudedareimportantSpanish reformsoutside theprograms in the labormarketaswell as fiscalandpensionsreform. Immediate results of the FROB activitywere visible in the quick stabilization ofmarket access in the banking sector and the decrease of funding costs, as well as bankconsolidations; the number of Cajas fell from 45 to two. Banks stabilized profitability,reducedholdingsofNPLandbadassets,increasedcapital,anddiminishedexposuretotherealestatesectorbyuseoftheassetmanagementcompany,Sareb.Long-termsuccessisseeninSpain’sreturntoeconomicgrowthin2014,anareainwhichitoutperformstheeuroareaaverage. Employment increases, competitiveness gains, economic rebalancing, increasedexports, anda current account surplus indicate an economic recovery reflected in ratingupgradesandlowborrowingcostsforSpain.TheFROBcreatednewmergedbanksthatweremoresolventandbettermanagedthantheinsolvent cajas that preceded them (De Juan 10.1). However, banks still hold a lot ofnonperformingloansandthepost-crisiseconomystillcontainslowervolumesofcredit.DeJuanbelieves that low returns are compoundedby instability causedbyECB stimulusofliquidity and deregulation in the US as well as unregulated banking activities. Thisrestructuringactivitywassignificant,asthebanksthatreceivedpublicsupportaccountedfor 18% of total assets (Ponce Huerta p. 33). In 2012, total deposits at Spanish banksamounted to€1.3 trillion, ofwhich€700billionwere coveredby theDepositGuaranteeScheme,andofthatamount,€250billionwereatbanksthatreceivedrecapitalizationaid.TheEUconcludesthattheFROBhelpedimprovetheresilienceofthebankingsystemandreduced therisksof financial instability (EC2016p.57).Emergencyrecapitalizationandburden sharing for losses are important aspectsof FROB’spowers, and its adaptation tochanginginternationalstandardsiscommendable.Thesemeasuresforstabilityarebalancedwith efficiency, as they reduce the potential burden on public finances and the negativeimpactsonrestructuredbanks.TherestructuringprocessesofSpanishbankswastimely,occurringlessthansixmonthsafterEUstateaidruleswereadopted(EC2016p.90).Thiswas key to restoring confidence in the Spanish banking system, and maintainingmacrofinancialstability,inconjunctionwithEuropeanandSpanishpolicies(p.92).CurrentFROBChairman,JaimePonceHuerta,reportedinSpring2019thattheFROB’sabilitytorecoveraiddependsonthreefactors(PonceHuertap.34).First,thependingdivestmentof an indirect61%stake inBankia, following itsmerger inBMNby the legaldeadlineofDecember2021.Thismergerhascreatedabankofabout€230billioninassets—theaimistoimproverecoveryvalueforFROBandprivateinvestors(whichholdaround35percentoftotalshares)(IMFp.18).Secondly,theperformanceofSareb,whichissubjecttoriskfromtheperformanceoftherealestatemarketitself,aswellastherateofdivestmentandtheabilitytoabsorbassets,highfinancialcosts,andhighoverheads(PonceHuertap.34).ThebehaviorofguaranteesofferedbyFROBinthedivestmentprocess,ifsignificantlydifferentthatthenexpectedlossof€2.5billionmayalsoimpactFROB’sabilitytorecoveritsinjections.ThoughSpaindiduseagreatdealofcapitalaid(between5-6%ofGDP)relativetoother


23

Europeancountries,theprofitabilityandefficiencyofSpanishbankshasimprovedgreatly(PonceHuertap.35).Importantly, as of December 2016, uncertainty remained as regards legal contingenciesfacedbyFROBonguaranteesgranted to theacquiring institutionsof theresolvedbanks,includingagainsttherulingbytheEuropeanCourtonthefloorclausesofbankmortgages,as thesepotential lossesmustbeabsorbedbyFROB(IMFp.18).TheFROBhas incurredabout€44billioninlossesasof2017(IMFp.19).However,Spainalsofacesthechallengesofahighpublicdebt,unemploymentthatishigherthan the euro area on average, low productivity and significant net external liabilities(Strauch).LossesfromSarebalsoexceedexpectations,andtheprivatizationofBankiaandcajareformarestillincomplete.(EC2019p.14).Banksalsofaceprofitabilitypressurefromprice correction of assets and the low interest rate environment that currently exist(Strauch).However,StrauchviewsSpainasa“Europeansuccessstory inovercomingthecrisis” and is certain in its ability to overcome these challenges. The Spanish stabilityprogramwasthefirstthatwassupportedbytheEuropeanStabilityMechanism,andRolfStrauch,ChiefEconomistoftheESM,believedthatthisdemonstratedtheESMssuccessinprotectingtheeuroarea.TheEuropeanCommissionremainsconcernedaboutthequalityofbanks’ loanportfolios,which reflect a non-performing loan ratio above 10% of total loans, and increases inforeclosedassets(EC2016p.84).On the other hand, PonceHuerta states that by creating a resolution infrastructure thatfocuses on prevention and planning compatible with the European framework that isfinancedbythebanksthemselves,SpainseekstoavoidthedifficultiesfacedbyEuropeancountriesduetofailingbanksinthefinancialcrisis(PonceHuertap.36).Spainseparatestheprevention authorities from the FROB, which is responsible for executing resolutiondecisions.


