I INTRODUCTION

Spain boasts a diversified modern financial system that is fully integrated with international and European financial markets. The Spanish banking regulator, Banco de España, joined the European System of Central Banks (ESCB) on 1 January 1999. As a result, the definition and implementation of the country’s monetary and exchange rate policy, the management of official currency reserves, the efficiency of the payment systems and the issuing of banknotes are now controlled by the ESCB.

Also as a consequence of integration, the Spanish regulatory system governing credit institutions largely mirrors the legal framework in other EU Member States. As such, credit institutions from other EU Member States may provide banking services in Spain, and vice versa, without the need to establish a branch or a subsidiary.

After a number of years during which Spanish regulatory activity followed EU-wide requirements to a great extent, the outbreak of the Spanish financial crisis and, mainly, the return of the Spanish economy to technical recession at the end of 2011, triggered a revolution in the Spanish banking system that started in 2012 and lasted until 2016.

In May 2012, the government adopted Royal Decree-Law 18/2012, now Law 8/2012 of 30 October, which regulates the obligation for credit institutions to take their foreclosed assets or those received in payment of debts linked to the real estate sector to a separate asset management company. Simultaneously, the government entrusted two independent appraisers with the duty of carrying out an analysis of the Spanish banking system’s balance sheets to determine what the capital needs of each Spanish credit institution would be in a stress scenario.

In the same month, the conversion of preferred shares held by the Fund for Ordered Bank Restructuring (FROB) in Bankia, the fourth-largest Spanish banking institution, and its public statement of needing up to €17 billion to restore its regulatory capital, resulted in it being nationalised by the government and, subsequently, a request to the European Union for financial assistance for the recapitalisation of certain Spanish financial institutions, which was concluded upon the signing of the memorandum of understanding (MOU) of 20 July 2012 between the Spanish and European authorities, with the participation of the International Monetary Fund (IMF).

According to the MOU, the Spanish banking sector would be provided with up to €100 billion in financial assistance under a programme that would cover a period of 18 months. The MOU comprised several specific conditions, the main ones being:

  1. the identification of the individual needs of capital after complete bank-by-bank stress tests;
  2. the recapitalisation, restructuring or resolution of weak banks by means of the implementation of plans to address any capital shortfalls identified in the stress tests;
  3. the enacting of resolution and burden-sharing legislation to provide the legal framework for a swift and orderly restructuring of the banking sector with minimum costs to taxpayers; and
  4. the reform of the regulatory and supervisory framework of the financial sector.

Additionally, the terms of the MOU provided for those banks receiving public funding support to segregate their problematic assets related to real estate development and their foreclosed assets into the external Asset Management Company for Assets Arising from the Bank Restructuring (SAREB). The design, incorporation and performing of SAREB constitutes one of the major achievements derived from the restructuring of the Spanish financial system.

SAREB’s share capital is 55 per cent privately owned (mainly by banks from
Group 0 (those proved by the stress tests to be adequately capitalised) and by insurance companies (both domestic and foreign)) and 45 per cent is owned by public authorities. SAREB has the mandate to divest the assets over 15 years, optimising levels of recovery and value preservation, and minimising negative effects on the real estate market and economy and the costs to taxpayers.

Overall, the final capital needs of Spanish banks proved to be lower than those initially identified. Of the original €56 billion of capital needs identified by the stress tests, approximately €41 billion were disbursed.

The EU financial assistance programme for certain Spanish financial institutions was successfully ended on 22 January 2014 (as scheduled). Such termination led to a new supervision post programme that will be in place until Spain repays at least 75 per cent of the funds provided, which is expected to occur no earlier than in 2026.

The end of the EU financial assistance programme and having overcome the worst years of the financial crisis permitted Spain to focus on the transposition of the relevant pieces of EU legislation enacted during the period 2013–2015. As a consequence of the intense legislative activity deriving therefrom, the current legal framework of the Spanish banking sector has been mainly gathered in the following two sets of legislation, which implement in Spain the CRR/CRD IV package2 and the EU legal framework on recovery and resolution of credit institutions,3 respectively:

  1. Law 10/2014, of 26 June, on the organisation, supervision and solvency of credit institutions (Credit Institutions Solvency Law); Royal Decree 84/2015, of 13 February, developing the Credit Institutions Solvency Law (RD 84/2015); Circular 2/2016 of the Banco de España, of 2 February, to credit institutions on supervision and solvency and completing the adaptation of the Spanish legal system to Directive 2013/36/EU and Regulation (EU) No. 575/2013 (Circular 2/2016); and Royal Decree-Law 14/2013, of 29 November, on urgent measures for the adaptation of the Spanish law to the EU rules and regulations on supervision and solvency of financial entities (RDL 14/2013), which jointly set forth the Spanish legal regime on supervision and solvency of credit institutions and have repealed and combined the numerous and diffuse rules on organisation and discipline of credit institutions that existed previously (Credit Institutions Solvency Law, RDL 14/2013, RD 84/2015 and Circular 2/2016, jointly, the Credit Institutions Solvency Regulations).
  2. Law 11/2015, of 18 June, on the recovery and resolution of credit institutions and investment firms (Recovery and Resolution Law) and Royal Decree 1012/2015, of 6 November, developing the Recovery and Resolution Law and amending Royal Decree 2606/1996, of 20 December, on deposit guarantee funds (jointly with the Recovery and Resolution Law, the Recovery and Resolution Regulations).

Although the legislative developments in connection with banks, saving banks and other financial institutions have decreased considerably in comparison to former years, various pieces of legislation were approved in 2017 that are likely to affect the credit institutions sector:

  1. Royal Decree-Law 11/2017, of 23 June, on urgent actions on financial matters, which has amended (1) Law 13/1989, of 26 May 1989, on credit cooperatives, allowing these types of credit institutions to become part of the ‘institutional protection schemes’ (i.e., contractual or statutory liability arrangements that protect the institutions involved in it and, in particular, ensure their liquidity and solvency to avoid bankruptcy when necessary) and, thus, improving their ability to overcome situations of liquidity or solvency stress; (2) the Recovery and Resolution Law, creating a new class of debt (the senior ‘non-preferred’ debt) eligible for Minimum Requirement for Own Funds and Eligible Liabilities (MREL) and Total Loss-absorbing Capacity (TLAC) purposes (see Section V); and (3) the Reinstated Text of the Securities Market Law (as approved by Royal Decree 4/2015, of 4 October) (Securities Market Law) to classify senior ‘non-preferred’ bonds, notes and similar securities as complex products for the purposes of the conduct of business rules contained therein.
  2. Circular of Banco de España 4/2017, of 4 November, to credit institutions in connection with rules on public financial information and financial statements templates, which replaced Circular of Banco de España 4/2004 as the new accounting circular for credit institutions as from 1 January 2018.
  3. Royal Decree-Law 5/2017, of 17 March, amending specific laws regarding the reinforcement of the protection of certain mortgage debtors (see Section IV.i) (RDL 5/2017), which, inter alia, broadens the scope of the measures relating to mortgage debtors at risk of social exclusion protection that are currently in place; extends by three additional years the moratorium on evictions on mortgagors in situations of extreme difficulty from their principal resident, which was established by Law 1/2013 (see Section IV.i); and establishes specific leasing arrangements in favour of foreclosed mortgagors whose eviction had been stayed.

