## 1. Division of Oversight Responsibilities: Cajas Structure and Organization

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### Introduction and core policy questions
- Spain’s financial markets deregulated beginning in 1977, allowing cajas de ahorros to engage in universal banking activities and to expand regionally and abroad.
- Key policy questions:
  - Whether cajas’ governance structure ensures business decisions free of political interference and adequate internal controls to support sound risk management.
  - Whether deregulation has sufficiently leveled the playing field between commercial banks (regulated/supervised by the central government) and cajas (regulated/supervised both by the central government and by Autonomous Communities), including coordination to avoid conflicts.

### Deregulation: stages, directed credit, and market outcomes
- Three historical stages:
  - Stage 1 (starting 1835): promotion of savings; origins in local councils, associations, religious orders, or pawnshops (montes de piedad); channel profits (excedentes) into social and cultural projects.
  - Stage 2 (starting 1926): shift toward credit to the public sector and favored sectors; subject to directed credit (coeficientes de inversión obligatoria), prohibition to engage in business with companies, and ministerial veto on high-level appointments.
  - Stage 3 (starting 1977): shift toward credit to households and SMEs; allowed universal banking activities (starting 1977); directed credits gradually eliminated (not fully abolished until 1992); 1988 allowed expansion outside home regions; 2002 eased legal barriers preventing mergers and strategic alliances among cajas.
- Directed credit rule (coeficientes de inversión obligatoria):
  - Required financial institutions to invest 50 percent of deposits in government paper, and another 30 percent in lending for set purposes (largely housing for cajas).
- Consolidation and market-share outcomes:
  - Cajas’ share in total banking system assets: from 22 percent in 1976 to 33 percent in 2004.
  - Cajas’ share in lending: from 18 percent in 1976 to 45 percent in 2004.
  - Cajas’ share in deposits: from 33 percent in 1976 to 52 percent in 2004.
  - Number of cajas: from 84 in 1976 to 46 in 2004.
  - Example merger used to resolve distress: 2001 Bancaja absorbed Caja de Ahorros y Préstamos de Carlet.

### Governance: legal character, profit allocation, objectives, and governing bodies
- Legal character:
  - Cajas are legally interpreted as credit institutions organized as private enterprises with foundational origins and social functions; those exercising control are not legal owners because cajas do not have share capital and equity consists mainly of reserves from retained earnings.
  - Constitutional Tribunal ruling (1988 referenced) described them as credit institutions with social character that do not distribute profits to private parties (entidades sin fin de lucro or non-profit institutions).
- Profit allocation and obra social:
  - Cajas are required to allocate at least half of their profits to reserves, and channel the remainder to community projects under their social mandate (obra social).
  - The share of profits allocated to the obra social averages close to 30 percent per year and has decreased somewhat over the past decade, while absolute profit levels increased.
  - Decline in obra social share attributed to increased taxation (cajas were almost tax-exempt before 1985) and higher capitalization requirements.
  - Obra social increasingly directed to public goods—particularly cultural, environmental, and research.
  - Study finding: obra social benefits 96 percent of the Spanish population; Spanish citizens use services/public goods provided by savings banks about three times per year.
- Main objectives pursued by cajas:
  - universal provision of financial services (promote savings among low- and middle-income classes);
  - economic efficiency (guarantee safety and profitability);
  - promotion of competition and avoidance of monopolistic practices (avoid usury);
  - contribution to welfare and redistribution (provide benefits for the poor);
  - promotion of regional and community development.
- Governing bodies and selection rules:
  - General assembly:
    - Main governing body responsible for strategic orientation and selecting management.
    - LORCA (Law 31/1985 of August 2, 1985) set assembly membership between 60 and 160 depending on caja size.
    - Ley Financiera (Law 44/2002 of November 22, 2002) capped public sector representatives (State, Autonomous Communities, public law agencies and Municipalities) at 50 percent of assembly members.
    - 2003 amendment to LORCA required representation of all Municipalities in which the caja has branches.
    - Autonomous Communities may deviate from national norms on assembly composition and selection rules.
  - Board of directors:
    - Selected by the assembly, usually from its ranks, reflecting assembly representation.
    - Board responsible, besides management, for the caja’s social mandate.
    - Board chairman is also president of the assembly and of the caja.
  - Internal audit function:
    - Audit committee members selected by the assembly from its ranks, reflecting assembly representation.
  - Management and terms:
    - Executive directors appointed by the board on professional criteria and confirmed by the assembly.
    - Executive directors expected to serve terms between four and six years (depending on caja by-laws); re-election allowed but cannot serve longer than 12 years.
  - Additional bodies (Law 26/2003 of July 17, 2003):
    - Compensation committee: provides information on compensation and incentives policies of board members and senior managers.
    - Investment committee: proposes investment strategy and monitors compatibility between the caja’s investment portfolio and its social mandate.
    - Distribution of seats in these committees must align with the board’s (and assembly’s) voting structure.
  - Representation rules (descriptive shares):
    - public sector (max 50 percent), depositors (25-50 percent), employees (5-15 percent), founders and others (no fixed rule).

