## EXECUTIVE SUMMARY ## Source details **Canonical URL:** [EXECUTIVE SUMMARY](https://www.imf.org/-/media/files/publications/cr/2024/english/1espea2024010-print-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2024/english/1espea2024010-print-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2024/english/1espea2024010-print-pdf.pdf.json) --- ### Key findings and assessments - Spanish authorities have made good progress in establishing an effective crisis management and resolution regime: support to the Single Resolution Board (SRB) for Significant Institutions (SIs), agreed resolution plans for Less Significant Institutions (LSIs), enhanced cross-authority coordination, crisis management manuals, and participation in crisis simulation exercises. - Improvements in bank resolvability, including compliance with the European Minimum Requirement for Own Funds and Eligible Liabilities (“MREL”). - Further work required to enhance operational capacity of the resolution regime; the Banco Popular resolution in 2017 highlighted the need for an adequately staffed resolution authority able to cope with fast burn cases and engage external parties at short notice. ### Legal and institutional gaps - Statutory powers require strengthening: - FROB should have the administrative resolution power to override shareholders’ rights and take control of a bank subject to a bail-in resolution without relying on special managers or corporate law powers. - The insolvency creditor hierarchy needs updating to distinguish between intra-group liabilities owned by the subsidiary in the parent company (and among subsidiaries) and those owned by the parent reflecting their investment in the subsidiary (which should be subordinated). - Consider powers for a bank liquidator to transfer deposit accounts backed by assets within national insolvency proceedings to an acquirer and allow the Fondo de Garantía de Depósitos (FGD) to contribute to financing that transfer if needed. ### Institutional recommendation for resolution functions - Authorities should integrate bank resolution authority for planning and execution in one institution so the NRA responsible for implementing orderly resolution actions controls primary levers (resolution planning and resolvability decisions). - Two broad options: - Merge FROB responsibilities for resolution implementation into BdE’s Bank Resolution Department (BRD). - Expand FROB’s statutory functions to include resolution planning and resolvability responsibilities. - During integration, reinforce full operational independence of the resolution function while maximizing synergies with BdE. ### Resolution mechanics and transparency - For bank resolution plans to be credible, statutory resolution tools need to be usable, at speed and with confidence to impose losses on banks’ creditors: - Clearly define operational procedures for imposing losses on MREL holders and other bail-inable liabilities; detail procedures in FROB operational bail-in playbooks. - Make the procedure for imposing losses transparent to the market and set out how FROB will navigate key strategic policy choices related to the design of a bail-in mechanic. - Note: Subsequent to the mission FROB published a policy on the bail-in mechanics (in December 2023). ### Liquidity in resolution - Establish a framework for addressing liquidity needs in resolution: - BdE should publish a policy framework clarifying its role as lender of last resort, including for liquidity to entities recapitalized through resolution that are viable. - Ensure ELA and liquidity in resolution lending capabilities are fully operational, including establishing a testing arrangement for lending capabilities with counterparties (e.g., on an annual basis). - BdE should coordinate closely with FROB to assess liquidity needs and available unencumbered collateral for Spanish banks in resolution. ### Crisis coordination and operational readiness - Continue to enhance cross-authority crisis coordination, formalize existing crisis management practices, and prioritize by agreeing a cross-authority crisis simulation exercise (CSE) strategy. - BdE’s BRD and FROB should ensure resources are sufficient for work not a major focus to date (resolvability assessment and bail-in execution). - FROB should have flexibility, where possible under national procurement legislation, to depart from procurement rules in a crisis to appoint external advisory support including independent valuers at short notice. ### Key statistics cited in the executive summary - Total banking assets amount to over 200 percent of the country’s GDP. - Domestic banks hold well over 90 percent of total banking sector assets. - The four largest banks (Santander, BBVA, CaixaBank, Banco de Sabadell) accounted for nearly two-thirds of total banking sector assets, as of end-2022. - Average Common Equity Tier 1 ratio is 12.6 percent (September 2023), below the European average of 15.6 percent (for SIs). - BdE Bank Resolution Department has 30 professional staff (plus two business support staff), of which 24 are focused on resolution planning and 6 on resolution policy development. ### Main recommendations—selected (priority, timing, agency) - Recommendation 1: Provide FROB with the administrative resolution power to override shareholders rights and take direct control of a bank subject to a bail-in resolution (¶18). Priority: H; Timing: I; Agency: MINECO. - Recommendation 2: Update the statutory insolvency creditor hierarchy to mitigate any legal impediments in imposing loss absorption in resolution (¶21). Priority: H; Timing: I; Agency: MINECO. - Recommendation 5: Integrate preventative resolution authority functions (i.e., BdE’s BRD) and FROB’s executive resolution functions for banks (¶30). Priority: H; Timing: I; Agency: MINECO. - Recommendation 6: Develop a failing or likely to fail (“condition 1”) assessment framework with clear prudential regulatory capital and liquidity ratio triggers (¶35). Priority: H; Timing: I; Agency: BdE. - Recommendation 12: Engage actively with industry to develop a shared approach to overcoming challenges associated with bail-in mechanics and with relevant foreign authorities as part of a process led by the SRB to facilitate transfer strategies for internationally active banks (¶54-55). Priority: H; Timing: I; Agency: FROB. - Recommendation 13: Establish an approach to addressing liquidity needs to solvent entities pre-resolution and to banks that have been recapitalized through the resolution process, publish a policy framework, ensure such lending capabilities are fully operational, establish testing arrangements and formalize an approach to assess the liquidity needs of Spanish banks in resolution (¶62-66). Priority: H; Timing: I; Agency: BdE and FROB. - Recommendation 17: Ensure resources are sufficient to conduct firm resolvability testing and bail-in implementation work that has not been a major focus to date (¶81). Priority: H; Timing: I; Agency: FROB and BdE. - Recommendation 18: Provide maximum flexibility where possible under national procurement legislation to allow FROB to depart from procurement rules in a crisis to appoint external advisors including independent valuers at speed in a crisis (¶83). Priority: H; Timing: NT; Agency: MINECO. - (Timing legend: C= Continuous; I = Immediate (within one year); NT = Near Term (1-3 years); MT = Medium Term (3-5 years). Priority legend: H = High; M = Medium; L = Low.) ### Institutional roles and specific entities - European authorities with jurisdiction: ECB, EC, SRB, ESM. - BdE: central bank, microprudential responsibilities for banks, “preventative” resolution authority (RA) for LSIs, statutory responsibility for ELA; BdE performs resolution tasks within the Single Resolution Mechanism (SRM). - SRB: responsible for resolution planning for SIs directly supervised by the ECB and all cross-border banking groups; performs oversight for LSIs. - BdE’s BRD: responsible for resolution planning for LSIs not part of a cross-border group and participates in SRB-led internal resolution teams for SIs. - FROB: sole responsibility for implementing resolution measures using national statutory powers for all Spanish banks if they fail; FROB can dedicate 23 full-time professional staff to resolution cases, up from 21 in 2017. - FGD (Fondo de Garantía de Depósitos): separate legal institution operating under private law; public mandate to provide deposit guarantees up to the limit of €100,000 per depositor and credit institution; financed by contributions from the industry; Board includes government, central bank, and industry representation. - Sareb: - Funded with equity of €4.8 billion (approximately 25 percent in share capital and 75 percent in subordinated debt). - Payment for purchased assets funded through issuance by Sareb of fixed income securities (senior debt) with the irrevocable guarantee of the Kingdom of Spain (50.781 million). - Total assets purchased had a transfer price of approximately €50 billion. - Sareb managed to reduce its portfolio by 50 percent; the business plan has achieved €25 billion reduction in assets over the last 10 years; Sareb reports negative equity of €14 billion equal to approximately 3 percent of GDP as of its 2022 audited accounts. - Sareb manages a €1 billion social housing portfolio; primary objective to complete winddown by 2027. ### Creditor hierarchy, bank liquidation and deposit continuity - Spanish insolvency creditor hierarchy subordinates intra-group liabilities in a way that may undermine bail-in use; legislation does not distinguish between intra-group liabilities reflecting cash held at a parent bank and those reflecting parent investment in the subsidiary. - Judicial liquidation can delay recoupment of funds used by FGD to pay insured depositors; vesting the bank liquidator with power to transfer deposit accounts backed by assets would improve depositor continuity and speed. - Recommended modified bank insolvency procedure should enable liquidators to transfer deposit accounts backed by assets, allow FGD to “top-up” shortfalls subject to least cost tests, and permit authority-proposed liquidator appointment. ### Resolution execution, bail-in mechanics, and cross-border coordination - FROB must ensure bail-in and transfer tools are operational and can be applied quickly; publish and road-test bail-in mechanics with industry. - FROB should specify processes for identification of eligible securities, suspension of trading, suspension of shareholder rights, write down/cancellation procedures, and lifting suspensions. - Engage with foreign authorities and SRB to facilitate transfer strategies and secure accelerated change