24

Source:PonceHuertap.37

IV. References

GonzaloAlconada:GONZALOALCONADA,ÁNGELES.“OrdóñezDiseñaUnPlanDeRescateUrgente Para Casos De Intervención.” Cinco Dias. December 4, 2009.https://cincodias.elpais.com/cincodias/2009/12/04/empresas/1259937604_850215.html.BdE 2014: Report on Banking Supervision in Spain 2014. Madrid: Banco de España,Eurosistema, 2014.https://www.bde.es/f/webbde/Secciones/Publicaciones/PublicacionesAnuales/MemoriaSupervisionBancaria/14/MBS2014_en.pdf.BdE2017: InformeSobreLaCrisisFinancierayBancariaEnEspaña,2008-2014:MayoDe2017. Madrid: Banco de España, Eurosistema, 2017.https://www.bde.es/f/webbde/Secciones/Publicaciones/OtrasPublicaciones/Fich/InformeCrisis_Completo_web.pdf.BdENota2017:Notainformativasobreayudasfinancierasenelprocesodereestructuracióndel sistema bancario español (2009-2016). Madrid: Banco de España, Eurosistema, 2017.https://www.bde.es/f/webbde/GAP/Secciones/SalaPrensa/NotasInformativas/Briefing_notes/es/notabe070917.pdf.


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DeJuan:deJuanA.(2019)WhysandWhereforesoftheSpanishCrisis.In:FromGoodtoBadBankers.PalgraveMacmillan,ChamEuropa Press: Europa Press. “Noticia Congreso Convalida Decreto RecapitalizarBanca.” Europa Press, March 10, 2011. https://www.europapress.es/economia/noticia-congreso-convalida-decreto-recapitalizar-banca-20110310181933.html.EC 2016: “Evaluation of the Financial Sector Assistance Programme.” Evaluation of theFiancialSectorAssistanceProgrammeSpain,2012-2014.Luxembourg:Publicationsofficeofthe European Union, 2016.https://ec.europa.eu/info/sites/info/files/file_import/ip019_en_2.pdfFROB 2018 : “Annual Report 2018” Annual Report 2018 , 2018.http://www.frob.es/en/Lists/Contenidos/Attachments/582/20190610%20MactividadesFROB2018_EN.pdfFontevecchia: Fontevecchia, Agustino. “Spanish Bank Stress Tests DramaticallyUnderestimate Capital Shortfall.” Forbes. Forbes Magazine, June 27, 2012.https://www.forbes.com/sites/afontevecchia/2012/06/27/spanish-banks-capital-shortfall-substantially-bigger-than-stress-tests-show/#7574101b27ee.IMF Technical Note : “Spain: Safety Net, Bank Resolution, and Crisis ManagementFramework—TechnicalNote .”Spain:SafetyNet,BankResolution,andCrisisManagementFramework— Technical Note , June 2012.https://www.imf.org/external/pubs/ft/scr/2012/cr12145.pdf.IMF: International Monetary Fund. 2017. “Spain: Financial Sector Assessment Program-TechnicalNote-ImpairedAssetsandNonperformingLoans.”InternationalMonetaryFund.November13,2017.https://www.imf.org/en/Publications/CR/Issues/2017/11/13/Spain-Financial-Sector-Assessment-Program-Technical-Note-Impaired-Assets-and-Nonperforming-45394IMF 2012: International Monetary Fund. 2012. “Spain: Financial Stability Assessment.”International Monetary Fund. June, 2012.https://www.imf.org/external/pubs/ft/scr/2012/cr12137.pdfIMF 2017: International Monetary Fund. 2017. “Spain: Financial System StabilityAssessment.” International Monetary Fund. October, 2017.https://www.imf.org/en/Publications/CR/Issues/2017/10/06/Spain-Financial-System-Stability-Assessment-45321IMFStaff2018:InternationalMonetaryFund.2018.“Spain:IMFStaffConcludingStatementof the 2018 Article IV Mission.” International Monetary Fund. October 3, 2018.https://www.imf.org/en/News/Articles/2018/10/03/Spain-IMF-Staff-Concluding-Statement-of-the-2018-Article-IV-MissionLey 9/2012 : Ley 9/2012, Ley 9/2012 § (2012).https://www.boe.es/boe/dias/2012/11/15/pdfs/BOE-A-2012-14062.pdfLey 11/2015 : Ley 11/2015, Ley 11/2015 § (2015).https://www.boe.es/buscar/act.php?id=BOE-A-2015-6789