### Regulation and supervision: constitutional basis and division of powers
- Dual oversight:
  - Cajas are regulated and supervised by the central government (ministry of the economy and the central bank) and by the Autonomous Communities (ACs).
  - Division of powers determined by the Constitution, AC Statutes (Estatutos de Autonomía), and Constitutional Tribunal rulings.
- Constitutional guidance:
  - Article 149 of the Constitution grants the State the competence to set “the bases that shall order credit, banking and insurance activities in Spain” (las bases para la ordenación del crédito, banca y seguros), applying to savings banks as credit institutions.
  - Constitution contains no explicit references to savings banks; conflicts resolved by the Constitutional Tribunal.
- CT rulings — core clarifications on the “bases”:
  - The CT confirmed that both the State and the ACs have regulatory and supervisory powers over cajas (STC 48/1988).
  - The “bases” cannot aim at complete uniformity; they must allow ACs regulatory/supervisory rights.
  - The “bases” must be as stable as possible; the State can define them via laws or lower-level instruments.
  - Regulations/executive actions aimed at safeguarding solvency are “basic”: definition of own funds; capital adequacy requirements; consolidation of accounts; limits on credit risk concentration and industrial participations; exchange and market risk rules; informational and transparency requirements.
  - AC responsibilities generally concern social objectives, transparency and consumer protection.

### Areas of tension: AC powers that may affect unity and solvency
- Two AC powers of concern:
  - AC powers to grant large investment and credit authorizations—these can affect solvency; though not currently imposed, their existence creates ambiguity.
  - AC powers to veto merger and acquisition proposals by savings banks even if supported by the Bank of Spain—this veto can impede consolidation and optimal mergers.
- Mergers and cross-regional consolidation:
  - Mergers require approval by the regional authority (both ACs in cross-border cases), creating hurdles to efficiency and risks of political interference.
  - Empirical consolidation: number of cajas declined from 77 in 1988 to 46 in 2003 (difference -31); most mergers have been intra-regional.

### Division of specific regulatory and supervisory powers (selected allocations)
- State powers:
  - Creates and defines governing bodies; defines groups to be represented and minimum/maximum representation shares (State definitions serve as reference).
  - Limits duration of mandates (4-6 years to be determined by statutes).
  - Can apply discipline and sanctioning for violations of “basic” norms, particularly solvency and stability; Law of Discipline and Intervention applies equally to banks and cajas.
  - Can intervene and liquidate savings banks that do not comply with “basic” regulations; Bank of Spain can prevent distribution of profits when own funds are below 80 percent of minimum requirement and can authorize deviations in profit allocation under specific conditions.
- AC powers:
  - Regulate aspects of internal organization and conduct of business, define exact representation shares within State framework.
  - Authorize creation and mergers of cajas (subject to a non-binding positive report from the Bank of Spain); authorize liquidation and dissolution when violations occur within their responsibility.
  - Supervise and sanction in areas attributed to ACs; must share supervisory information with the Bank of Spain and may cooperate formally.
  - For multisite cajas: structure/organization regulated by AC of origin; activities regulated by all ACs in which the caja operates (territorial criterion applies to obra social allocation).
  - In many ACs, powers include veto over mergers, authorization requirements for equity investments and lending, approval of use of profits and obra social.