in control approvals for internationally active banks. ### Liquidity in resolution: BdE, ELA, and FGD capacity and constraints - BdE findings and recommendations: - BdE can provide ELA to a solvent institution facing temporary liquidity problems; BdE has an ELA manual and capacity to value some loan collateral at scale using statistical valuation models. - Recommend BdE publish a policy framework clarifying its lender of last resort role for solvent entities pre-resolution and for recapitalized banks, define collateral and haircut methodologies, and regularly test ELA/lending arrangements (e.g., on an annual basis). - BdE should formalize approach with BRD and FROB to assess liquidity needs and available unencumbered collateral. - FGD key statistics and constraints: - The FGD guarantees deposits of €884 billion and has 144 member financial institutions. - The 0.8. percent of covered deposits target in Spain meets the minimum harmonized EU target. DGF ex ante funds currently exceed this by €8.1 billion (fourth quarter, 2023). - FGD can raise an additional ex-post levy from industry up to a maximum of 0.5 percent of covered deposits annually. - Since 2019, FGD maintains an additional funding capacity by means of a commercial loan facility agreement, currently subscribed with 10 credit institutions for amount to an additional €5 billion of financial capacity or 0.52 percent of covered deposits. - FGD is limited from contributing to recapitalization costs under Spanish law when resolution is triggered; it can only contribute to the cost of loss absorption and its capacity is constrained by the least cost rule, eligible depositor preference, and the 50 percent cap of the target level of the FGD (0.4 covered deposits). - Recommendations for FGD and MINECO: - Use the flexibility within the EU legal framework to facilitate FGD’s ability to finance resolution; consider amendments to national implementing legislation of the BRRD and DGSD to maximize FGD flexibility. - Provide FGD flexibility to enter loss-sharing arrangements with acquirers subject to least cost safeguards, valuation analysis, no creditor worse-off than liquidation principle, and relevant caps. - FROB should codify and publicly set out its flexibility to use FGD funds and develop a pre-defined approach to calculate FGD contributions to resolution costs. ### Financial crisis preparedness, coordination, and CSEs - National crisis management framework (CMF) recommended to ensure readiness for testing resolvability capabilities, executive powers and backstop liquidity provision; formalize National Handbooks and Operational Steps Documents and subject them to regular CSEs. - CSE design and objectives: - Learning-focused simulations to raise awareness and improve knowledge of crisis organization. - Testing-focused simulations to probe operational preparedness with elements of surprise. - Recommendations: - BdE, FROB and FGD should formalize crisis management practices and agree a cross-authority CSE strategy. - Each authority should be supported by an operational manual reflective of their crisis roles and responsibilities. - Regular intra- and inter-authority simulation exercises with senior policymakers and relevant home and host authorities are advisable. ### Resourcing and operational readiness - RAs require significant staffing and the capacity to scale in a crisis; BdE’s BRD staffing increased from 26 to 33 since 2017; FROB increased full-time professional staff dedicated to resolution to 23, up from 21 in 2017. - Comparative staffing context: RA staffing levels in jurisdictions with a financial sector of a similar proportion of GDP as Spain range from 30 to 100 permanent staff working on resolution policy, resolution planning and resolution implementation. - Procurement flexibility recommendation: MINECO should provide FROB the maximum flexibility within national procurement legislation to depart from procurement rules in crisis scenarios to appoint external advisers quickly; such flexibility should be limited to crisis scenarios. *Source: EXECUTIVE SUMMARY, Spain: Financial Safety Net and Crisis Management (FSAP technical note).* ### EXECUTIVE SUMMARY __________________________________________________________________________ 5 ### EXECUTIVE SUMMARY ### Key findings and assessments - Spanish authorities have made good progress in establishing an effective crisis management and resolution regime: support to the Single Resolution Board (SRB) for Significant Institutions (SIs), agreed resolution plans for Less Significant Institutions (LSIs), enhanced cross-authority coordination, crisis management manuals, and participation in crisis simulation exercises. - Improvements in bank resolvability, including compliance with the European Minimum Requirement for Own Funds and Eligible Liabilities (“MREL”). - Further work required to enhance operational capacity of the resolution regime; the Banco Popular resolution in 2017 highlighted the need for an adequately staffed resolution authority able to cope with fast burn cases and engage external parties at short notice. ### Legal and institutional gaps - Statutory powers require strengthening: - FROB should have the administrative resolution power to override shareholders’ rights and take control of a bank subject to a bail-in resolution without relying on special managers or corporate law powers. - The insolvency creditor hierarchy needs updating to distinguish between intra-group liabilities owned by the subsidiary in the parent company (and among subsidiaries) and those owned by the parent reflecting their investment in the subsidiary (which should be subordinated). - Consider powers for a bank liquidator to transfer deposit accounts backed by assets within national insolvency proceedings to an acquirer and allow the Fondo de Garantía de Depósitos (FGD) to contribute to financing that transfer if needed. ### Institutional recommendation for resolution functions - Authorities should integrate bank resolution authority for planning and execution in one institution to ensure the NRA responsible for implementing orderly resolution actions controls primary levers (resolution planning and resolvability decisions). - Two broad options: 1) merge FROB responsibilities for resolution implementation into BdE’s Bank Resolution Department (BRD); or 2) expand FROB’s statutory functions to include resolution planning and resolvability responsibilities. - During integration, reinforce full operational independence of the resolution function while maximizing synergies with BdE. ### Resolution mechanics and transparency - For bank resolution plans to be credible, statutory resolution tools need to be usable, at speed and with confidence to impose losses on banks’ creditors: - Clearly define operational procedures for imposing losses on MREL holders and other bail-inable liabilities. - Detail procedures in FROB operational bail-in playbooks. - Make the procedure for imposing losses transparent to the market. - In designing bail-in mechanics, FROB should set out how it will navigate key strategic policy choices related to design of a bail-in mechanic. - Note: Subsequent to the mission FROB published a policy on the bail-in mechanics (in December 2023). ### Liquidity in resolution - Establish a framework for addressing liquidity needs in resolution: - BdE should publish a policy framework clarifying its role as lender of last resort, including for liquidity to entities recapitalized through resolution that are viable. - Ensure ELA and liquidity in resolution lending capabilities are fully operational, including establishing a testing arrangement for lending capabilities with counterparties (e.g., on an annual basis). - BdE should coordinate closely with FROB to assess liquidity needs and available unencumbered collateral for Spanish banks in resolution. ### Crisis coordination and operational readiness - Continue to enhance cross-authority crisis coordination, formalize existing crisis management practices, and prioritize by agreeing a cross-authority crisis simulation exercise (CSE) strategy. - BdE’s BRD and FROB should ensure resources are sufficient for work not a major focus to date (resolvability assessment and bail-in execution). - FROB should have flexibility, where possible under national procurement legislation, to depart from procurement rules in a crisis to appoint external advisory support including independent valuers at short notice. --- ### Key statistics cited in the executive summary - Total banking assets amount to over 200 percent of the country’s GDP. - Domestic banks hold well over 90 percent of total banking sector assets. - The four largest banks (Santander, BBVA, CaixaBank, Banco de Sabadell) accounted for nearly two-thirds of total banking sector assets, as of end-2022. - Average Common Equity Tier 1 ratio is 12.6 percent (September 2023), below the European average of 15.6 percent (for SIs). - BdE Bank Resolution Department has 30 professional staff (plus two business support staff), of which 24 are focused on resolution planning and 6 on resolution policy development. ### Institutional roles (excerpt) - European authorities with jurisdiction: ECB, EC, SRB, ESM. - BdE: central bank, microprudential responsibilities for banks, “preventative” resolution authority (RA) for LSIs, statutory responsibility for ELA; BdE performs resolution tasks within the Single Resolution Mechanism (SRM). - SRB: responsible for resolution planning for SIs directly supervised by the ECB and all cross-border banking groups; performs oversight for LSIs. - BdE’s BRD: responsible for resolution planning for LSIs not part of a cross-border group and participates in SRB-led internal resolution teams for SIs. - LSI licensing and sanctioning are performed by the ECB directly. --- ### MAIN RECOMMENDATIONS—THE FINANCIAL SAFETY NET AND CRISIS MANAGEMENT (TABLE 1, SELECTED) - Recommendation 1: Provide FROB with the administrative resolution power to override shareholders rights and take direct control of a bank subject to a bail-in resolution (¶18). - Priority: H - Timing: I - Agency: MINECO - Recommendation 2: Update the statutory insolvency creditor hierarchy to mitigate any legal impediments in imposing loss absorption in resolution (¶21). - Priority: H - Timing: I - Agency: MINECO - Recommendation 3: Enable liquidators to transfer deposit accounts backed by assets within the national insolvency proceeding to an acquirer and for the authorities (i.e., FGD, FROB) to provide the liquidator for the court to appoint or to be appointed as liquidator (¶23). - Priority: M - Timing: MT - Agency: MINECO - Recommendation 4: Provide backstop temporary public