Notwithstanding the foregoing, certain events of great importance that occurred in 2017 are likely to affect the whole banking sector – in particular, the two described below.

i Resolution and sale of Banco Popular Español

Banco Popular Español, SA (Banco Popular), the fifth largest bank in Spain and a listed company, was put under resolution and sold to Banco Santander, SA (Banco Santander) as part of the resolution tool involving the sale of the entity’s business, for a total consideration of €1. The implementation of this resolution tool derived from the execution of the resolution of the FROB Steering Committee of 7 June 2017 (the FROB Resolution), which, in turn, adopted the measures required to put in place the Decision of the Single Resolution Board (SRB) of the same date, concerning the adoption of the resolution scheme in respect of Banco Popular, in compliance with Article 29 of Regulation (EU) No. 806/20144 (Regulation 806/2014).

As regards the background of Banco Popular’s resolution, on 6 June 2017, the European Central Bank (ECB) informed the SRB that the entity was failing or likely to fail under the circumstances described in Article 18.4.c) of Regulation 806/2014. Based on the ECB’s judgement, the SRB agreed to put Banco Popular under resolution, approved the resolution scheme containing the resolution mechanisms to be applied and instructed the FROB, as the executive resolution authority for Banco Popular, to take the measures required to apply the resolution scheme. The resolution scheme envisaged the writing down or conversion of shares and other capital instruments of Banco Popular that were eligible for resolution purposes and the sale of all the outstanding shares after those measures were implemented. Pursuant to the applicable EU rules and regulations on the resolution of credit institutions, prior to deciding on the resolution of Banco Popular, the SRB obtained the required valuation of the entity from an independent expert, which estimated a negative economic value of Banco Popular amounting to minus €2 billion, in the baseline scenario, and minus €8.2 billion, in the most adverse scenario.

On the basis of the foregoing, and in compliance with the SRB’s instructions, the FROB Resolution was adopted. Pursuant to that:

  1. Banco Popular share capital outstanding prior to the date of the FROB Resolution was written down to create a non-distributable voluntary reserve;
  2. a capital increase was made without pre-emptive subscription rights to convert all the Additional Tier 1 capital instruments of Banco Popular into share capital;
  3. share capital was reduced to zero through the write-down of the shares deriving from the conversion described in point (b) to create a non-distributable voluntary reserve;
  4. a capital increase without pre-emptive subscription was agreed to convert all the Tier 2 capital instruments into newly issued Banco Popular shares; and
  5. all the newly issued Banco Popular shares deriving from the conversion described in point (d) were transferred to Banco Santander for a total price of €1.

It is worth noting that this whole process took place in a single day and, in particular, that the implementation of the resolution scheme was carried out during the night of 6 to 7 June, so that when the Spanish markets opened on 7 June, the resolution of Banco Popular and its sale to Banco Santander had already been made public.

ii European Court of Justice’s final ruling on floor clauses

The European Court of Justice’s final ruling on ‘floor clauses’5 (Ruling), on 21 December 2016, held that the temporary limitation imposed by the Spanish Supreme Court6 on the amounts that had to be refunded to borrowers qualifying as consumers under the Spanish law on consumer protection, and who had entered into mortgage agreements containing floor clauses that were judicially declared void, was contrary to EU law. Hence, borrowers who had paid more interest under their mortgage agreement than they would have paid had the floor clause not existed would be entitled to a refund of all excess amounts paid since the entry into force of the underlying contract (and not merely since 9 May 2013, as initially declared by the Spanish Supreme Court) if the floor clauses included in their mortgage contracts were judicially declared void.

The Ruling’s main legislative consequence was the enactment of Royal Decree- Law 1/2017, of 20 January, on urgent consumer-protection measures in connection with floor clauses (RDL 1/2017), which establishes a mechanism that increases the potential for customers and credit institutions to reach out-of-court settlements for the refunding of the corresponding excess amounts; customers may opt to pursue this mechanism at their discretion.

From a practical standpoint, the Ruling has resulted in an increase in the litigation against credit institutions, not only in relation to floor clauses’ but also in connection with other financial instruments and practices widely extended in the Spanish financial market (such as agreements on the payment of the expenses related to the execution of mortgage loan agreements – which, according to Spanish market practice, have traditionally been borne by the mortgagor – or the use of ‘multicurrency’ mortgages).

iii Summary

To sum up, a new institutional and legal framework for the Spanish banking system has been established in a multi-stage procedure commenced in 2012, which developed intensely between 2013 and 2015 and considerably slowed in 2016 and 2017. Within this process, a number of measures have been taken with the aim of improving bank transparency, regulation and supervision, and speeding up the recovery of the Spanish financial system within the context of a more propitious economic environment.

II THE REGULATORY REGIME APPLICABLE TO BANKS

The Spanish regulatory regime for credit institutions is currently set out in the Credit Institutions Solvency Regulations, Law 26/2013, of 27 December, on savings banks and banking foundations (Savings Banks and Banking Foundations Law) and its regulations, and Law 13/1989, of 26 May 1989, on credit cooperatives.7 This regulatory framework may be supplemented by the circulars, rules and guidelines issued, from time to time, by Banco de España or by the ECB.

A credit institution is defined under Spanish law as a company duly authorised to receive from the public deposits or other forms of repayable funds and grant credits for their own account. Spanish credit institutions may therefore primarily engage in a number of retail banking services.

Credit institutions must be recorded in a register maintained by Banco de España before they commence banking activities.

There are other types of regulated entities that play an important role in the Spanish market for financial services, among which financial credit establishments, electronic money entities and payment service entities are especially noteworthy.

i Credit institutions: banks, savings banks and credit cooperatives

Credit institutions consist of banks, savings banks, credit cooperatives and the Official Credit Institute (ICO), which is the country’s financial agency. Excluding the figures relating to the ICO, banks represent 47.15 per cent of all Spanish credit institutions, credit cooperatives represent 51.22 per cent and savings banks the remaining 1.63 per cent.8 Banks are nevertheless by far the most important category of credit institution in Spain, as the value of their assets represents 96.51 per cent of the sector, while credit cooperatives’ represent 3.42 per cent and savings banks 0.07 per cent.9

The raising of funds from the general public, except through activities subject to the securities markets regulations, is reserved for credit institutions.

Based on the foregoing figures, banks have a central role in the financial system because of the sheer volume of their business and their involvement in every segment of the Spanish economy. Most Spanish banks provide a full range of services for corporate and private customers, including collection and payment services outside Spain through foreign branches. Banks have the legal form of public limited companies and are therefore subject to general principles of company law as well as banking regulations.

Savings banks are a specific type of credit institution that accounted, until recently, for nearly half of the Spanish financial sector. Savings banks tended to be locally oriented entities of variable (but generally limited) size with strong economic and social ties to their home region. Although savings banks fully participated in the market, they were a special category within the financial services industry, as they were structured as foundations rather than companies and governed by representatives of collective shareholders: mainly depositors, employees and local authorities. Any positive result was allocated to social welfare and cultural projects.