### Observed institutional weaknesses in AC practices
- Some large ACs (Madrid, Valencia, País Vasco and Cataluña) have substantial regulatory and supervisory norms on licensing, regulation, supervision and transparency, and sanctioning.
- Institutional weaknesses:
  - Lack of independence of ACs’ supervisors from AC executive governments—and possibly from supervised cajas.
  - Constraints on compensation of governing body members may limit cajas’ capacity to use compensation as an incentive device.

### AC procedural and substantive powers: selected Autonomous Communities (highlights)
- Madrid:
  - Mergers must be authorized by the Government of Madrid; cross-community mergers require joint approval of both governments.
  - Equity investments that result in control and represent more than 5 percent of capital must be authorized; investments >2 percent of consolidated assets must be approved.
  - Sanctions to entities: fines up to 1 percent of capital or 300,000 euros (very severe); other tiers specified with exact maxima (1/2 percent of capital or 150,000 euros; 60,000 euros).
  - Use of profits and obra social: Consejería approves use of profits and plans.
  - Remuneration restrictions: governing body members cannot receive remuneration except compensations for expenditures; must act independently.
- Valencia:
  - IVF authorizes creation/changes in statutes; mergers require Conseller approval; IVF approves obra social plans and marketing activities with economic content.
  - Supervision delegated to the IVF; Conseller can remove the Director General and intervene when solvency/liquidity are at risk.
- País Vasco (Euskadi):
  - Departamento de Hacienda y Finanzas grants licenses and approves statutes; can require authorization for investments in real estate, shares, monetary assets or for large loans/single-name concentrations.
  - Sanctions and registry regimes specified with exact maxima (e.g., fines up to 1 percent of capital or 300,000 euros for very severe sanctions).
- Cataluña:
  - Government of the Generalitat authorizes licenses and withdrawals; mergers authorized by the Government; requirements include preserving rights of creditors and depositors and publication of authorization.
  - Departamento empowered to classify/select assets for investment within the State framework; Departamento approves General Assemblies’ decisions on obra social uses.
  - Sanctions include private rebuke, public reprimand, fines up to fifty million pesetas, and withdrawal of the license.

### Implications for consolidation and European integration
- Combination of AC-level authorization requirements for mergers, AC-imposed conditions on mergers (preserve obra social, labor stability, no liquidation), AC approval thresholds for equity investments, and supervisory/sanctioning powers may create significant obstacles to cross-regional consolidation.
- Given the decline from 77 cajas in 1988 to 46 in 2003 (difference -31), remaining consolidation may be constrained if ACs exercise powers restrictively.
- Multiplicity of procedural approvals and substantive conditions could limit agility to adapt to long-term challenges from ongoing European banking integration.

### Public representation, political influence, and turnover evidence
- Public representation and political influence:
  - Substantial public-sector representation in governing bodies raises concerns about political influence.
  - Historical evolution: liberalization reduced public participation from 1977; LORCA and CT rulings allowed municipalities to increase representation; Law 44/2002 (Ley Financiera) reduced public sector ceiling to 50 percent and institutionalized irrevocability of consejeros.
  - Remaining concerns: 50 percent ceiling may not eliminate perceptions of political influence via other representatives; irrevocability helps but reelection possibilities may affect independence.
- Comparative turnover (Executive Turnover in Banks and Cajas, 1986–2000):
  - Observations (institution/year): 1246 (Commercial banks) and 859 (Cajas)
  - Turnover of directors: 18.8 (Commercial banks), 20.7 (Cajas)
  - Permanence of directors (years): 5.3 (Commercial banks), 4.8 (Cajas)
  - Turnover of presidents: 13.2 (Commercial banks), 16.4 (Cajas)
  - Permanence of president (years): 7.6 (Commercial banks), 6.1 (Cajas)
  - Turnover of general director: 31.2 (Commercial banks), 13.1 (Cajas)
  - Permanence of general director (years): 3.2 (Commercial banks), 7.6 (Cajas)