ownership resolution tool for the Government as a last resort option where all other resolution actions have failed (¶25). - Priority: M - Timing: NT - Agency: MINECO - Recommendation 5: Integrate preventative resolution authority functions (i.e., BdE’s BRD) and FROB’s executive resolution functions for banks (¶30). - Priority: H - Timing: I - Agency: MINECO - Recommendation 6: Develop a failing or likely to fail (“condition 1”) assessment framework with clear prudential regulatory capital and liquidity ratio triggers for when the assessment should be conducted (¶35). - Priority: H - Timing: I - Agency: BdE - Recommendation 7: Develop an agreed assessment methodology for firms’ recovery actions based on which the FROB should request advice on condition 2 (¶36). - Priority: H - Timing: I - Agency: FROB - Recommendation 8: Continue to monitor LSIs' progress to becoming fully resolvable by 2025, further develop the approach to identifying and removing impediments to resolution, and develop and publish a resolvability scoring framework for reviewing Spanish LSIs’ self-assessment reports (¶42). - Priority: H - Timing: NT - Agency: BdE - Recommendation 9: Design a policy framework that describes the range of actions to be taken by each authority when a firm no longer meets the MREL requirements (¶43). - Priority: H - Timing: I - Agency: FROB and BdE - Recommendation 10: Enhance the transparency of the Spanish resolution framework by publishing policy documents and encourage firms to publicly disclose non-confidential parts of their resolvability self-assessments (¶46). - Priority: H - Timing: C - Agency: BdE - Recommendation 11: Authorize DGSFP to set binding recovery planning requirements for insurers (¶50). - Priority: L - Timing: I - Agency: MINECO - Recommendation 12: Engage actively with industry to develop a shared approach to overcoming challenges associated with bail-in mechanics and with relevant foreign authorities as part of a process led by the SRB to facilitate transfer strategies for internationally active banks (¶54-55). - Priority: H - Timing: I - Agency: FROB - Recommendation 13: Establish an approach to addressing liquidity needs to solvent entities pre-resolution and to banks that have been recapitalized through the resolution process, publish a policy framework, ensure such lending capabilities are fully operational, establish testing arrangements and formalize an approach to assess the liquidity needs of Spanish banks in resolution (¶62-66). - Priority: H - Timing: I - Agency: BdE and FROB - Recommendation 14: Use the flexibility afforded within the EU legal framework to facilitate FGD’s ability to finance resolution (¶69). - Priority: H - Timing: NT - Agency: MINECO and FGD - Recommendation 15: Establish a national crisis management framework (CMF) for bank failure and ensure a coordinated approach to a firm’s crisis preparedness across prudential, resolution and market operations (¶72-73). - Priority: M - Timing: NT - Agency: FROB, BdE and FGD - Recommendation 16: Formalize existing crisis management practices and prioritize, by agreeing a cross-authority (BdE, FROB, FGD) Crisis Simulation Exercise (CSE) strategy (¶77). - Priority: M - Timing: NT - Agency: FROB and BdE, FGD - Recommendation 17: Ensure resources are sufficient to conduct firm resolvability testing and bail-in implementation work that has not been a major focus to date (¶81). - Priority: H - Timing: I - Agency: FROB and BdE - Recommendation 18: Provide maximum flexibility where possible under national procurement legislation to allow FROB to depart from procurement rules in a crisis to appoint external advisors including independent valuers at speed in a crisis (¶83). - Priority: H - Timing: NT - Agency: MINECO (Timing legend: C= Continuous; I = Immediate (within one year); NT = Near Term (1-3 years); MT = Medium Term (3-5 years). Priority legend: H = High; M = Medium; L = Low.) --- ### Background and scope (concise) - The FSN comprises: (1) early intervention, including recovery planning; (2) resolution actions, including bank resolution planning and resolvability assessments; (3) central bank emergency liquidity assistance and liquidity in resolution; and (4) deposit protection. - This note focuses on the financial safety net and crisis management framework for banks in Spain and on national aspects and operational readiness: operationalization of the Spanish resolution regime, the ELA framework, depositor compensation by the FGD and review of recovery and resolution plans for LSIs. - The note is informed by international standards—the Financial Stability Board (FSB) Key Attributes of Effective Resolution Regimes for Financial Institutions and the International Association of Deposit Insurers (IADI) Core Principles for Effective Deposit Insurance Systems—but does not assess compliance with them. --- *Source: EXECUTIVE SUMMARY, Spain: Financial Safety Net and Crisis Management (FSAP technical note).* ### 7. FROB is the NRA responsible for implementing resolution or so-called “execution” RA. ### 7. FROB is the NRA responsible for implementing resolution or so-called “execution” RA. ### FROB: mandate, resourcing, and role - FROB has sole responsibility for implementing resolution measures using national statutory powers for all Spanish banks if they fail, regardless of whether they are classified as SIs or LSIs. - FROB is a member of the SRM’s internal resolution teams and is responsible for implementation of resolution decisions taken by the SRB in relation to SIs and cross-border groups. - For LSIs, FROB not only executes but also takes all the resolution decisions. - At international level, FROB is the contact point and coordinator with international authorities. - FROB activities are funded through levies on firms. - FROB has the capacity to dedicate 23 full-time professional staff to resolution cases, up from 21 in 2017. - Annex I (referenced in the source) lists Spanish SIs and LSIs with a resolution plan involving the use of resolution tools. ### FGD (Fondo de Garantía de Depósitos) - FGD is a separate legal institution, established by law, with its own legal personality, operating under private law. - Public mandate: provision of deposit guarantees up to the limit of €100,000 per depositor and credit institution. - Governance: FGD has a Board with representation from the government, the central bank, and the industry. - Membership and funding: All deposit-taking institutions must be a member of the FGD; the FGD fund is financed by contributions from the industry. - Insolvency role: Banks whose failure would not satisfy the resolution conditions are placed into a court-based insolvency procedure; in a bank insolvency, the FGD pays out eligible depositors up to the statutory limit of €100,000. - Executive Commission composition: chaired by the BdE Governor and includes the BdE Deputy Governor and two elected members of the BdE Governing Council (BdE Governing Council composition described in the source). - Legal name note: As from Law 11/2015, FROB is no longer an acronym of "Fondo de Reestructuración Ordenada Bancaria", but rather the legal name (see art. 1 of Law 11/2015). ### Sareb: purpose, structure, and recent developments - Creation and purpose: - Sareb was created in 2012 to manage nonperforming assets purchased from Spanish bank portfolios following the global financial crisis. - Primary business objective: maximise cashflows from its assets and complete its winddown by 2027. - Initial ownership and funding: - Funded with equity of €4.8 billion (approximately 25 percent in share capital and 75 percent in subordinated debt). - Public institutions (FROB) retained 45 percent of Sareb’s equity and subordinated debt; the remaining 55 percent was subscribed by private investors. - Payment for purchased assets funded through issuance by Sareb of fixed income securities (senior debt) with the irrevocable guarantee of the Kingdom of Spain (50.781 million). - Total assets purchased had a transfer price of approximately €50 billion. - Portfolio reduction: Since establishment, Sareb has managed to reduce its portfolio by 50 percent. - Key developments since the 2017 FSAP: 1. Sareb now operates with negative equity: At the end of 2020, Sareb reported own funds as negative and forecast that this could continue until the end of its business plan. As of its 2022 audited accounts, Sareb has negative equity of €14 billion equal to approximately 3 percent of GDP. Spanish legislation was changed to allow Sareb to continue operating. 2. Change from a private to a public company: Following a decision by the EC to classify Sareb debt as Spanish public debt in 2021, the government took a controlling stake in Sareb. 3. Business plan performance: The business plan has achieved €25 billion reduction in assets over the last 10 years, leaving roughly the same volume of sales to be achieved in the remaining 4 years. Sareb believes their pricing strategy leveraged upon an enhanced segmentation of its portfolio, will enable them to meet their 2027 deadline for completing the winddown. 