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MayerBrown:“SummaryofGovernmentInterventions-Spain.”SummaryofGovernmentInterventions - Spain, April 21, 2009.https://www.mayerbrown.com/public_docs/0263fin_Summary_Government_Interventions_Spain.pdf.MoU:European Commission. 2012. “Memorandumof Understanding on Financial-SectorPolicy Conditionality.” July 20, 2012.http://ec.europa.eu/economy_finance/eu_borrower/mou/2012-07-20-spain-mou_en.pdfOECD: OECD (2012), OECD Economic Surveys: Spain 2012, OECD Publishing.http://dx.doi.org/10.1787/eco_surveys-esp-2012-enBottomUpStressTest:OliverWyman.2012.“AssetQualityReviewandBottom-UpStressTest Exercise.” Madrid: Marsh & McLennan Companies. September 28, 2012.https://www.bde.es/f/webbde/SSICOM/20120928/informe_ow280912e.pdfEC 2019: “Post Programme Surveillance Report Spain, Spring 2019.” Post ProgrammeSurveillance Report Spain, Spring 2019. Luxembourg: Publications office of the EuropeanUnion,2019.https://ec.europa.eu/info/sites/info/files/economy-finance/ip106_en_1.pdfPonceHuerta:PonceHuerta,Jaime.2019.”FROBintherestructuringoftheSpanishbankingsystem.Whereitstandsafteradecadeofactivity(2009-2019)andconsiderationsfortheBanking Union.” Financial Stability Review 36 (2019): 23-44.http://www.frob.es/en/Lists/Contenidos/Attachments/579/FROB_in_the_restructuring.pdfRealDecreto-ley9/2009 :RealDecreto-ley9/2009,RealDecreto-ley9/2009§ (2009).http://www.congreso.es/constitucion/ficheros/leyes_espa/rdl_009_2009.pdf.RealDecreto-ley2/2011 :RealDecreto-ley2/2011,RealDecreto-ley2/2011§ (2011).https://boe.es/buscar/pdf/2011/BOE-A-2011-3254-consolidado.pdfRealDecreto3047/1977 :RealDecreto-ley 3047/1977, RealDecreto-ley 3047/1977 §(1977).https://www.boe.es/buscar/doc.php?id=BOE-A-1977-28234Segovia:Segovia,Carlos.“ElGobiernoSaleAl'Rescate'DelFondoDeRescateBancarioConUna Inyecci.” El Mundo. El Mundo, June 20, 2017.https://www.elmundo.es/economia/2017/06/20/59480ccf22601dcc5c8b4579.html.Strauch:European StabilityMechanism. 2019. “The Spanish Financial Sector Assistanceprogramme: 7 years later.” October 7, 2019. https://www.esm.europa.eu/speeches-and-presentations/spanish-financial-sector-assistance-programme-7-years-later-speech-rolf