### Barriers to raising capital, capital instruments, and market discipline
- Limits to raising capital:
  - Legal form precludes issuance of shares; cajas rely largely on retained profits.
  - Over the past ten years, cajas channeled over 70 percent of after-tax profits into their revenue reserve every year.
  - Since 1985, cajas can raise capital by issuing subordinated debt (Tier 2) and preferred participations (qualifying preferred participations as Tier 1; non-qualifying as Tier 2).
- Cuotas participativas (since 1990) as partial remedy:
  - Part of Tier 1 capital; grant no voting rights; issuance generally more heavily regulated than corporate stocks.
  - By end-2005 no cuotas participativas had been issued; reasons include ample caja capital and access to alternative cheaper sources.
  - Preferred participations (participaciones preferentes) used intensively during 1999–2001; share in regulatory capital capped to 30 percent in 2003.
  - Law 19/2003 of July 4, 2003: outstanding amount of participaciones preferentes cannot be greater than 30 percent of Tier 1 capital, without prejudice to Bank of Spain restrictions.
- Features deterring issuance of cuotas participativas:
  - Legal allowance for dividend stabilization fund smooths returns, diminishing variable-income nature.
  - Cajas’ discretion to allocate profits to obra social could raise concerns about dilution of cuota-holders’ share of profits (practical concern mitigated since cuota-holders have no voting rights).
  - Perceived “first-mover-disadvantage” due to transaction costs and investor aversion to new instruments.
- Remedies in distress and limitations:
  - Cajas have not suffered systemic crises; individual distress resolved through mergers among cajas.
  - In distress, cuotas participativas likely of limited help; remedies include sale of assets or support from the deposit guarantee fund.
  - Important that cajas maintain solid equity and risk profiles given difficulty in promptly bringing in substantial new capital.
- Limited market assessment and contestability:
  - Cajas cannot be purchased by private parties; do not issue tradable equity, limiting continuous market assessment through equity prices.
  - Assets and branches can be purchased by individuals, private companies and commercial banks; mergers and acquisitions among cajas require AC approval.
- Transparency and governance reforms:
  - Since 2005, cajas that issue traded instruments must publish an annual Governance Report.
  - CNMV-led working group consulted on corporate governance improvements for publicly traded firms and savings banks; a Corporate Governance Code draft has been released for comments with a special subgroup focusing on savings banks.

### Comparative capital instrument example: Norway (Box 2)
- Norway’s primary capital certificates (PCCs) broadly similar to cuotas participativas but provide voting rights and tradability.
- PCCs accounted for 16.1 percent of savings banks capital (including subordinated debt) in 2000; used mainly by large savings banks.
- PCC features include property and dividend rights, voting rights (not proportional), and limits on individual holdings (no more than 10 percent of PCCs of a single savings bank).

### Executive compensation, system role, and policy recommendations
- Compensation and governance:
  - Cajas cannot use stock options due to absence of stock prices; stock options can induce profit maximization but also excessive risk-taking.
  - Savings banks appear able to attract professionals with compensation appropriate to market conditions.
  - Compensation to non-executive governing body members restricted by law to “dietas por asistencia y desplazamiento.”
- System role and performance:
  - Cajas have extended services, created a competitive environment, supported social/cultural/educational projects, and increased market share of deposits and credit to the private sector to account for more than one-half of the system in 2005.
  - Cajas have built a strong capital base and the system has suffered no systemic crisis.
- Conclusions and policy recommendations to strengthen governance (paragraph 49):
  - Ensuring that the 2002 regulations on corporate governance are fully implemented, strengthening them if required in particular as regards outside influence on the savings banks’ decisions.
  - Promoting new means to raise high-quality capital, such as the issuance of cuotas participativas to the market.
  - Allowing savings banks to merge freely within and across Autonomous Communities provided the Bank of Spain has ruled favorably on the viability of the merged institution.
  - Reducing over time the public sector representation ceiling, currently at 50 percent.
- Regulatory and supervisory division (paragraph 50):
  - The Autonomous Communities’ powers do not include solvency or financial stability issues, in line with Tribunal Constitucional rulings.
  - Future legal changes should preserve the sole and exclusive role of the Bank of Spain in prudential oversight—solvency and financial stability—of all financial institutions, including savings banks.
  - Avoiding inconsistency between the Bank of Spain and ACs would align Spanish supervision with trends toward avoiding fragmentation and enhancing harmonization.
- Resolution mechanisms and capital-raising constraints (paragraph 51):
  - Current resolution mechanisms are basically restricted to mergers or asset sales.
  - Mergers could be useful for smaller cajas but cannot be relied on to resolve systemically important cajas.
  - Incapacity to raise capital through instruments granting voting rights precludes a potentially useful, less costly vehicle to resolve cajas with problems—particularly relevant for large cajas.
  - Policy consideration: consider introducing alternative resolution mechanisms, e.g., allowing issuance of capital instruments with attached voting rights if a caja is in serious distress or its assembly wishes to do so.
  - Supervisor should remain particularly vigilant to ensure risk profiles account for difficulties in promptly bringing in substantial new capital.