The corporate model of savings banks has completely changed in recent years. After a number of partial reforms during 2011 and 2012 (as a consequence of which most of the Spanish savings banks were transformed into banks through different integration processes), a comprehensive revolution of their legal regime was put in place in December 2013 when the Savings Banks and Banking Foundations Law was passed. That regulatory revolution considerably deepened in 2015 and 2016 as a result of the approval of various pieces of ancillary legislation developing the Savings Banks and Banking Foundations Law.10

Since 2010, 43 of the 45 savings banks (99.39 per cent of the aggregate average assets of the sector) have been part of a consolidation process, which has resulted in seven banking groups now operating. The number of branches has been reduced by 43.9 per cent and the workforce by 38.6 per cent since late 2008.11 In the light of these radical changes to the sector, the Savings Banks and Banking Foundations Law aims to limit the role of savings banks in the credit institutions’ sector (capping their balance sheets, market share and geographical scope of banking activities), clarifying the role of former savings banks in their capacity as shareholders of credit institutions, and strengthening incompatibility requirements regarding the governing bodies of the former savings banks and the commercial banks controlled by them. Some of the main features of the new regime are as follows:

  1. savings banks will only be entitled to engage in the solicitation of repayable deposits from the public and the granting of credits within the territory of one autonomous region or a maximum of 10 neighbouring provinces;
  2. savings banks need to be engaged mainly in the deposit-taking and lending business;
  3. any person holding an executive position in a political party, trade union or professional association, elected representatives in public administrations, senior officers in such public administrations and those who have held any of the foregoing positions during the past two years, will not be allowed to be a member of a management body of a savings bank. This is a breakthrough on the prior regime that aims to avoid previous failures in the management of savings banks;
  4. any savings bank holding assets in excess of €10 billion or with a market share in relation to the deposits in its autonomous region of more than 35 per cent shall transfer its financial activity to a credit entity and become a ‘banking foundation’ or a ‘regular foundation’, depending on the stake it holds in the entity receiving its financial activity; and
  5. ‘banking foundations’ are those foundations with a (direct or indirect) holding in a credit entity of at least 10 per cent of its share capital or voting rights or such other percentage allowing the appointment or removal of at least one member of the board. These entities shall have the purpose of managing their stake in the relevant credit institutions and pursuing their social project or corporate responsibility programme. Depending on the stake of the banking foundation in the credit entity (the relevant thresholds being 10, 30 and 50 per cent), a number of internal rules and protocols shall be in place. Additionally, the dividend distribution of credit institutions controlled by banking foundations shall be subject to a minimum voting majority of two-thirds.

Credit cooperatives are private institutions whose corporate purpose is to attend to the financial needs of members and those of third parties by means of the development of those activities that are also carried out by credit institutions. Their current regime is contemplated in Law 13/1989, of 26 May 1989, on credit cooperatives as its developing regulation, as approved by Royal Decree 84/1993 of 22 January.

ii Other types of regulated entities that do not qualify as credit institutions under Spanish law
Financial credit establishments

Financial credit establishments (EFCs) are a special type of regulated entity that do not qualify as credit institutions (although they did until the Credit Institutions Solvency Law was approved) and that carry out, in a professional manner, one or more of the following activities:

  1. granting of loans and credits, including consumer loans and mortgage-backed loans;
  2. factoring, with or without recourse, and other ancillary activities;
  3. leasing;
  4. granting of security interests; and
  5. granting of reverse mortgages.

The legal framework governing EFCs is established in Law 5/2015, of 27 April, on promoting corporate financing (Law 5/2015), the main features of which include the following:

  1. the creation of EFCs requires authorisation from the Ministry of Economy, Industry and Competitiveness, which, in turn, requires the issuance of a mandatory prior report by Banco de España;
  2. Law 5/2015 regulates the existence of hybrid institutions (i.e., EFCs that also provide payment services or issue electronic money); and
  3. a significant portion of the obligations applicable to credit institutions on solvency, conduct of business, control of major shareholdings and transfer of business and corporate governance are also applicable to EFCs.

Finally, in October 2015, the Ministry of Economy, Industry and Competitiveness made public a draft regulation aimed at developing the legal framework of EFCs. The draft regulation has not yet been approved.

Electronic money entities

Electronic money entities (EDEs) are recognised as a special type of regulated entity that issues electronic money. The legal regime for EDEs was established in 2008 and amended in 2011 by a law regulating the issuing of electronic money and the legal regime of EDEs, partially implementing Directive 2009/110/EC. Secondary legislation was approved by Royal Decree-Law 778/2012, of 4 May, developing the legal framework of EDEs, clarifying the definition of e-money and the scope of the applicable Spanish regulations, and establishing the requirements for the setting up and running of EDEs, since their supervision and sanction regime is very similar to that applicable to credit institutions. Royal Decree-Law 778/2012 fully implemented Directive 2009/110/EC.

Payment services entities

In 2009, Spain made provision for a new type of regulated entity that renders, in a professional manner, payment services that coincide with those set out in the Annex of Directive 2007/64/EC of the European Parliament and of the Council, of 13 November 2007. Secondary legislation was approved in May and June 2010 that establishes the conditions and requirements for the rendering of these activities, and further guidelines on transparency and customer protections were issued by Banco de España.

III PRUDENTIAL REGULATION

Given its participation in the single supervisory mechanism (SSM), Banco de España qualifies as a ‘national competent authority’ (NCA), which implies that credit institutions considered as significant are supervised by the ECB, while less significant institutions are directly supervised by Banco de España and, indirectly, by the ECB. Of the 119 significant institutions supervised by the ECB, 12 are Spanish (as at 5 December 2017, but taking into consideration the absorption of Banco Mare Nostrum by Bankia, effective as of January 2018). These 12 significant institutions represent more than 90 per cent of deposit assets in Spain.

i Relationship with the prudential regulator

Although Banco de España no longer sets the country’s monetary and exchange rate policy, except in its role as a member of the ESCB, it remains in control of, inter alia, the following functions:

  1. management of currency and precious metal reserves not transferred to the ECB;
  2. supervision of the solvency and behaviour of credit institutions (pursuant to the distribution of competencies set forth by the SSM);
  3. promotion of the stability of the financial system and of national payment systems, without prejudice to the functions of the ECB; and
  4. minting and circulation of coins and other types of legal tender.

Banco de España carries out continuous monitoring and analysis of credit institutions, assessing the reports and regular information received from them, and conducting on-site inspections. There is close interaction between Banco de España and the entities subject to its supervision. Provisioning rules are straightforward, transparent and verified by Banco de España.

The responsibilities of Banco de España include the verification of maximum rates and charges for banking services rendered by credit institutions. It also verifies the customer protection rules and keeps several registries of public banking information, including the register of institutions, the registers of senior officers and of shareholders, auditors’ reports, and a special registry of the articles of association of supervised institutions. Banco de España also receives confidential information from institutions on their financial situation and their shareholders.

Banco de España may issue general or specific recommendations and requirements to entities (i.e., requiring adequate provisioning for less solvent obligors and improvements in the quality control over assets). It may also initiate disciplinary proceedings against institutions and their boards of directors or managers, or may even intervene and replace directors to remedy deficiencies or non-compliance.

Banco de España has powers to enforce compliance with the organisational and disciplinary regulations applicable to credit institutions operating in the Spanish financial sector. These powers are exercised not only over credit institutions and other financial institutions subject to its oversight, but also over directors and managers, who can be penalised for very serious or serious infringements when they are attributable to wilful misconduct or negligence. Sanctions can also be imposed on the owners of significant shareholdings in credit institutions and on Spanish nationals who control a credit institution in an EU Member State.