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V. KeyProgramDocuments

SummaryofProgram

Legal/RegulatoryGuidance

Ley 9/2012 : Ley 9/2012, Ley 9/2012 § (2012).https://www.boe.es/boe/dias/2012/11/15/pdfs/BOE-A-2012-14062.pdfLey 11/2015 : Ley 11/2015, Ley 11/2015 § (2015).https://www.boe.es/buscar/act.php?id=BOE-A-2015-6789MoU:European Commission. 2012. “Memorandumof Understanding on Financial-SectorPolicy Conditionality.” July 20, 2012.http://ec.europa.eu/economy_finance/eu_borrower/mou/2012-07-20-spain-mou_en.pdfRealDecreto-ley9/2009 :RealDecreto-ley9/2009,RealDecreto-ley9/2009§ (2009).http://www.congreso.es/constitucion/ficheros/leyes_espa/rdl_009_2009.pdf.RealDecreto-ley2/2011 :RealDecreto-ley2/2011,RealDecreto-ley2/2011§ (2011).https://boe.es/buscar/pdf/2011/BOE-A-2011-3254-consolidado.pdfRealDecreto3047/1977 :RealDecreto-ley 3047/1977, RealDecreto-ley 3047/1977 §(1977).https://www.boe.es/buscar/doc.php?id=BOE-A-1977-28234MediaStories

GonzaloAlconada:GONZALOALCONADA,ÁNGELESGONZALO.“OrdóñezDiseñaUnPlanDe Rescate Urgente Para Casos De Intervención.” Cinco Dias. December 4, 2009.https://cincodias.elpais.com/cincodias/2009/12/04/empresas/1259937604_850215.html.Europa Press: Europa Press. “Noticia Congreso Convalida Decreto RecapitalizarBanca.” Europa Press, March 10, 2011. https://www.europapress.es/economia/noticia-congreso-convalida-decreto-recapitalizar-banca-20110310181933.html.Segovia:Segovia,Carlos.“ElGobiernoSaleAl'Rescate'DelFondoDeRescateBancarioConUna Inyecci.” El Mundo. El Mundo, June 20, 2017.https://www.elmundo.es/economia/2017/06/20/59480ccf22601dcc5c8b4579.html.Strauch:European StabilityMechanism. 2019. “The Spanish Financial Sector Assistanceprogramme: 7 years later.” October 7, 2019. https://www.esm.europa.eu/speeches-and-presentations/spanish-financial-sector-assistance-programme-7-years-later-speech-rolfReports/Assessments

BdE 2014: Report on Banking Supervision in Spain 2014. Madrid: Banco de España,Eurosistema, 2014.https://www.bde.es/f/webbde/Secciones/Publicaciones/PublicacionesAnuales/MemoriaSupervisionBancaria/14/MBS2014_en.pdf.


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BdE2017: InformeSobreLaCrisisFinancierayBancariaEnEspaña,2008-2014:MayoDe2017. Madrid: Banco de España, Eurosistema, 2017.https://www.bde.es/f/webbde/Secciones/Publicaciones/OtrasPublicaciones/Fich/InformeCrisis_Completo_web.pdf.BdENota2017:Notainformativasobreayudasfinancierasenelprocesodereestructuracióndel sistema bancario español (2009-2016). Madrid: Banco de España, Eurosistema, 2017.https://www.bde.es/f/webbde/GAP/Secciones/SalaPrensa/NotasInformativas/Briefing_notes/es/notabe070917.pdf.EC 2016: “Evaluation of the Financial Sector Assistance Programme.” Evaluation of theFiancialSectorAssistanceProgrammeSpain,2012-2014.Luxembourg:Publicationsofficeofthe European Union, 2016.https://ec.europa.eu/info/sites/info/files/file_import/ip019_en_2.pdfIMF Technical Note : “Spain: Safety Net, Bank Resolution, and Crisis ManagementFramework—TechnicalNote .”Spain:SafetyNet,BankResolution,andCrisisManagementFramework— Technical Note , June 2012.https://www.imf.org/external/pubs/ft/scr/2012/cr12145.pdf.IMF: International Monetary Fund. 2017. “Spain: Financial Sector Assessment Program-TechnicalNote-ImpairedAssetsandNonperformingLoans.”InternationalMonetaryFund.November13,2017.https://www.imf.org/en/Publications/CR/Issues/2017/11/13/Spain-Financial-Sector-Assessment-Program-Technical-Note-Impaired-Assets-and-Nonperforming-45394IMF 2012: International Monetary Fund. 2012. “Spain: Financial Stability Assessment.”International Monetary Fund. June, 2012.https://www.imf.org/external/pubs/ft/scr/2012/cr12137.pdfIMF 2017: International Monetary Fund. 2017. “Spain: Financial System StabilityAssessment.” International Monetary Fund. October, 2017.https://www.imf.org/en/Publications/CR/Issues/2017/10/06/Spain-Financial-System-Stability-Assessment-45321IMFStaff2018:InternationalMonetaryFund.2018.“Spain:IMFStaffConcludingStatementof the 2018 Article IV Mission.” International Monetary Fund. October 3, 2018.https://www.imf.org/en/News/Articles/2018/10/03/Spain-IMF-Staff-Concluding-Statement-of-the-2018-Article-IV-MissionMayerBrown:“SummaryofGovernmentInterventions-Spain.”SummaryofGovernmentInterventions - Spain, April 21, 2009.https://www.mayerbrown.com/public_docs/0263fin_Summary_Government_Interventions_Spain.pdf.EC 2019: “Post Programme Surveillance Report Spain, Spring 2019.” Post ProgrammeSurveillance Report Spain, Spring 2019. Luxembourg: Publications office of the EuropeanUnion,2019.https://ec.europa.eu/info/sites/info/files/economy-finance/ip106_en_1.pdf