*Source: _cr06215 - 1. Division of Oversight Responsibilities: Cajas Structure and Organization; sections 20, 27, 28, 47–51 (IMF staff analysis).*

### 1. Division of Oversight Responsibilities: Cajas Structure and Organization ........................12

### 1. Division of Oversight Responsibilities: Cajas Structure and Organization

### Introduction: context and core policy questions
- Spain’s financial markets deregulated beginning in 1977, allowing cajas de ahorros (savings banks) to engage in universal banking activities and to expand regionally and abroad.
- Key policy questions:
  - Whether cajas’ governance structure ensures business decisions free of political interference and adequate internal controls to support sound risk management.
  - Whether deregulation has sufficiently leveled the playing field between commercial banks (regulated/supervised by the central government) and cajas (regulated/supervised both by the central government and by Autonomous Communities), including coordination to avoid conflicts.

### Deregulation: stages and outcomes
- Three historical stages in the evolution of cajas:
  - Stage 1 (starting 1835): promotion of savings; origins in local councils, associations, religious orders, or pawnshops (montes de piedad); channel profits (excedentes) into social and cultural projects.
  - Stage 2 (starting 1926): shift toward credit to the public sector and favored sectors; subject to directed credit (coeficientes de inversión obligatoria), prohibition to engage in business with companies, and ministerial veto on high-level appointments.
  - Stage 3 (starting 1977): shift toward credit to households and SMEs; allowed universal banking activities (starting 1977); directed credits gradually eliminated (not fully abolished until 1992); 1988 allowed expansion outside home regions; 2002 eased legal barriers preventing mergers and strategic alliances among cajas.
- Directed credit rule (coeficientes de inversión obligatoria): required financial institutions to invest 50 percent of deposits in government paper, and another 30 percent in lending for set purposes (largely housing for cajas).
- Consolidation and market-share outcomes:
  - Cajas’ share in total banking system assets: from 22 percent in 1976 to 33 percent in 2004.
  - Cajas’ share in lending: from 18 percent in 1976 to 45 percent in 2004.
  - Cajas’ share in deposits: from 33 percent in 1976 to 52 percent in 2004.
  - Number of cajas: from 84 in 1976 to 46 in 2004.
- Mergers sometimes used to resolve financial difficulties (example: 2001 Bancaja absorbed Caja de Ahorros y Préstamos de Carlet).