Additionally, as a consequence of the CRR/CRD IV package and the entry into force of RDL 14/2013, the supervisory powers of Banco de España and the National Securities Market Commission (CNMV) have been widened and strengthened to ensure appropriate enforcement of the new banking and supervisory discipline. Likewise, RDL 14/2013 has amended Law 13/1994, of 1 June 1994 (the rule setting out the competences and regime applicable to Banco de España), to allow it to issue technical guidelines and answer binding questions on supervisory regulation.

Finally, according to the regime set forth by the Recovery and Resolution Regulations, Banco de España is the pre-emptive resolution authority, while executive resolution powers are vested in the FROB (see Section III.iv).

ii Management of banks

The board of directors of a credit institution (with at least five members) has prominent powers to administer and manage the operations and financial matters of the entity. Members of the board and senior management must have good commercial and professional reputations, appropriate experience and the ability to carry out proper governance of the entity.

A new suitability regime was established in 2014. Although it was in line with the regime applicable up to then (which was repealed), this new regime brought some novelties. For instance, Banco de España is entitled under the Credit Institutions Solvency Law to determine the maximum number of positions that may be held simultaneously by a director, general manager or the holder of a similar position in view of the particular circumstances of the institution and the nature, size and complexity of its activities. Save in the case of directors appointed pursuant to a replacement measure, directors, general managers and holders of similar positions in institutions that are significant in size, or that are more complex or of a special nature, may not hold more than four non-executive positions simultaneously, or one executive position at the same time as two non-executive positions (for these purposes, the positions held within the relevant credit institution’s corporate group are counted as one).

The Credit Institutions Solvency Law obliges credit institutions to put corporate governance arrangements in place that are sound and proportionate in view of the risks taken by the institution. In addition, the following obligations are established:

  1. the board of directors may not delegate functions related to corporate governance arrangements, the management and administration of the institution, the accounting and financial reporting systems, the process for the disclosure of information and the supervision of senior management;
  2. the chair of the board of directors must not hold the position of managing director simultaneously, unless this situation is justified by the institution and authorised by Banco de España;
  3. a website must be maintained on which the information required by the Credit Institutions Solvency Law is published and on which the institution explains how it complies with its corporate governance obligations;
  4. the obligation to draft and keep an up-to-date general viability programme that considers all the measures that will be taken to restore the viability and financial soundness of institutions in the event that they suffer any significant damage;
  5. the obligation to establish a nomination committee comprising non-executive directors and in which, at a minimum, one-third of its members, and in any case its chair, are independent directors. This committee must decide on a target figure for the representation of the gender currently underrepresented on the board of directors;
  6. the board must actively participate in the management and valuation of the assets, and regularly approve and review the risk policies and strategies of the institution; and
  7. Banco de España will be entitled to determine which institutions must establish a risk committee or, as the case may be, those institutions that may establish combined audit and risk committees to perform the functions of the risk committee.

Significant time has been devoted to Spanish remuneration policies during the past few years, as has been the case at both European and international levels. In particular, the Credit Institutions Solvency Law includes the provisions of the CRR/CRD IV package relating to the obligation for credit institutions to put in place remuneration policies that are consistent with their risks. In a nutshell, these provisions relate to:

  1. the obligation to make a clear distinction between the criteria used for setting fixed remuneration and variable remuneration;
  2. the obligation that the remuneration policy applicable to members of the board of directors of a credit institution is subject to the approval of the general shareholders’ meeting or equivalent body under the same terms as those applicable to listed companies;
  3. the principles that will apply to variable elements of remuneration (inter alia, the variable component must not exceed 100 per cent of the fixed component save in cases of approval of the general shareholders’ meeting granted in accordance with the procedure laid down in the Credit Institutions Solvency Law, in which case, it may reach up to the 200 per cent; at least 50 per cent of the variable remuneration is awarded in instruments; at least 40 per cent of the variable remuneration (either paid in cash or in instruments) is deferred for a period of between three and five years; the variable remuneration is paid or vests only if it is sustainable according to the financial situation and results of the institution; or 100 per cent of the variable remuneration is subject to explicit ex post risk adjustments – malus and clawback arrangements), with special attention in this regard to credit institutions that benefit from public financial assistance; and
  4. the obligation to establish a remuneration committee or, if Banco de España so determines, a joint nomination and remuneration committee.

Finally, as previously mentioned, credit institutions (other than credit cooperatives and savings banks) are incorporated as banks and have the legal form of limited liability companies. As such, general corporate rules will fully apply to them (i.e., they must have a suitable structural organisation, compliance and internal audit functions and risk assessments, and certain separate and delegated committees within the board, including an internal audit committee). These rules are primarily contemplated in Royal Legislative Decree 1/2010, of 2 July, approving the Spanish Companies Law.

iii Regulatory capital and liquidity

Spain’s capital and liquidity requirements legislation has traditionally incorporated capital adequacy requirements in line with international standards as set out by the Basel Committee on Banking Supervision. According to these, a banking group should be adequately capitalised overall (in terms of both volume and capital quality), and there should be an adequate distribution of capital and allocation of risk, with sufficient buffers to allow ordinary growth.

Several laws, decrees and regulations on own funds, capital requirements and liquidity of individual credit institutions and consolidable groups have been approved through the years, most of them to implement the Basel I, Basel II and Basel III Accords. These regulations have been followed by specific circulars and guidelines issued by Banco de España determining the technical specifications and control of minimum funds.

Nonetheless, the entry into force of the CRR/CRD IV package and of the Credit Institutions Solvency Regulations has led not only to a deep change (at both European and Spanish levels) in the regulation of solvency and liquidity of credit institutions but, more generally, to a fundamental step forward in the creation of the banking union. Since 1 January 2014, the nuclear regime for credit institutions solvency is condensed in the CRR (which is directly applicable in EU Member States). Where needed, the Credit Institutions Solvency Regulations supplement this regime in Spain.

One of the most interesting changes deriving from the entry into force of the Credit Institutions Solvency Law is the inclusion of ‘capital buffers’ (i.e., additional capital requirements to those envisaged under the CRR), the regime of which is further developed by RD 84/2015 and Circular 2/2016. Failure to comply with capital buffers entails restrictions on distributions and payments relating to components of Common Equity Tier 1 (such as shares) or Additional Tier 1 capital (such as contingent convertible bonds) and on the payment of variable remuneration, and the obligation to submit a capital conservation plan that must be approved by the competent supervisor.