4. New social housing objective: Sareb manages a €1 billion social housing portfolio with an objective to provide affordable rental solutions for vulnerable families. - Oversight: BdE’s Directorate General Banking Supervision reviews on an annual basis Sareb’s business plan; BdE monitors evolution of Sareb’s financial situation, asset management controls, and valuation and impairment evolution. ### MINECO and CNMV roles - MINECO (Ministry of Economy, Trade and Enterprise): - Responsible for government policy on economic matters, including legislation for the financial system and use of public funds during a crisis. - FROB must notify MINECO if the first two conditions for resolution have been met (i.e., a firm is ‘failing or likely to fail’ and it is not reasonably likely that action can, or will, be taken to change this). - FROB needs MINECO approval for implementing resolution measures that have a direct fiscal impact or systemic implications. - For decisions affecting the general state budget or management by FROB of its investment portfolio, the Governing Committee of FROB shall decide in a smaller composition including the Chairman and representatives of MINECO and the Ministry of Finance. - MINECO has no statutory role in providing backstop solvency or liquidity support in a system-wide financial crisis where use of resolution tools has been unsuccessful. - The Government is the sole gateway to the EC regarding all state aid cases. - CNMV: - Responsible for supervision of the Spanish securities markets, ensuring transparency and correct price formation, and protection of investors. - CNMV is responsible for resolution planning for investment firms and is the designated RA for CCPs. ### Progress since the 2017 FSAP - On bank resolvability: - A preferred resolution strategy has been set for all Spanish SIs and LSIs judged by BdE’s BRD as likely to enter resolution on failure. - These banks are subject to BRRD minimum requirement for MREL. BdE has communicated MREL-related requirements at a national level to all credit institutions under its scope, addressing institutional protection schemes (IPS). - BdE’s BRD has recommended that LSIs comply with the EBA guidelines for institutions on improving resolvability. - On cross-authority coordination: - Memoranda of understanding (MoUs) signed among BdE’s Directorate General Banking Supervision, BdE’s BRD, FROB, and CNMV to enhance cooperation for resolution planning and vulnerable banks. - BdE internal circular establishes procedures and exchange of information between resolution and supervision functions in BdE. - Two collaboration committees set up—one with BdE and FROB and the other with CNMV and FROB—to support information exchange on supervisory action and resolution planning and cooperation in responding to banks and investment firms in stress. - On financial crisis preparedness and management capabilities: - Authorities have developed internal crisis preparedness, crisis handbooks, and operational steps documents for resolution execution. - FROB participated in the SRB’s host crisis simulation exercise (CSE) based on an SI failure and organized an LSI-focused CSE to test internal capabilities. - BdE and FROB participated in SI-focused and LSI-focused CSEs with European authorities. ### Recent crisis experience: Banco Popular (2017) - Bank profile and failure timeline: - Banco Popular was predominately a domestic bank focused on SME lending; main problems originated in the real estate portfolio. - It was Spain's sixth largest bank with total assets of around €160 billion. - On the evening of June 6, 2017, the ECB and the SRB determined that Banco Popular was non-viable and triggered resolution after a severe liquidity crisis in preceding weeks. - On June 7, 2017, the SRB took a resolution decision and instructed FROB to implement the ‘sale of business tool’, accepting an offer by Banco Santander, preceded by ancillary write-down and conversion into shares of AT1 and Tier 2 capital instruments. - Lessons and implications: - Banco Popular highlighted the challenge of liquidity-driven failures and the importance of RAs acting quickly; such cases can meet conditions for entry into resolution before the “resolution weekend”. - If private sector purchasers are less willing to acquire failed bank liabilities, operational challenges increase; a temporary bridge bank may be needed to enable onward partial property transfer. - The case underscored the need for RAs to have adequate expertise and capacity to engage external parties at short notice, and for banks to have operational capacity to provide information needed for rapid resolution action. - Close collaboration between BdE’s Bank Resolution Department and FROB is paramount to test reporting capabilities; continued efforts needed to establish effective coordination among authorities. - Authorities should consider loss sharing arrangements to facilitate share transfer resolution strategies (as discussed in para 69 of the source). ### Framework for bank failure and resolution tools - Statutory alignment: - Spanish statutory bank resolution toolkit aligns with the global framework for institutions that could be systemic in failure. - BRRD implemented in Spain; SRM sets out BdE preventative and FROB execution resolution powers and tools and the SRB/NRAs coordination framework. - FROB resolution tools (Box 2): 1. Bail-in: Write-down or conversion of liabilities (bail-in): the nominal value of liabilities may be both written down entirely or in part, or converted into regulatory capital instruments. 2. Sale of business: the institution’s shares or assets and liabilities are transferred entirely or in part to another institution or third party. 3. Bridge institution: the institution’s assets and liabilities, or its shares, are transferred (in part or as a whole) to a bridge institution established by the RA and under the authority’s control. 4. Asset management vehicle: part of the institution’s assets and liabilities are transferred to a separate asset management vehicle in connection with the use of one of the previously mentioned tools. - Usage rules: - These four resolution tools can be used in combination or separately (with the exception that the asset management vehicle must always be used in combination with another tool in the EU regime). ### Overriding shareholder rights: limitations and timeline - Legal limitation: - FROB faces significant limitations in its capacity to override shareholder rights in resolution. - FROB can appoint a special manager or seek direct control only by exercising corporate law powers to override shareholder rights; powers of the special manager correspond to those of the board or general shareholders meeting as necessary in relation to resolution tools. - Operational constraint: - Appointing a special manager can take significant time and prove destabilizing while the bank remains open. - FROB estimates it would take at least two weeks to appoint a special manager in a way consistent with FROB’s obligations under procurement legislation—likely inconsistent with a fast burn failure scenario. - Even if time allowed, qualified candidates may not be available and may have conflicts of interest. - Conditional direct control: - FROB may rely on company law procedures to override shareholder powers but can only take direct control of powers corresponding to the shareholders meeting or assembly under certain circumstances: (i) if it is not possible to meet legal conditions for valid convening/adoption of decisions by the general meeting or assembly; or (ii) if the new general shareholders meeting or assembly in resolution rejects or obstructs FROB’s proposed decisions necessary to implement the resolution. ### Creditor hierarchy and bail-in considerations - Spanish insolvency creditor hierarchy: - Spanish insolvency creditor hierarchy subordinates intra-group liabilities, which may undermine use of the bail-in tool. - Legislation does not distinguish between intra-group liabilities reflecting cash held at a parent bank and those reflecting parent investment in the subsidiary; as a result, all intra-group liabilities currently rank, among subordinated liabilities, just above between tier 2 regulatory capital instruments and senior non preferred debt. - Practical impact: - For some Spanish banks with resolution plans, intra-group liabilities can be material relative to MREL eligible liabilities. - Bail-in of intra-group liabilities consistent with current creditor hierarchy could undermine orderly resolution by spreading contagion within the group contrary to the preferred resolution strategy. - Reliance on bail-in exclusion powers may be possible but could create “no creditor worse-off than liquidation” compensation risks by making losses on other creditors greater than under insolvency counterfactual valuation. - Current treatment of intra-group liabilities in Spanish law could represent a significant barrier to orderly implementation of a bail-in resolution strategy. ### Recommendations (selected) - Legislative change to FROB’s powers: - MINECO should take the next legislative opportunity to give FROB administrative resolution powers to override shareholder rights directly and implement resolution. - Such powers should not require FROB to appoint a special manager or demonstrate “reasons of special urgency” or wait for the general meeting or assembly to reject or obstruct FROB’s proposals. - National legislation should ensure that FROB can assume the powers of the shareholders as a matter of primary resolution legislation, without any further requirements under corporate law. - There should be no requirement for involvement of shareholder approval, annual general meetings or administrative processes and procedures. *Source: SPAIN INTERNATIONAL MONETARY FUND.* ### 21. MINECO should update the corporate insolvency creditor hierarchy to remove the ### 21. MINECO should update the corporate insolvency creditor hierarchy to remove the statutory creditor hierarchy subordination of some intra-group liabilities ### Corporate insolvency creditor hierarchy - Recommendation: Remove statutory creditor hierarchy subordination of some intra-group liabilities. - Proposed distinction: - Intragroup liabilities owed by the subsidiary to the parent company (and among subsidiaries) should rank in accordance with their ordinary insolvency ranking in line with the nature of the liability (usually senior liabilities). - Intragroup liabilities owned by the parent reflecting their investment in the subsidiary should remain subordinated. ### Bank Liquidation and deposit continuity - Context: - Insolvency proceeding in Spain is a judicial process governed by Royal Legislative Decree 1/2020, of May 5 (“Insolvency Proceeding”). - Credit institutions that enter an insolvency proceeding are subject to the ordinary insolvency legislation applicable for natural and legal persons, with assets liquidated by a court appointed liquidator. - Findings: - Judicial liquidation can delay recoupment of funds used by the FGD to pay insured depositors at the beginning of the process. - Vesting the bank liquidator with the power to transfer deposit accounts backed by assets of the failed bank would deliver better continuity of services for depositors than provided by an FGD payout. - Such a transfer would significantly increase the speed of the liquidation process. - The FGD could “top-up” if there were insufficient good assets to back the transfer of deposit liabilities. ### Recommendations on modified bank insolvency procedure (paragraphs 23) - Legislative change at next opportunity to establish a modified bank insolvency procedure that: - Enables liquidators to transfer deposit accounts backed by assets to an acquirer. - Makes rapid repayment of depositors a priority objective of the liquidator. - Provides a bank liquidator with an effective sale-of-business tool whereby depositors backed by good assets can be transferred out of liquidation when sold to an acquirer. - Allows FGD funds to “top up” any shortfall in net assets available to back a deposit book transfer subject to an appropriate least cost test. - Requires the court to appoint the liquidator proposed by the authorities or permits the authority