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VI. Appendix

Appendix1:FROBProgramsbetween2009-2012andSAREB’sAssetPurchase

Source:IMFp.19Appendix2:ChronologicalSummaryofSpanishInterventions2008-2011

ChronologicalSummaryofSpanishInterventions2008-2011(BdE2017p.114)October 10, 2008: Real Decreto-ley 6/200 which created Fondo para la Adquisición deActivosFinancieros(FAAF)October10,2008:RealDecreto1642/2008,whichreformedtheGuaranteeDepositFunds.October13,2008:RealDecreto-ley7/2008,onurgentfinancialandeconomicmeasures.June 26, 2009: Real Decreto-ley 9/2009, which created the Fondo de ReestructuraciónOrdenadaBancaria(FROB).—June29,2010:BankofSpainCircular3/2010,amendingCircular4/2004(onDecember22)onpublicandreservedfinancialinformationstandards,andmodelsoffinancialstatements.July9,2010:RealDecreto-ley11/2010,onthereformofthesavingsbanksector.


30

February18,2011:RealDecreto-ley2/2011,onstrengtheningthesolvencyrequirementsofcreditinstitutions.June3,2011:RealDecreto771/2011,whichmodifiesRealDecreto216/2008(onFebruary15)ontheresourcesof financial institutionsandRealDecreto2606/1996(onDecember20),aaboutGuaranteeDepositFundsofCreditInstitutionsOctober14,2011:RealDecreto-ley16/2011,whichreunitedthethreeGuaranteeDepositFundsNovember 30, 2011: Bank of Spain Circular 5/2011, modifying Circular 4/2004 (onDecember22)aboutstandardsforpublicandreservedfinancialinformationandmodelsoffinancialstatements.Appendix3:FROBIInvolvements

Source:BdE2017p.118


31

Appendix4:SavingsBankSectorandFROB/FGD

Source:BdE2017,p.137

Appendix5:FROBIIInjections

Source:BdE2017p.132


32

Appendix6:FullFROBInjections


33

Source:BdENota2017p.5-8

Appendix7:VisualizationofMergersTimeline


34

Source:https://www.bde.es/f/webbde/GAP/Secciones/SalaPrensa/InformacionInteres/ReestructuracionSectorFinanciero/Arc/mapa_sector2018.pdf

Appendix8:FROBlosses

Source:https://www.bde.es/f/webbde/GAP/Secciones/SalaPrensa/NotasInformativas/Briefing_notes/es/notabe231118.pdf


35

Appendix9:FROBBailouts

Source:

FROB2018


36

Appendix10:FunctionsofFROB

Source:http://www.frob.es/es/Lists/Contenidos/Attachments/589/MemoriaactividadesFROB2018.pdf

Appendix11:Specificinformationyearbyyearoncapitalinjections

http://www.frob.es/es/Sobre-el-FROB/Paginas/Informes-de-cuentas-anuales.aspx


37

Appendix12:TimelineofSpanishBankingSector

Source:MoUpage5

Appendix13:TimelineofFROBactivities

Source:https://www.bde.es/f/webbde/GAP/Secciones/Publicaciones/InformesBoletinesRevistas/RevistaEstabilidadFinanciera/19/mayo/Review_EF_36_Spring.pdf


38

Appendix14:FROB2009-2016finances

Source:IMFp.20


39

Appendix15:StressTestplansforFROBIII

Source:BdE2017p.192


40

Appendix16:FullsummaryofFROBpurchasesanddivestments

Source:BdE2017p.249