In particular, the various capital buffers provided for in the Credit Institutions Solvency Regulations are as follows:

  1. capital conservation buffer (2.5 per cent of the institution’s risk exposure): a non-discretionary buffer, the application of which is being phased in from 1 January 2016 (in 2018, the applicable buffer is 1.875 per cent whereas in 2017, it was 1.25 per cent);
  2. countercylical capital buffer: a specific buffer for each institution or group, which is calculated as the weighted average of the countercyclical buffer percentages applicable in each of the territories in which an institution has exposures. The percentage applicable to risk exposures in Spain is set by Banco de España and ranges between zero and 2.5 per cent. According to the Credit Institutions Solvency Law, the applicable buffers are to be phased in between 1 January 2016 and 31 December 2018. Banco de España has decided to maintain the countercyclical buffer applicable to risk exposures in Spain for the first quarter of 2018 at zero per cent (as it was set up for the immediately preceding quarters);12
  3. buffers for global systemically important institutions (G-SIIs) and other systemically important institutions (O-SIIs): buffers specifically applicable to certain institutions by reason of their systemic importance. The identification of institutions as G-SIIs or O-SIIs is decided by Banco de España, which must annually review the classification it has carried out. Banco de España also has to set the buffer to be maintained by each type of institution, which in the case of G-SIIs will range from 1 per cent to 3.5 per cent, and in the case of O-SIIs may not exceed 2 per cent. These buffers are applicable from 1 January 2016, although in the case of both G-SIIs and O-SIIs, they must be fulfilled in tranches in the following four years. The only credit institution identified by Banco de España as a G-SII for 2018 is Banco Santander, which belongs to Subcategory A. Owing to the gradual implementation of this buffer, as foreseen in the Credit Institutions Solvency Law, the capital buffer it needs to meet in 2018 is equivalent to 0.75 per cent of its total risk exposure (on a consolidated basis). Besides, Banco de España has already confirmed that Banco Santander will maintain its status as a G-SII for 2019 and that the G-SII capital buffer will be fully applicable to the entity in that year (amounting to 1 per cent of its total risk exposure on a consolidated basis). The following credit institutions have been classified as O-SIIs by Banco de España for 2018: Banco Santander, BBVA, CaixaBank, Bankia and Banco Sabadell;13 and
  4. systemic risk buffer: a buffer that may be set by the Banco de España to cover non-cyclical systemic or macroprudential risks where there is a risk of disruption in the financial system, with the potential to have serious negative consequences for the financial system and the real economy.

Regarding liquidity, the Credit Institutions Solvency Law states that Banco de España will assess business models, corporate governance procedures and systems, supervision and evaluation findings, and all systemic risks.

iv Recovery and resolution

The Recovery and Resolution Regulations have updated the Spanish legislation on the recovery and resolution of credit institutions that was introduced in 2012 with the entry into force of Law 9/201214 to adapt it to the EU legislation on this matter.

The Recovery and Resolution Regulations foresee three phases (as described below) that correspond to the various stages in the deterioration of an institution’s financial situation. The rules governing each of these phases are based upon the following two main principles:

  1. the separation of supervisory and executive resolution functions. The resolution powers in the pre-emptive resolution phase are entrusted to Banco de España, as regards credit institutions, and the CNMV, as regards investment firms, while the FROB holds the resolution powers in the executive phase; and
  2. public resources cannot be used to fund recovery and resolution proceedings, the cost of which must be borne first by the shareholders of the institution under resolution, second by certain creditors, and finally by the credit institutions and investment firms sector (if needed).
Early intervention phase

Prior to any breach of the solvency, regulatory or disciplinary rules or the declaration by the competent authority of any of these three phases, an institution must draw up and periodically update a recovery plan elaborating on the measures and actions to be taken to restore its financial position should it deteriorate significantly. The plan must be approved by the institution’s board of directors and reviewed by the relevant supervisor.15

Early intervention measures can be adopted by the relevant supervisor when an institution or a parent of a consolidated group of institutions breaches, or is likely to breach, solvency, regulatory or disciplinary rules, provided that it is foreseeable that the institution will be able to overcome the situation by its own means. These measures include requiring the removal of one or several members of the governing body of the institution, convening a general meeting and proposing items on its agenda, or requiring the board of directors of the institution to draw up a plan for restructuring the institution’s debt or requiring changes to be made to its business strategy.

Pre-emptive resolution phase

The pre-emptive resolution authority must draw up, approve and maintain a resolution plan for each individual institution or consolidated group that falls under its remit. Among other measures, it must consult the resolution authorities from those jurisdictions in which an institution or group has established a significant branch.

When drawing up the report, the pre-emptive resolution authority must determine whether the individual institution or consolidated group is resolvable (as this term is defined in Article 15.1 of the Recovery and Resolution Directive). Should any obstacles to the resolution of the institution be identified, the ‘non-resolvable’ institution must propose measures to remove them. These measures have to be approved by the relevant pre-emptive resolution authority. If it does not consider the proposed measures to be sufficient, it may request the relevant institution to adopt alternative measures (in particular, any of those foreseen in Article 17.5 of the Recovery and Resolution Directive as transposed into Spanish law).

Executive resolution phase

An institution will be resolved when all of the following circumstances have been met:

  1. it is non-viable (as this term is defined in the Recovery and Resolution Law mirroring the definition included in the Recovery and Resolution Directive) or it is reasonably foreseeable that it will become so in the near future;
  2. there is no reasonable prospect that private sector measures, supervisory measures (such as the early intervention measures), or the conversion or redemption of capital instruments16 will prevent the institution from becoming non-viable within a reasonable period of time; and
  3. for reasons of public interest, it is necessary or advisable to proceed with the institution’s resolution rather than liquidating it or winding it up in the applicable insolvency proceedings.

The FROB has the power to initiate the resolution process. The opening of the execution phase of the resolution will normally entail the replacement of the institution’s board of directors, managing directors or similar officers (although the FROB may maintain them) with the person or persons appointed by the FROB to manage the institution under its supervision. The resolution tools available to the FROB are:

  1. the sale of the institution’s business;
  2. the transfer of assets or liabilities to a bridge entity;
  3. the transfer of assets or liabilities to an asset management company; and
  4. internal recapitalisation (the Spanish bail-in tool).

In contrast to Law 9/2012, the use of a bail-in as a resolution tool is now specifically envisaged in the Recovery and Resolution Law. Moreover, the scope of this tool has been broadened in comparison to that of the measure which was foreseen in Law 9/2012 (the redemption or conversion of subordinated debt instruments). The Spanish bail-in tool, which came into force on 1 January 2016, allows all the institution’s liabilities (including senior debt) not expressly excluded by the Resolution and Recovery Law (or by an express decision of the FROB)17 to be amortised or converted into capital to recapitalise the institution. This tool may be used to recapitalise the institution so that it resumes its activities and market confidence in it is restored, or to convert into capital or reduce the principal amount of the credits or debt instruments transferred through the use of the resolution tools referred to previously. When using the Spanish bail-in tool, the FROB will require the body, person or persons in charge of the management of the institution under resolution to submit an activities reorganisation plan containing the necessary measures to restore the long-term viability of the institution, or of a portion of its business, within a reasonable time frame.

Finally, the Recovery and Resolution Law has created a National Resolution Fund financed by the credit institutions and investment firms themselves which, under certain circumstances, will finance the resolution measures adopted by the FROB (briefly, when there are losses arising from a resolution process that have not been covered entirely by the eligible liabilities).

IV CONDUCT OF BUSINESS

i Conduct of business rules

According to the Credit Institutions Solvency Law, credit institutions rendering services in Spain, whether domestic entities or foreign entities authorised in another Member State that open a branch or provide cross-border services in Spain, must observe the applicable rules setting out the discipline of credit institutions, as well as those enacted in the interest of the general good, whether they are dictated by the state, autonomous communities or local entities.

The ‘general good’ includes, inter alia, protection of the recipients of services, protection of workers, consumer protection, preservation of the good reputation of the national financial sector, prevention of fraud and protection of intellectual property.

Some conduct of business rules relate to compliance with regulations on advertising (i.e., a prohibition of misleading or subliminal advertising, aggressive commercial practices), or to conduct that may injure or is likely to injure a competitor, and to consumer-related matters. Credit institutions are subject to Spanish regulations protecting financial services users, and they must establish consumer services departments and a customer ombudsman to handle complaints about individuals or legal persons who are deemed users of their financial services.