to appoint the liquidator themselves; where a liquidator is proposed, that person must be a bank insolvency practitioner monitored by FROB or FGD. - Requires the liquidator to work with the FGD to ensure an effective transfer of depositors and facilitate continuity of depositor services (which may incur costs, e.g., to maintain continuity of IT services). - Maintains the liquidator’s ordinary liquidation objectives to protect the interests of creditors and maximize recoveries, other than the specified modifications. ### Backstop public support options (paragraphs 24–25) - Current status and constraints: - Spain did not implement the BRRD government stabilization powers into national legislation. - Use of government stabilization powers under BRRD would require that losses related to a bank in resolution be absorbed by its shareholders and creditors equivalent to 8 percent of the liabilities of the bank under resolution. - Spanish banks currently earmarked for resolution have sufficient resources to comply with full MREL loss-absorbency requirements. - Banks not expected to be resolved—but rather liquidated—are not required to meet MREL requirements and under certain circumstances may need to be resolved rather than liquidated to preserve financial stability. - The 2018 Euro area FSAP recommended a financial stability exemption from the 8 percent bail-in requirements where bail-in of all MREL liabilities would fail to stabilize the bank or would trigger a system-wide crisis. - Recommendation: - The Government should exercise its flexibility under the BRRD to transpose the government stabilization tools so these are available to MINECO. - These powers should only be exercised as a last resort when bail-in of a failing bank’s own funds and other liabilities is insufficient to return it to solvency and preserve financial stability more widely. - If European legislation were revised to allow an exemption from the 8 percent bail-in requirement, Spanish legislation should be amended accordingly. ### Institutional Arrangements (paragraphs 26–32) - Principle: - FSB Key Attributes: jurisdictions should designate an administrative authority or authorities responsible for exercising resolution powers. - Institutional models (examples provided in source): - RA co-located with supervisory authority, separate from the central bank. - RA co-located with supervisory authority within the central bank. - RA institutionally separate from both central bank and supervisor (e.g., expanded deposit insurance agency). - Hybrid model: more than one authority designated as RA or retaining resolution-related functions (example includes Spain). - Governance requirements to ensure operational independence of the RA: - Adequate staffing, leadership of the same seniority, separate reporting lines, allocation of decision-making responsibilities. - Manage conflicts between prudential supervisory objectives and RA objectives. - Potential conflicts identified: - In crisis, risk of regulatory forbearance or disagreement on whether conditions for resolution are met. - In peacetime, RA directions to remove impediments to resolvability may have high cost and prudential implications for the firm. - Setting minimum loss absorbency requirements may have prudential implications (e.g., disincentivizing cheaper funding sources). - Specific notes: - Potential conflicts between banking supervision and FROB’s function of managing legacy holdings may lessen as holdings are unwound. - MINECO plans to carry out a review of the resolution institutional arrangements by the end of 2024. - Recommendation (paragraph 30): - MINECO should take the next legislative opportunity to integrate preventative RA functions at the BdE’s BRD and FROB’s execution resolution functions into one institution to: - Ensure the authority implementing orderly resolution actions has control over resolution planning and resolvability decisions. - Align incentives and bring resolution-planning expertise to execution. - Two broad integration options: - Merge FROB resolution execution functions into BdE’s Bank Resolution Department. - Expand FROB’s statutory functions to include preventative resolution functions. - In either case, ensure sufficient staff and dedicated governance arrangements. - Governance adjustments if integration involves FROB (paragraph 31): - Review decision-making role of other authorities in FROB executive governance to avoid conflicts of interest. - BdE representative should have an advisory rather than decision-making role in FROB resolution decision-making bodies. - FROB resources for resolution planning must be equal to or greater than those currently within BdE’s BRD. - Careful consideration needed on how FROB will leverage BdE supervisory and other data. - BdE internal governance (paragraph 32): - Whether or not integration occurs, BdE should enhance governance arrangements for resolution: - Consider having prudential supervision and resolution business areas report to different Deputy Governors. - Alternatively, provide the Director General for resolution with a vote on the BdE Executive Commission on matters related to preventative resolution. - Integrating FROB into BdE BRD may assist with appointment of external advisors given procurement rule differences. - If functions remain separate, BdE should enhance the operational independence of BRD to manage conflicts of interest. ### Entry Into Resolution (paragraphs 33–36) - Three distinct conditions required to take a bank into resolution: - Condition 1: BdE’s Directorate General Banking Supervision declares a bank to be failing or likely to fail for a less significant institution, after consulting FROB and BdE’s BRD. - Condition 2: FROB decides, with support of BdE’s Directorate General for Banking Supervision, whether the firm can take private action to recover and avoid failure. - Condition 3: FROB assesses whether resolution is in the public interest. - Process notes: - If all three conditions are met, FROB prepares and adopts a resolution scheme including specific resolution measures. - FROB is expected to issue an economic report (art 51(2) Ley 11/2015) to MINECO and the Ministry of Finance in case of impact on the state budget and must seek MINECO approval if the resolution “action has an impact on the state budget.” - Finding: - BdE’s Directorate General Banking Supervision does not have an established internal methodology or triggers to inform its judgement about when to conduct a condition 1 assessment for a firm experiencing stress. - Existing procedures reference EBA guidance and SREP indicators but lack an explicit trigger framework or methodology describing when condition 1 assessments will be conducted. - Risk: condition 1 may be judged met only after deterioration has progressed, making orderly resolution more difficult. - Recommendations: - BdE’s Directorate General Banking Supervision should define clear regulatory capital and liquidity ratio triggers to determine when a condition 1 assessment should be conducted. - Current practice: BdE notifies RAs if a bank has a SREP score of 3 or 4 and if it breaches one of a set of key indicators, but frameworks do not explicitly address when to assess condition 1. - Appropriate triggers could be similar to quantitative metrics in supervisory SREP scoring, triggers for reporting to the SSM (which include breaches of Pillar 1, 2, or leverage requirements), or bank recovery planning. - The framework should be developed in consultation with FROB and inform FROB’s statutory powers to request an assessment of FOLTF. - Triggers should be part of regular reporting for firms on the BdE supervision watchlist and be sufficiently early to allow recovery actions and contingency planning, and preserve structural separation between BdE’s Directorate General Banking Supervision and FROB. - The FROB should develop an agreed assessment methodology for firms’ recovery actions, based on which FROB should request advice on condition 2. - BdE should ensure it has required data to inform the condition 2 assessment methodology or that firms can provide it promptly. ### Preparing for future bank failure (paragraphs 37–39) - Recovery plans: - Supervisors (BdE for LSIs and the ECB for SIs) review recovery plans to assess potential to maintain or restore institution viability. - BdE’s Directorate General Banking Supervision submits recovery plans to the RAs (BdE’s BRD and FROB) for assessment of potential impediments to resolvability. - Bank resolution planning and resolvability requirements: - BdE and the SRB have made progress on resolution plans for Spanish SIs and LSIs judged by BdE’s BRD as likely to meet the public interest test and enter resolution on failure. - BdE has drafted and adopted resolution plans for all LSIs, including credit cooperatives. - Entities under BdE remit: - 51 entities subjected to simplified obligations. - 6 entities with full obligations. - During the resolution planning cycle 2024, BdE will update resolution plans for 30 LSIs (25 simplified obligations and 5 full obligations). - Cooperative sector consolidation: creation in March 2018 of an IPS. - For entities assessed as likely to enter resolution on failure, BdE’s BRD default preferred resolution tool is the sale-of-business (i.e., share or partial property transfer resolution). - BdE’s BRD has developed a public interest assessment (PIA) framework for LSIs to determine which LSIs should have resolution plans and MREL requirements; this builds on SRB guidance for SIs and gathers bespoke information from Spanish LSIs. - Where an LSI is determined to have public interest or resolution is the best way to achieve resolution objectives, a resolution strategy is established requiring firm-specific MREL requirements. - BdE’s BRD has set an MREL requirement for all Spanish LSIs with a resolution plan and they all comply with their minimum MREL requirements. - Most Spanish LSIs rely on CET1 resources to comply with their MREL requirements. - BdE has communicated bilaterally one piece of additional MREL-related requirements at a national level to address how IPS should be treated. *Source: 1espea2024010-print-pdf* ### 40. The BdE has not published any domestic-level guidance on non-MREL resolvability ### The BdE has not published any domestic-level guidance on non-MREL resolvability ### Resolvability expectations for LSIs - BdE applies the SRB Resolution Planning Manual and to draw up the LSI resolution plans. - BdE’s BRD has recommended LSIs to comply with the EBA’s guidelines for institutions on improving resolvability and expects them to comply with the SRB’s “Expectations for Banks” (by 2025, rather than 2023 