### Governance: ownership, mandate, and governing bodies
- Legal character:
  - Cajas are legally interpreted as credit institutions organized as private enterprises with foundational origins and social functions; those exercising control are not legal owners because cajas do not have share capital and equity consists mainly of reserves from retained earnings.
  - Constitutional Tribunal ruling (1988 referenced) described them as credit institutions with social character that do not distribute profits to private parties (entidades sin fin de lucro or non-profit institutions).
- Profit allocation and obra social:
  - Cajas are required to allocate at least half of their profits to reserves, and channel the remainder to community projects under their social mandate (obra social).
  - The share of profits allocated to the obra social averages close to 30 percent per year and has decreased somewhat over the past decade, while absolute profit levels increased.
  - Decline in obra social share attributed to increased taxation (cajas were almost tax-exempt before 1985) and higher capitalization requirements.
  - Obra social increasingly directed to public goods—particularly cultural, environmental, and research—suggesting a shift away from more direct redistributional roles.
  - A study (PricewaterhouseCoopers, 2005) shows obra social benefits 96 percent of the Spanish population; Spanish citizens use services/public goods provided by savings banks about three times per year.
- Main objectives pursued by cajas (as stated):
  - universal provision of financial services (promote savings among low- and middle-income classes);
  - economic efficiency (guarantee safety and profitability);
  - promotion of competition and avoidance of monopolistic practices (avoid usury);
  - contribution to welfare and redistribution (provide benefits for the poor);
  - promotion of regional and community development.
- Governing bodies and selection rules:
  - General assembly:
    - Main governing body responsible for strategic orientation and selecting management.
    - LORCA (Law 31/1985 of August 2, 1985) set assembly membership between 60 and 160 depending on caja size.
    - Ley Financiera (Law 44/2002 of November 22, 2002) capped public sector representatives (State, Autonomous Communities, public law agencies and Municipalities) at 50 percent of assembly members.
    - 2003 amendment to LORCA required representation of all Municipalities in which the caja has branches.
    - Deviations from national norms permitted by Autonomous Communities with respect to number of assembly members and each group’s share, inclusion of other representatives, and rules for selecting assembly members.
  - Board of directors:
    - Selected by the assembly, usually from its ranks, reflecting assembly representation.
    - Board responsible, besides management, for the caja’s social mandate.
    - Board chairman is also president of the assembly and of the caja.
  - Internal audit function:
    - Audit committee members selected by the assembly from its ranks, reflecting assembly representation.
  - Management:
    - Most board functions delegated to executive director level (executive committee and director general).
    - Executive director(s) appointed by the board on professional criteria and confirmed by the assembly.
    - Executive directors expected to serve terms between four and six years (depending on caja by-laws); re-election allowed but cannot serve longer than 12 years.
  - Additional bodies under Law 26/2003 of July 17, 2003:
    - Compensation committee: provides information on compensation and incentives policies of board members and senior managers.
    - Investment committee: proposes investment strategy and monitors compatibility between the caja’s investment portfolio and its social mandate.
    - Distribution of seats in these committees must be in line with the board’s (and therefore assembly’s) voting structure.
  - Representation rules indicated in figure: public sector (max 50%), depositors (25-50%), employees (5-15%), founders and others (no fixed rule).

### Regulation and supervision: division of powers and constitutional basis
- Dual oversight:
  - Cajas are regulated and supervised by the central government (ministry of the economy and the central bank) and by the Autonomous Communities (ACs).
  - The division of powers is determined by the Constitution, AC Statutes (Estatutos de Autonomía), and Constitutional Tribunal rulings.
- Constitutional guidance:
  - Article 149 of the Constitution grants the State the competence to set “the bases that shall order credit, banking and insurance activities in Spain” (las bases para la ordenación del crédito, banca y seguros), applying to savings banks as credit institutions.
  - Spain’s Constitution contains no explicit references to savings banks; Articles 148 and 149 refer to “credit and banking.”
  - The special legal nature of cajas and lack of explicit constitutional reference led to conflicts settled by the Constitutional Tribunal.
- Variations and exceptions:
  - ACs’ powers over cajas are restricted to aspects of internal organization and conduct of business, but Statutes differ across ACs and the Constitutional Tribunal’s rulings shape the division.
  - Exception: three savings banks linked to the Catholic Church—CajaSur (Andalucía), Cajacírculo (Castilla y León), and Caja Inmaculada (Aragón)—are supervised by the central government instead of the Autonomous Community.
  - A five-year conflict over oversight and control of CajaSur (involving the savings bank, central government, Junta de Andalucía and Church representatives) was recently resolved by an agreement restoring oversight powers of the Autonomous Community in exchange for rebalancing representation powers within the caja.

*Source: _cr06215 - 1. Division of Oversight Responsibilities: Cajas Structure and Organization*

### 20. The “bases” shall define a minimum common ground to ensure the unity of the

### 20. The “bases” shall define a minimum common ground to ensure the unity of the

### Constitutional principle and practical implications
- The Constitution requires that preserving the unity of the system means all financial institutions in Spain—regardless of their regional origins in the case of cajas—be subject to the same “bases.”
- Key practical questions arising from this principle:
  - What is the exact definition of the “bases”?
  - What is the meaning of “bases” regarding regulatory and supervisory practices?
- Rulings of the Constitutional Tribunal (CT) have clarified the meaning and extent of the “bases.”