Further, a credit institution must make certain information available to customers, including:

  1. the existence of the customer service department and of the customer ombudsman, as the case may be, including postal and email addresses;
  2. its obligation to serve and resolve customers’ complaints within two months;
  3. the existence and contact information of Banco de España’s complaints service;
  4. its internal customer service regulations; and
  5. references to the legislation in force on transparency and protection of financial services customers.

Besides, there are rules on the delivery of contracts and a number of specific provisions regarding the valid incorporation of terms into consumer contracts (some of which are currently the subject of legal debate after several recent Supreme Court decisions declaring null and void certain terms traditionally used by Spanish banks).

Since 2010, anti-money laundering laws and regulations applying to credit institutions (including EU credit institutions rendering cross-border services in Spain) set forth certain particularities in relation to credit institutions’ compliance with Spanish anti-money laundering rules, including:

  1. requirements regarding identification details;
  2. information on the purpose of banking transactions;
  3. the nature of customers’ activities; and
  4. the obligation to analyse transactions and business relationships continuously, including for existing clients (in particular in relation to the contracting of new products or when significant or complicated transactions are carried out, or special obligations in relation to ‘politically exposed persons’), their close relatives and known related parties.

In addition to the foregoing, a number of rules regarding protection of consumers of investment services apply to credit institutions (categorisation of investors, delivery of appropriate and comprehensible information on the financial instruments and investment strategies offered to the customer, etc.), including rules to check that the conduct of credit institutions is sufficiently diligent, and guidelines issued by the CNMV that should be followed by credit institutions. In this regard, Ministerial Order ECC/2316/2015 of 4 November on information obligations and the classification of financial products, is especially noteworthy, as it establishes certain information and classification obligations that must be observed by institutions that market specific financial products (such as banking deposits). Credit institutions are specifically included within the subjective scope of this order.

New legislation approved since 2012 on consumer protection and on evictions in cases of mortgage default is aimed at reinforcing the protection of some vulnerable mortgage debtors. The main pieces of legislation in connection with this matter are:

  1. Royal Decree Law 6/2012, of 9 March, on urgent measures to protect mortgage debtors without resources (RDL 6/2012), as amended by RDL 5/2017, which provides for a series of mechanisms to protect mortgage debtors at risk of social exclusion, the main pillar of which is the creation of a code. This code – which, although it provides for voluntary accession, has been signed by the vast majority of credit institutions operating in Spain – envisages three consecutive stages of action the purpose of which is to accomplish the restructuring of the relevant mortgage debt;
  2. Law 1/2013, of 14 May, on measures to reinforce the protection of mortgage debtors, the restructuring of debt and social renting (Law 1/2013), which established a four-year moratorium from 15 May 2013 on evictions on mortgagors in situation of extreme difficulty from their principal resident (which has been extended for three more years by RDL 5/2017); and
  3. Law 25/2015, of 28 July, on a ‘second chance’ mechanism, diminishing the financial burden and other social-related measures, which, inter alia, sets out a number of protections for debtors within their insolvency proceedings (including the possibility of release from all debts in cases where the debtor’s assets do not cover his or her aggregate debts), improves the Code of Good Practices in relation to mortgage debtors without resources, as approved by RDL 6/2012, and broadens the scope of the application of the Code so that a greater number of debtors can benefit from it.

In this regard, a draft Bill on real estate loans was approved on 3 November 2017. The aim of this draft Bill is to implement in Spain Directive 2014/17/EU of the European Parliament and of the Council of 4 February 2014 on credit agreements for consumers relating to residential immoveable property and amending Directives 2008/48/EC and 2013/36/EU and Regulation (EU) No. 1093/2010. It is expected to be approved and enter into force in the first half of 2018.

The purpose of this new piece of legislation is to diminish the costs associated with early cancellation and amendments to the terms of mortgage loans, and to reinforce the transparency in connection with this type of product. Among other matters, the draft Bill:

  1. lowers the fees incurred by early termination of mortgage loan agreements and conversion from a fixed to a variable rate;
  2. sets forth the amount of payment breaches of the debtor that allow for early termination of the loan agreement (payment breaches amounting to more than (1) nine monthly instalments or 2 per cent of the total loan, during the first half of the loan agreement term, or (2) 12 monthly instalments or 4 per cent of the total loan, during the second half of the loan agreement term);
  3. prohibits ‘cross-selling’ in connection with mortgage loans (preventing the granting of a mortgage loan that is conditional on the acquisition of a related financial product, such as life insurance or a credit default swap); and
  4. imposes certain pre-contractual obligations on the creditors.
ii Spanish banking secrecy

The duty on credit institutions to keep their clients’ information confidential from third parties other than the supervisory authorities has traditionally been a feature of the Spanish banking system and is codified in law. Credit institutions, their managers and directors, and significant shareholders and their managers and directors, must safeguard and keep strictly confidential all information relating to balances, operations and any other customer transactions unless required to disclose the same by an applicable law or the supervisory authorities. In these exceptional cases, the delivery of confidential data must comply with the instructions of the client or with those provided by the applicable law.

The sharing of confidential information between credit institutions within the same consolidated group is not subject to these restrictions.

Any breach of the aforementioned regulations will be deemed a serious offence, which may be punished according to the ordinary sanctions procedure provided under Spanish banking regulations.

V FUNDING

The main funding for Spanish credit institutions is based on deposits made by their customers. However, according to Banco de España, the global number of deposits taken from the private sector has decreased during the past few years.

Both capital and debt issuance have also been sources of funding. These instruments include (in addition to common shares) perpetual contingent convertible debt (which will normally qualify as Additional Tier 1 for solvency purposes), the newly created senior ‘non-preferred’ debt (see Section I) and subordinated debt. These types of debt instruments must be verified by the relevant supervisor to confirm they meet the conditions established by the bank solvency regulations and their issuance is subject to the securities market regulations. In this regard, the Securities Market Law imposes relevant restrictions on the conditions of issuance of these instruments when they are to be marketed to retail investors. In a nutshell, a tranche of the issuance, which shall amount to at least 50 per cent of its total value, has to be addressed to qualified investors, and the face value of the issued instruments cannot be lower than a certain amount (which varies depending on the specific features of the instrument and the nature of the issuer).

In recent years, mistrust in Spanish public finances and the financial system resulted in a substantial increase in funding costs and difficulties in gaining access to wholesale markets, which had a considerable effect on sovereign debt during the summer of 2012. Additionally, as already mentioned, the Recovery and Resolution Regulations have introduced a number of instruments that are eligible for the recapitalisation of credit institutions within a resolution scenario, as well as specific FROB powers.

VI CONTROL OF BANKS AND TRANSFERS OF BANKING BUSINESS

i Control regime

The Spanish regime for the prudential assessment of Banco de España regarding acquisitions and increases of holdings in Spanish credit institutions is contemplated in the Credit Institutions Solvency Regulations. The regime set forth therein must be construed in light of the entry into force of the SSM and the distribution of competencies between the ECB and the NCAs set out in the SSM Regulations.18

According to the regime established on the occasion of the entry into force of the SSM, the acquisition of a significant holding is subject to a mandatory pre-acquisition non-opposition from the ECB. The corresponding application shall be notified through Banco de España. A ‘significant holding’ is defined as the direct or indirect holding (taking into account conditions regarding aggregation laid down in the Spanish regulations) of shares in the issued share capital or voting rights of a Spanish credit institution in excess of 10 per cent, as well as any holding below that threshold that allows the holder to have a ‘notable influence’ on the corresponding credit institution. In accordance with Article 23 of RD 84/2015, ‘notable influence’ shall be deemed to exist when there is the capacity to appoint or dismiss a board member of the corresponding credit entity.