for SIs). - The BdE’s BRD has communicated an expectation to Spanish firms that they must provide a self-assessment report on their level of compliance with these resolvability expectations. - BdE has not yet formally identified any substantive impediments to LSIs’ resolvability to date. ### Risks, public interest assessment, and systemic considerations - Recent international experiences show that banks deemed non-systemic a priori can become systemic in a crisis, implying preferred resolution strategies may not be feasible. - To assess public interest when defining which LSIs are within the scope of resolution, BdE’s BRD considers: - bank-specific data; - the regional implication of LSI liquidation by developing an understanding of alternative service providers in each region; - the implications for regional economies of LSI liquidation by assessing the extent to which the bank’s counterparties are multi-banked or solely dependent on the LSI; - the credibility and feasibility of LSI resolution strategies taking into account the institution FOLTF in a theoretical scenario of systemic crisis (system wide events). ### Compliance challenges and timeline - LSIs are expected to comply with SRB and EBA resolvability expectations by 2025. - SRB and EBA resolvability expectations were finalized in 2020 and 2022 respectively, which may make it challenging for firms to develop required capabilities before the compliance deadline. - Many resolvability requirements will be novel to banks and may require additional input or guidance from BdE’s BRD where European-level policy lacks sufficient detail. - BdE currently conducts frequent bilateral calls, meetings and workshops for LSIs; as firms submit self-assessment reports, BdE’s BRD will face the challenge of assessing diverse, detailed firm-specific approaches against often high-level policy expectations. - The text refers to a 2024 compliance deadline in relation to ensuring comparable levels of resolvability ahead of that date. ### Recommendations on resolvability assessment and MREL policy - BdE’s BRD should: - Continue to monitor LSIs' progress to becoming fully resolvable by 2025. - Further develop its approach to identifying and removing impediments to resolution. - Develop and publish a resolvability scoring framework for reviewing Spanish LSIs’ self-assessment reports to support consistent feedback and ensure LSIs deliver a comparable level of resolvability ahead of the 2024 compliance deadline. - Use the scoring/evaluation framework to prioritize BdE’s BRD verification of firm-specific capabilities and their on-going maintenance. - Consider coordination on a Banking Union scoring framework, since other NRAs will face similar evaluation challenges. - Identified issues in LSI self-assessment reports should be addressed as part of the resolution planning work plan with the bank and tested in collaboration with FROB. - BdE’s BRD and FROB should keep LSI resolution strategy assumptions under regular review and prepare for alternative resolution strategies where the preferred strategy (transfer in the Spanish context) cannot be implemented. - BdE, in close consultation with FROB, should design a policy framework describing actions to be taken when a firm no longer meets the MREL requirements, with the objective that LSIs enter resolution while still having sufficient MREL resources to ensure the resolution plan is feasible and credible. - Particular focus where LSIs rely on CET1 resources to comply with MREL requirements to ensure CET1 MREL resources are available to support orderly resolution rather than being used to avoid bank failure. - If legal barriers to this policy objective are identified, these should be identified and an analysis for how to overcome them considered at national and European authority levels where relevant. ### Resolution disclosures - Ex-ante resolution disclosures can enhance market understanding of how a resolution would be conducted and build market confidence, clarifying expectations and strengthening market discipline and public accountability. - Disclosure of firm-specific resolvability assessments should balance transparency with protection of commercially sensitive information and statutory confidentiality, ensuring disclosures do not constrain RA options at the time of failure. - CRR II and BRRD II introduced disclosure requirements on TLAC and MREL, including composition of own funds and eligible liabilities, ranking in creditor hierarchy and firm-specific MREL requirements. - These requirements already apply to Spanish G-SIBs and will apply to the remainder of Spanish banks subject to resolution from January 1, 2024, or later if a bank has a longer transition period to meet its MREL targets. - Recommendation: BdE’s BRD should continue to enhance transparency by publicly disclosing its policy documents and encourage firms to publicly disclose non-public parts of their resolvability assessments, and consider requiring firms to publish the non-confidential parts of resolvability self-assessments. ### Insurer recovery and resolution planning - DGSFP regulates the Spanish insurance and pension markets and is a department within the Ministry of Economic Affairs funded by the state budget. - Two of the top 10 insurers are domestic and owned by Spain’s banks; the top five insurers by assets comprise 44 percent of the assets of all insurers. - The 2017 FSAP recommended DGSFP develop recovery and resolution plans for the five largest insurers. - Spain has a well-functioning winding up system through the “Consorcio de Compensación de Seguros” (CCS), which has supported the winding up of 300 insurers since 1984. The CCS tools include portfolio transfer and purchasing of credits; all insurance contracts (other than life insurance and export credit insurance) contribute to the CCS’s fund. - EU legislation to establish a recovery and resolution regime for insurance and reinsurance undertakings (IRRD) is being developed; Spanish authorities will wait for negotiation outcomes before introducing new insurance resolution regulations. - DGSFP is working on a crisis management group for MAPFRE Group and a national regulation on insurer recovery planning is being prepared; a provision requiring insurers to prepare and keep updated a recovery plan is in the Draft Amendment to Law 20/2015, which was published on the Ministry of Economic Affairs website on March 7, 2023 for public consultation. - Recommendation: MINECO should take the next legislative opportunity to pass legislation giving powers to DGSFP to set recovery planning requirements for insurers. DGSFP should keep under review its approach to resolution planning, considering ongoing IRRD negotiations. ### Resolution execution, bail-in mechanics, and cross-border coordination - Statutory resolution tools must be usable quickly and confidently to impose losses via bail-in or transfer tools. - Bail-in: impose losses on creditors holding loss-absorbing instruments by cancelling or reducing claims to recapitalize the bank. - Transfer: strand creditors holding loss-absorbing instruments while transferring good assets and other liabilities to a bridge bank or private purchaser. - FROB is responsible for executing resolution measures for all Spanish banks if they fail, regardless of classification as SIs or LSIs; for SIs, FROB would follow instructions by the SRB. - FROB has developed an internal crisis preparedness program and shared with industry a process for bail-in and sale of business tools defining roles and responsibilities. - The FSB has noted public disclosure of an authority’s bail-in mechanics is essential for credibility and predictability and to allow stakeholders (e.g., CSDs) to coordinate implementation. - The EBA finalized guidelines in February 2023 requiring NRAs to publish their approach to implementing the bail-in tool; during the FSAP Mission in October 2023 FROB was developing, and published for consultation in December 2023, its preferred mechanism for implementing the bail-in. - Recommendations for FROB: - Engage actively with industry to develop a shared approach to overcoming bail-in mechanics challenges and provide leadership on treatment of MREL liabilities common across the Spanish industry (e.g., subordinated, and senior debt governed by Spanish law). - Publish how it will navigate key strategic policy choices in designing bail-in mechanics, including specifying: 1) the process for the identification of the eligible securities within the scope of the bail-in; 2) the process for suspending trading of securities within the scope of bail-in; 3) the process for suspension of, or change in, shareholder rights; 4) the process for write down and/or cancellation of equity and/or debt; and 5) the process for lifting the suspension of trading and shareholder rights. - Road test its bail-in mechanism with industry before finalization to gather feedback on mechanism design choices. - Actively engage with relevant foreign authorities as part of a process led by the SRB to facilitate transfer strategies for internationally active banks and agree arrangements for securing necessary change in control approvals on an accelerated basis for Spanish banks with a multiple point of entry resolution strategy. ### Liquidity in resolution and temporary liquidity assistance - Ensuring banks in resolution have sufficient liquidity to meet obligations as they fall due is essential. - Recapitalized banks are expected to meet liquidity needs from private resources initially; if insufficient, access to temporary liquidity assistance (TLA) is needed to ensure orderly resolution. - TLA to banks in resolution should be securable against a wide range of eligible collateral. - Central banks have become more transparent about crisis lending facilities; as a euro area member, BdE is part of the Eurosystem monetary policy operations and manages settlement operations, collateral management, payment traffic and TARGET services for Spanish counterparties. - BdE manages the engagement with Spanish counterparties and can manage credit risk related to collateral eligible under the Eurosystem monetary policy collateral framework. - Under domestic legislation BdE is responsible for “ensuring the stability of the Spanish financial system” as lender of last resort. - The published ECB ELA agreement forms the high-level harmonized basis for any BdE provision of ELA in Spain; ELA can only be provided in exceptional circumstances to a solvent institution facing temporary liquidity problems and must be sufficiently collateralized. Collateral eligibility criteria can differ from normal monetary policy operations and provision of ELA depends on national central bank frameworks, the ECB ELA Agreement, Article 14.4 of the ECB Statute, and compliance with EU law principles including prohibition of monetary financing, central bank independence and the EU State Aid framework. *Source: 1espea2024010-print-pdf - 40. The BdE has not published any domestic-level guidance on non-MREL resolvability* ### 59. Recent international experiences have highlighted that a bank in resolution may ### Recent international experiences have highlighted that a bank in resolution may require more liquidity support than the Single Resolution Fund (SRF) and the ESM backstop ### Liquidity in resolution: framework and market practice - The ECB ‘Agreement on emergency liquidity assistance’ does not explicitly refer to resolution, but Section 4.1.b provides that a bank is considered solvent for ELA purposes if “there is a credible prospect of recapitalization [...] by which harmonized minimum regulatory capital levels would be restored within 24 weeks after the end of the reference quarter of the data that showed that the bank does not comply with harmonized regulatory minimum standards; in duly justified, exceptional cases the Governing Council may decide to prolong the grace period of 24 weeks”. - Euro Area wide policy issues on liquidity in resolution will be considered as part of the upcoming Euro Area FSAP. - The SRF’s projected size is around EUR 80 billion as of end of 2023. The nominal cap for ESM loans to the SRF is set at EUR 68 billion. ### Banco de España (BdE) emergency liquidity assistance (ELA) role and capabilities Findings - Within the limits set by the Euro Area framework, the BdE can at its discretion provide emergency liquidity to a bank in stress if it is solvent assessed on a forward-looking basis and meets other pre-defined eligibility criteria. - BdE market operations rely on written confirmation of the SSM’s or BSD’s assessment of firms’ solvency position in assessing these ELA eligibility criteria. - The BdE Market Operations Department has additional capacity to value some loan collateral at scale by relying on statistical valuation models focused on assessing credit risk, informed by data on banks loan assets held in the Spanish central credit register. - The BdE has an ELA manual describing procedures envisaged within the Eurosystem’s ELA framework. BdE considers the firm's financial position, the quality and quantity of unencumbered assets offered as collateral, the impact of not granting ELA on financial stability, and the expected duration of any ELA facility. - The BdE has some existing capability to manage valuation challenges associated with loan collateral and to accept a wide range of collateral, including covered bond securities and some loans, given its role in Eurosystem monetary operations. Recommendations (operational and transparency) - Establish an approach to addressing liquidity needs to solvent entities pre-resolution and to banks recapitalized through the resolution process; the April 2023 EC legislative proposal on crisis management and deposit insurance may expand scope of banks entering resolution and increase funding needs. - BdE should publish a policy framework clarifying its role as a lender of last resort for both solvent entities pre-resolution and banks recapitalized through resolution. If national legislative barriers exist, they should be identified and addressed with MINECO. - Ex-ante transparency on BdE’s backstop liquidity policy would improve market participants’ understanding, facilitate contingency planning, and anchor public understanding of central bank liquidity assistance; this would allow scope for temporary reductions in real-time transparency where financial stability is threatened. - Any provision of liquidity support to banks recapitalized through the resolution process would require assessment by the ECB Governing Council and confirmation the entity can be considered solvent for ELA purposes. - BdE should define collateral (eligible or non-eligible for Eurosystem monetary policy operations) accepted for ELA, the haircut methodology, assumed pricing of temporary crisis liquidity, and possible channels for collateral mobilization. - Institute a more formal and regular review of BdE counterparty ELA liquidity capacity based on eligible and non-eligible Eurosystem collateral as part of internal ELA governance to support rapid crisis response. - Regularly test (e.g., on an annual basis) BdE’s capabilities to provide liquidity to banks in resolution, including operational procedures, firms’ information provision, and clarifying there is no pre-commitment to grant liquidity. - Encourage banks to pre-position collateral at the BdE by identifying and assessing types of collateral ex ante to reduce mobilization risk and increase lending capacity in a sudden failure. - Conduct simulation exercises or dry runs to test BdE ELA and liquidity lending arrangements. - BdE monetary operations department should formalize an approach with the BRD and FROB to assess liquidity needs and available unencumbered collateral for Spanish banks in resolution, including agreeing liquidity forecasting and collateral reporting requirements and jointly monitoring unencumbered collateral. ### Deposit Guarantee Arrangements (FGD) — capacity, constraints, and recommendations Key statistics and arrangements - The FGD guarantees deposits of €884 billion and has 144 member financial institutions. - The 0.8. percent of covered deposits target in Spain meets the minimum harmonized EU target. DGF ex ante funds currently exceed this by €8.1 billion (fourth quarter, 2023). - FGD can raise an additional ex-post levy from industry up to a maximum of 0.5 percent of covered deposits annually. - Since 2019, FGD maintains an additional funding capacity by means of a commercial loan facility agreement, currently subscribed with 10 credit institutions for amount to an additional €5 billion of financial capacity or 0.52 percent of covered deposits. - The FGD's financial capacity would allow for the individual payout of all banks with a liquidation strategy, as well as the simultaneous pay out of several of them. - FGD is limited from contributing to recapitalization costs under Spanish law when resolution is triggered; it can only contribute to the cost of loss absorption. - FGD capacity to contribute to resolution costs is further limited by three statutory conditions: 1) the least cost rule; 2) eligible depositor preference; and 3) the 50 percent cap of the target level of the FGD (0.4 covered deposits). Challenges identified - The least cost rule and depositor preference reduce the likelihood of FGD suffering losses in a liquidation and therefore limit its ability to contribute to resolution costs even when resolution could yield better depositor continuity and no higher costs net of recoveries. - LSIs may have insufficient MREL on entry into resolution to meet the SRF 8 percent rule without imposing losses on uninsured depositors; inability of FGD to bridge gaps can create pressure to avoid resolution or result in disorderly resolution. - The CMDI proposal may align the insolvency ranking of all deposits above ordinary unsecured claims, increasing the likelihood FGD would suffer a loss in the counterfactual insolvency analysis, thereby increasing its ability to contribute to resolution costs. Recommendations (legal and operational flexibility) - Use the flexibility within the EU legal framework to facilitate FGD’s ability to finance resolution. MINECO should consider an amendment to national implementing legislation of the BRRD and DGSD to maximize FGD flexibility to contribute to resolution costs, including recapitalization of banks in resolution. - Provide FGD with flexibility to enter into loss-sharing arrangements with acquirers to support transfer resolution strategies; any such use must be subject to least cost safeguards, appropriate valuation analysis, no creditor worse-off than liquidation compensation principle, and relevant caps (e.g., least cost and 50 percent of FGD funds). - FGD should codify that it will rely on counterfactual insolvency valuation analysis provided by the FROB or a similar valuation methodology agreed in advance to ensure consistency in least cost assessments. - FROB should publicly set out its flexibility to use FGD funds to support resolution action and develop a pre-defined approach to calculate the amount FGD could contribute to resolution costs to reduce market uncertainty and support rapid authority action. ### Financial crisis preparedness & coordination Inter-authority coordination findings - National financial crisis management authorities (BdE, FROB, FGD) must clearly define roles, responsibilities, and operating procedures. - Coordination arrangements for preparation, planning and execution of resolution measures are set out in Law 11/2015. FROB has signed cooperation agreements with BdE and CNMV, first signed in 2018 and reviewed in 2021, to enhance coordination across recovery, resolution planning and implementation. - Two Collaboration Committees (one with BdE and FROB; the other with CNMV and FROB) meet every six months and can meet more regularly as necessary. Recommendations (crisis management framework and preparedness) - Establish a national crisis management framework (CMF) for bank failure to ensure readiness for testing banks’ resolvability capabilities, executive resolution powers and backstop liquidity provision; ensure National Handbooks and Operational Steps Documents developed by the FROB are fully tested and refined for the Spanish context and subject to regular crisis simulation exercises (CSEs). - Develop a coordinated approach to a firm’s crisis preparedness across prudential, resolution and market operations to achieve clear sequencing of authority requirements on the same firm over an agreed timeline. - National authorities should meet periodically in normal times to oversee preparation and maintenance of national and authority-specific crisis plans, coordinate engagement with firms, sequence requests, and capture synergies. - Regular intra-and inter-authority financial crisis simulation exercises with participation by senior policymakers, including relevant home and host authorities, are advisable to test and enhance operational preparedness. *Source: IMF staff assessment text provided in the content unit.