A similar prior control procedure shall be carried out if the owner of a significant holding intends to increase that holding up to or above 20, 30 or 50 per cent of the issued share capital or voting rights of a Spanish credit entity; or if, as a consequence of a potential acquisition, the relevant shareholder could acquire control of the Spanish credit institution.

The disposal of a significant shareholding in a Spanish credit entity, the reduction of a significant shareholding below 20, 30 or 50 per cent of the issued share capital or voting rights of a Spanish credit entity, or the loss of control of a Spanish credit entity, require prior notification to the competent supervisory body.

Likewise, immediate written notification to both the competent supervisor and the relevant credit entity is required if, as a result of the acquisition, the acquirer would hold, either on its own or in concert with other entities, directly or indirectly, 5 per cent or more of the issued share capital or voting rights of a Spanish credit entity.

The obligation to seek non-opposition for a proposed acquisition or increase of qualifying shareholding falls on the acquirer. However, the Spanish bank whose shareholding may be acquired must notify the competent supervisor as soon as it becomes aware of the proposed acquisition.

Within the framework of the assessment of the suitability of a potential acquirer and the financial strength of the proposed acquisition, a report from the Commission for the Prevention of Money Laundering and Monetary Infractions is needed, the aim of which is to ensure that the relevant credit entity is managed in a prudent manner taking into account the influence that may be exercised by the acquirer.

Finally, two provisions modifying the previous regime on significant holding positions are noteworthy: (1) resolutions passed by a credit institution with the votes of a shareholder acting in breach of the notification obligations may only be challenged in court to the extent that the votes corresponding to those shares have resulted in the passing of those resolutions, as opposed to being subject to potential challenge in all cases; and (2) the authority to take measures in the event of the influence of significant shareholders that may damage the management or financial situation of the institution no longer corresponds to the Ministry of Economy, Industry and Competitiveness, but to the relevant credit institution’s supervisor.

ii Transfers of banking business

The Spanish financial system has recently moved towards greater consolidation, mainly for efficiency and profitability, in an increasingly mature financial market and as a consequence of the restructuring of the Spanish banking system. The need to strengthen solvency is also a key driving factor. Naturally, the same factors apply to transfers of banking business, particularly considering the crucial importance of size in gaining access to wholesale capital markets.

The transfer of banking business by virtue of mergers, total and partial spin-offs, or assignments of assets and liabilities, any legal or economic arrangement analogous to any such transaction, and any structural modification deriving from the foregoing, is subject, in addition to general corporate law, to regulatory approval from the Ministry of Economy, Industry and Competitiveness as set forth in the Credit Institutions Solvency Law and the Credit Institutions Solvency Regulations.

Of particular relevance in recent times have been the mergers or integrations between savings banks instigated by Banco de España. Few mergers had been carried out between savings banks other than in cases of financial difficulty. Once the transfer of the savings banks’ banking business was achieved, the next step (which took place during 2014) was the transformation of savings banks into banking foundations. The most noteworthy example of this is Fundación Bancaria Caixa d’Estalvis i Pensions de Barcelona (la Caixa), which was created in June 2014 as a consequence of the transformation of la Caixa into a foundation in compliance with the Savings Banks Law. This banking foundation (the largest in Europe in terms of assets) is the sole shareholder of Criteria CaixaHolding, which in turn is the major shareholder of CaixaBank (one of the four largest banks in Spain).

Special regimes for the transfer of banking businesses are set out in the Recovery and Resolution Regulations (see Section III.iv).

VII THE YEAR IN REVIEW

A number of new provisions have been enacted since the financial crisis began in 2007, inter alia, to enhance the capacity of Spanish credit institutions to increase the supply of credit to firms and individuals, to authorise the state to guarantee new funding transactions of medium-term bank debt, or to establish temporary and partial moratoria on the monthly instalments payable by unemployed debtors. In recent years, and certainly between 2012 and 2016, most of these provisions have been implemented as a consequence of the MOU signed with the European authorities and setting up a programme that was in place until January 2014.

Although legislative production slowed considerably in 2017, important reforms were approved that are likely to affect the activity of credit institutions. This notwithstanding, the most crucial event for the credit institutions sector in 2017 was, without doubt, the resolution of Banco Popular and its sale to Banco Santander in the framework of the resolution scheme approved by the SRB and implemented by the FROB. This resolution has meant the use of the Recovery and Resolution Regulations for the first time, and in a significantly large credit institution (as said, the fifth largest bank in Spain at the time the resolution took place).

According to official data disclosed by the National Institute of Statistics, the full-year gross domestic product for 2017 increased by 3.1 per cent. In addition, according to the IMF’s most recent forecasts, it is expected to grow by 2.8 per cent in 2018 and by 2.2 per cent in 2019. Thus, the signs of improvement in the Spanish economy that emerged in 2014 and were consolidated in 2015 and 2016 have stabilised in 2017.

As regards the main figures for the Spanish banking sector in 2017, the total balance sheet fell by 2.1 per cent to September 2017 (the last available consolidated data at the time of writing), affected mainly by the steady decline of the total volume of credit to the private sector. Data for June 2017 showed that all live lending portfolios continued their downward trend, with the exception of non-mortgage lending to households, which was up by 2.7 per cent year-on-year. The volume of non-performing loans (NPLs) fell by 12 per cent in the 12 months to September 2017. As for new lending transactions, all portfolios showed a positive trend in the 12 months to September 2017. Especially encouraging are the figures relating to lending to SMEs and to households, which showed significant increases.

The results of the banking system in the first half of 2017 (being the last available consolidated data at the time of writing) are not sufficiently reliable to give an accurate view of the overall sector, as they were heavily affected by the negative performance of Banco Popular during that time. Pursuant to the figures disclosed by Banco Santander, Banco Popular lost €12.13 billion in the first six months of 2017, which accounted for most of the €6.18 billion losses in the Spanish banking sector for the half year.19

VIII OUTLOOK AND CONCLUSIONS

The banking supervision model stems from two financial crises – the first resulting from the transition from dictatorship to democracy and the second at the beginning of the 1990s – and the collapse of a number of entities. As a result, Banco de España had to forge a model that not only kept entities in good financial condition, but obliged them to ‘save for a rainy day’ in prosperous times. This policy, while extremely useful during the current economic crisis, has not been enough, as the request by the government for financial assistance from the banking sector in June 2012 proved.

Ten years after the international crisis started, the resilience of the Spanish banking sector, historically subject to regulation and supervision based on the prudent and stringent application of international standards, was outstanding until 2012, certainly in comparison to many other developed countries. However, to strengthen the solvency of the Spanish financial system and complete the restructuring of the sector, further measures have been adopted in the past few years with various consecutive reforms. In 2012, the MOU imposed the establishment and approval of new measures, inter alia:

  1. new levels of capital requirements;
  2. coverage for risk exposure through new provisions;
  3. transparent processes on write-downs and accounting rules; and
  4. a framework for the restructuring and resolution of banks.