* ### 75. Financial sector crisis simulation exercises (CSE) are essential tools for authorities to ### Financial sector crisis simulation exercises (CSE) ### Purpose and design of CSEs - CSEs are essential tools for authorities to practice decision-making in the face of a financial crisis and are not a pass/fail test. - Two broad purposes: - Learning-focused simulations: - Intended to raise awareness of crisis management issues and improve knowledge of crisis organization, plans, procedures, protocols. - Target discussion and gaming of aspects of the crisis management framework and reactions of those responsible for implementation. - Testing-focused simulations: - Designed to probe individuals, teams, and organizational preparedness and identify areas of strength or vulnerability. - Involve more elements of surprise (e.g., akin to a fire drill), with the scenario generally unknown to players in advance. - Learning and testing-focused simulations share the same design parameters (players involved, level of realism, openness of scenario, context and setting, player role, timing) but may make different choices in arranging those parameters. ### Spanish authorities’ participation and CSE recommendations - Recent activity: - The BdE and FROB have participated in an SI-focused CSE with European Authorities. - FROB has organized an internal LSI-focused CSE. - These exercises helped identify enhancements relevant to assessing internal MREL, the assessment of Condition 1, and business reorganization plans. - Recommendations: - BdE, FROB and FGD should formalize existing crisis management practices and prioritize by agreeing a cross-authority CSE strategy. - Each authority should be supported by an operational manual reflective of their roles and responsibilities in crisis to increase operational readiness and ensure adequate resourcing. - FROB should engage with EU institutions to shape any SRB CSE priorities to ensure they reflect Spanish priorities. - A CSE manual should: - Capture best practice from Spanish authorities’ experience to date. - Make clear the different purposes of crisis simulations: teaching versus testing. - Help professionalize the role of CSE in sustaining crisis management capability while managing risks of unintended outcomes undermining cross-authority or cross-border cooperation. - Tailor scenario complexity to the state of development of the authority’s crisis operational processes, procedures, and wider arrangements. ### Resourcing for resolvability verification and resolution execution - Key observations: - Verification of firms’ resolvability capabilities and execution of resolution actions are extremely resource-intensive for RAs (resolution authorities). - Activities after a resolution action continue long after the action: executing the bail-in mechanism, overseeing the restructuring plan, ensuring the firm returns to normal liquidity markets, and responding to litigation claims. - FROB model and procurement framework: - FROB’s business model as an execution RA is based on rapidly upscaling resources in a crisis, relying on external advisory support. - FROB developed an external advisory procurement framework establishing framework contracts with pre-selected external professional advisory firms (e.g., valuation experts, strategic advisors, legal advisors). - In the run-up to resolution, FROB would launch a competitive process among pre-selected candidates; the Governing Committee decides to launch the tender and award the contract. - It is estimated that the tender could be completed in approximately two weeks. - FROB has developed some limited in-house capacity to conduct resolution valuation to respond to fast-burn crises if valuation analysis is needed before an external expert can be appointed. - Staffing developments and demands: - Since 2017: - BdE’s BRD staffing increased from 26 to 33, divided into two divisions: policy and firms resolution planning. - FROB increased full-time professional staff dedicated to resolution to 23, up from 21 in 2017. - Both organizations describe staff turnover as low. - RAs need well prepared staff to cope with fast burn cases; cooperation among different authorities and the capacity to engage external parties at very short notice are critical. - BdE’s BRD will need resources and expertise to respond to firms’ implementation questions, increasing strain on BdE existing resources in assessing firm-specific proposals. - Recommendation on resourcing: - BdE’s BRD and FROB should ensure sufficient resourcing to conduct work that has not been a major focus to date, including resolvability assessment and testing whether banks' resolvability capabilities are operational. - Resolution implementation readiness will grow in focus as FROB formalizes its resolution mechanics. - Comparative staffing context: RA staffing levels in jurisdictions with a financial sector of a similar proportion of GDP as Spain range from 30 to 100 permanent staff working on resolution policy, resolution planning and resolution implementation. ### Procurement rules and recommendation for crisis flexibility - Current practice: - FROB’s advisory framework agreement with panels of professional service providers is intended to ensure expedited appointment of external advisers in the run-up to resolution. - The tender process among pre-selected candidates is estimated to be completable in approximately two weeks. - Recommendation: - MINECO should provide FROB with the maximum flexibility where possible under national procurement legislation to allow departure from procurement rules in a crisis scenario to appoint quickly external advisory support including independent valuers. - Flexibility should be limited to crisis scenarios and should not apply to external advisory support recruited for preparation for future crises. - Rationale: In some situations (e.g., Banco Popular resolution in 2017), it may not be possible to wait two weeks to appoint professional advisors required to prepare for and execute a resolution transaction. FROB’s rapid scaling business model could be significantly constrained if bound by all aspects of national procurement legislation. ### Banking sector structure—selected end-2022 figures (source: BdE) - Banks end-2022: - Domestic Banks: # of firms 99, total assets 2.755,24 billion USD, percent of banking sector 92.08, Change 2012-2017 -31.47, Change 2017-2022 10.77 - Foreign Banks: # of firms 94, total assets 205,17 billion USD, percent of banking sector 6.86, Change 2012-2017 -49.24, Change 2017-2022 7.92 - Subsidiaries: # of firms 11, total assets 56,32 billion USD, percent of banking sector 1.88, Change 2012-2017 -55.46, Change 2017-2022 0.07 - Branches: # of firms 83, total assets 148,85 billion USD, percent of banking sector 4.97, Change 2012-2017 -46.07, Change 2017-2022 11.23 - State-owned (if any): # of firms 1, total assets 31,76 billion USD, percent of banking sector 1.06, Change 2012-2017 43.39, Change 2017-2022 -89.70 - Total Banks: # of firms 194, total assets 2.992,17 billion USD, percent of banking sector 100.00, Change 2012-2017 -29.23, Change 2017-2022 0.21 ### Bail-in mechanics—key authority design choices - Material differences jurisdictions must address when designing an open bank bail-in mechanism: - Valuation timelines: - Some approaches assume final valuations of an SI and LSI can be concluded in a matter of days, others assume lengthier processes. - Rapid valuation assumptions require banks’ valuation systems and reporting capabilities to deliver outputs and proportionate expectations on reporting capabilities. - Treatment of resolved bank shares: - Options include cancelling all shares and issuing new shares to be distributed to formed creditors, or suspending existing shares until the completed resolution valuation informs final bail-in terms. - The former approach may necessitate additional regulatory approval processes (prospectus, disclosure, investor protection), especially when MREL instruments are held by non-domestic investors. - Authorities should engage early with foreign authorities on resolution-specific exemptions from such requirements as set by the FSB Principles on Bail-in Execution (2018). - Issuance of new shares: - Some authorities require CSDs to create new shares on issuance of the resolution order; the bank in resolution is responsible for creating the global note to enable technical creation at the CSD. - Other authorities do not require issuance of new shares under a certificates of entitlement mechanism. - Cancelling existing shares and issuing new shares may involve using the statutory resolution order to facilitate listing and amending articles of association. - Issuance of interim securities: - Interim securities (e.g., certificates of entitlement) can be traded between the resolution action and the final resolution valuation. - Example: United Kingdom issues certificates of entitlement that do not involve acceptance of an offer by creditors and therefore do not require prospectus/listing authority publication, enabling distribution on the Monday after a resolution weekend. - Compliance with change in control/other regulatory requirements: - Some bail-in mechanics more explicitly address compliance with supervisory change in control and other regulatory requirements (e.g., the CNMV role in supervising takeover bids, enforcing compliance with the Takeovers Directive and approving offer documents and prospectuses). - An orderly bank resolution must demonstrate compliance with minimum authorization requirements and that its owners are fit and proper. ### Resolution liquidity arrangements—examples and transparency trend - Central banks and other authorities are becoming more transparent about functions as liquidity providers of last resort, including publishing crisis lending facility details and access criteria. - Examples: - U.S.: Under the Dodd-Frank Act (2010), the FDIC can draw on the Orderly Liquidity Authority with the agreement of the U.S. Treasury to provide temporary liquidity support to banks in a Title II resolution. - Canada: In 2016, the Bank of Canada published a standing liquidity facility framework to support lender-of-last-resort functions for banks in stress or resolution. - U.K.: In 2017, the Bank of England’s sterling monetary framework and resolution liquidity framework set out conditions for access to central bank liquidity against a wide range of collateral with transparent access criteria. - Hong Kong: In 2019, HKMA published a comprehensive revamp of its liquidity facility framework to better reflect its role as lender of last resort in crisis management and resolution. - Switzerland: In 2022, the Swiss Government announced plans to introduce legislation enabling the Swiss National Bank to bolster the liquidity of a systemically important bank in the process of resolution. *Source: IMF staff report text.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1espea2024010-print-pdf.pdf_