Systemically important banks maintain a solid position, which enables them to continue their domestic and international expansion, and to continue to deal with the crisis without requiring public support or intervention. However, the position of some small and medium-sized credit institutions and the economic conditions of the country have been substantially jeopardised during the past few years.

Now that the programme set out in the context of the now-defunct MOU has been successfully exited, the Spanish financial sector is subject to post-programme surveillance by the European Commission, the ECB and the European Stability Mechanism. According to the conclusions reached in the context of the last surveillance visits:

  1. the Spanish economy is showing clear signs of recovery, and is growing at a faster pace than the eurozone average;
  2. the orderly deleveraging of the private sector has further advanced and, at the same time, access to credit, in particular for households and healthier companies (including SMEs) with positive growth prospects, has improved significantly;
  3. job creation has accelerated, but unemployment, in particular youth and long-term unemployment, remains very high, as does labour market segmentation;
  4. government debt is still increasing, and bringing it back to the 60 per cent reference value will require a continued fiscal effort in the long run; and
  5. the banking sector’s stabilisation continues, marked by the improvement of banks’ asset quality, strengthened solvency and liquidity and the sector’s return to profitability. Nonetheless, these signs are not uniform across financial institutions. A key milestone for improving the management of SAREB’s financial assets has been completed with the introduction of incentives in servicers’ contracts that link remuneration to performance.

In conclusion, the profound reforms put in place between 2012 and 2016, both as a consequence of the MOU and as a result of the overhaul of the capital and liquidity requirements and governance and compensation regimes at global, European and Spanish levels, are already taking form. Today, Spain’s banking sector is made up of fewer banks with adjusted risk profiles and improved corporate governance, although the legislative reforms still remain to be tested in the market. In any event, the general economic environment, and the numerous and well-targeted advances in the restructuring of the banking system, allow us to believe that the future can be looked at with reasonable confidence.

1 Juan Carlos Machuca is a partner and Joaquín García-Cazorla is an associate at Uría Menéndez Abogados, SLP.

2 Regulation (EU) No. 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No. 648/2012 (applicable since 1 January 2014) (CRR); and Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (CRD IV).

3 Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EEC,
2007/36/EEC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No. 1093/2010 and (EU) No. 648/2012, of the European Parliament and of the Council (Recovery and Resolution Directive).

4 Regulation (EU) No. 806/2014, of the European Parliament and Council of 15 July 2015, establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism and a Single Resolution Fund and amending Regulation (EU) No. 1093/2010.

5 ‘Floor clauses’ are contractual clauses that set minimum interest rates in mortgage agreements. A borrower with a mortgage with a variable interest rate and floor clause would never benefit from an interest rate that falls below the corresponding floor. Floor clauses were used extensively in Spanish consumer mortgage contracts.

6 On 9 May 2013, the Spanish Supreme Court heard a claim brought by a Spanish consumer association against three credit institutions (a bank, BBVA; a former savings bank, Caixagalicia; and a credit cooperative, Cajamar) challenging the validity of the floor clauses those entities commonly used in mortgage contracts with customers qualifying as consumers under the Spanish law on consumer protection. The Court’s decision (which was of immense importance in Spain as it was likely to affect the general validity of ‘floor clauses’) stated that, although ‘floor clauses’ are not illegal per se, they can be considered illegal if they are not drafted in a clear, understandable manner, or, even if drafted clearly and understandably, if they have nevertheless not been explained to customers in the mortgage agreement negotiation process with clarity and transparency. The Court’s decision also stated that it lacked retroactive effects, so defendants were not obliged to return money received before 9 May 2013 that was in excess of what they would have received had the ‘floor clauses’ not been included.

7 As regards credit cooperatives, certain matters and rules are also regulated at regional level.

8 Amounts obtained from Banco de España’s registry of institutions as of 6 March 2018.

9 Figures calculated on the basis of the data publicly available on the websites of the AEB (the Spanish banking association), UNACC (the Spanish national union of credit cooperatives), Caixa Pollença and Caixa Ontinyent (the only two savings banks currently in existence).

10 Royal Decree 877/2015 of 2 October (as amended by Royal Decree 536/2017), which, inter alia, develops the Savings Banks and Banking Foundations Law in connection with the reserve fund to be created by specific banking foundations; Ministerial Order ECC/2575/2015 of 30 November, establishing the content, structure and the disclosure requirements for the annual corporate governance report of certain banking foundations; National Securities Market Commission (CNMV) Circular 3/2015 of 23 June on the technical and legal specifications and information requirements for websites of listed companies and savings banks that issue securities on official secondary securities markets; and Banco de España Circular 6/2015 of 17 November to savings banks and banking foundations on specific matters pertaining to remuneration and the corporate governance reports of savings banks that do not issue securities admitted to listing on official secondary securities markets and on the obligations of specific banking foundations derived from stakes in credit institutions (collectively, the Savings Banks and Banking Foundations Developing Regulations).

11 Presentation on the status of the regulatory and financial outlook of the savings banks’ sector issued by the Spanish Confederation of Savings Banks on 26 February 2018.

12 Banco de España press release dated 20 December 2017, available at https://www.bde.es/f/webbde/GAP/Secciones/SalaPrensa/ComunicadosBCE/NotasInformativasBCE/17/presbe2017_72en.pdf.

13 Banco de España press release on the setting of the capital buffers for systemic institutions for 2018, dated 24 November 2017, available at https://www.bde.es/f/webbde/GAP/Secciones/SalaPrensa/NotasInformativas/17/presbe2017_62en.pdf.

14 Law 9/2012 of 14 November, on the framework for the restructuring and resolution of financial institutions (Law 9/2012), which was approved as a consequence of the subscription of the MOU and which was a major achievement in the Spanish regulatory landscape. The Recovery and Resolution Regulations constitute a continuation of the regime established by Law 9/2012 as they share the same principles and replicate, to a great extent, its structure and sections. This notwithstanding, the Recovery and Resolution Regulations have broadened the scope of the Spanish recovery and resolution legislation as it applies to investment firms, which were not included in the scope of Law 9/2012.

15 The Recovery and Resolution Regulations entrust powers to the relevant supervisor (Banco de España or the ECB for credit institutions, and the CNMV for investment firms), which will play a major role in the early intervention phase; the pre-emptive resolution authority (Banco de España or the CNMV, as applicable); and the executive resolution authority (the FROB).

16 The Recovery and Resolution Law foresees that the FROB may agree to the redemption or conversion of certain capital instruments, which will be done either separately from the use of any resolution tool (including internal recapitalisation) or with any of the available resolution tools (provided that the circumstances triggering the resolution process are met).

17 The excluded liabilities set forth in the Recovery and Resolution Law are those listed in Article 44.2 of the Recovery and Resolution Directive.

18 Council Regulation (EU) No. 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions and Regulation (EU) No. 468/2014 of the European Central Bank of 16 April 2014 establishing the framework for cooperation within the Single Supervisory Mechanism between the European Central Bank and national competent authorities and with national designated authorities (SSM Framework Regulation).

19 Figures obtained from the BBVA Research Banking Outlook Report as of November 2017, available at https://www.bbvaresearch.com/wp-content/uploads/2017/11/Banking_Outlook_-3Q17.pdf.