### Constitutional Tribunal (CT) rulings — core clarifications
- First: The CT confirmed that not only the State, but also the Autonomous Communities (ACs) have regulatory and supervisory powers over cajas (STC 48/1988). The State and the ACs have regulatory, supervisory and sanctioning powers within their corresponding areas of responsibilities.
- Second: Granting powers to ACs implies that the “bases” cannot aim at complete uniformity; they cannot be so detailed as to prevent ACs from exercising any regulatory and supervisory rights.
- Third: The “bases” must be stable to the greatest possible extent. The State has the right to modify the “bases” and, if it does so, the ACs must adapt their own norms accordingly. The State can define the “bases” through laws or through lower-level legal instruments such as circulars and simple executive actions—associated with competencias ejecutivas.
- Fourth: Regulations and executive actions aimed at safeguarding the solvency of credit institutions are considered “basic” by the CT. These include:
  - the definition of own funds,
  - capital adequacy requirements,
  - requirements on consolidation of accounting balances and results,
  - limits on credit risk concentration and industrial participations,
  - regulations on exchange and market risk exposure,
  - informational and transparency requirements.
- Fifth: Responsibilities falling within the orbit of ACs’ powers generally concern safeguarding social objectives, transparency and consumer protection.

### Areas of tension and concerns
- The CT-based definitions of the “bases” may in specific cases be not fully consistent with the objective of preserving the unity of the Spanish financial system.
- Two AC powers of particular concern:
  - AC powers to grant large investment and credit authorizations.
    - These powers can affect solvency. Although ACs are not currently imposing investment and credit authorization requirements—and it is commonly understood that they will not do so—the fact that legislation explicitly allows them to do so creates ambiguities.
  - AC powers to veto merger and acquisition proposals by savings banks even if supported by the Bank of Spain.
    - This veto power can impede further consolidation and may prevent economically optimal mergers.
    - Mergers and acquisitions among cajas require approval by the regional authority (of both ACs in case of cross-border mergers), creating hurdles to efficiency and opening the door for political interference.
    - So far, all but one of the mergers involving cajas have been between institutions from the same region. The only merger between cajas from different regions was between Caja Madrid and Caja de Ceuta.

### Division of regulatory and supervisory powers (summary of Tables 1 and 2)
- Two classifications of powers between the State and ACs:
  - (a) powers affecting the internal structure and organization of savings banks;
  - (b) powers affecting the activities of savings banks.
- Selected concrete allocations and constraints (as reflected in Tables 1 and 2):
  - Savings banks’ governing bodies
    - The State creates, and defines the nature of, the cajas’ governing bodies; it regulates general composition and essential roles (general assembly, the board of directors and the audit committee).
    - ACs can include additional groups to be represented, as long as the State’s general model is not altered significantly.
  - Composition of governing bodies
    - The State defines specific groups to be represented and their minimum and maximum representation shares. CT rulings (STC 48 and 49/1988) established the State’s definitions serve as a reference but are not strictly binding for ACs, granting most responsibilities in this regard to the ACs.
    - ACs define the exact representation shares using the State framework as reference. In response to CT decisions, many ACs included their own legislatures among represented groups; Law 44/2002 aimed at eliminating public sector dominance in many cajas.
  - Savings banks founded by the Catholic Church
    - The CT ruled that the special regime for Catholic-founded savings banks has a “basic” character based on a 1979 international agreement with the Vatican. Catholic savings banks are not subject to the representation shares imposed by ACs on other savings banks, albeit they must give some representation to relevant groups. Catholic savings banks are supervised by the AC where they operate (Law 5/2005; previously they could opt for Ministry of the Economy supervision).
    - ACs have no power over Catholic savings banks unless such banks voluntarily choose AC oversight.
  - Election systems
    - The State can only require that ACs design election procedures that guarantee representative governing bodies.
    - Design of election systems is responsibility of the ACs.
  - Eligibility, incompatibilities and removal
    - The State can determine eligibility and incompatibility conditions for selection and removal of governing bodies’ members; ACs can only add to those conditions.
  - Duration and reelection
    - The State is empowered to limit duration of mandates; current State legislation sets limits of 4-6 years, to be exactly determined by savings banks’ statutes. Despite this, some new AC laws directly determine these periods.
    - The CT ruled against the basic nature of the one-period reelection limit (STC 49/1988); ACs have the right to determine the number of successive reelections.
  - Creation and mergers of savings banks
    - The State can exercise powers through the Bank of Spain’s report, which has a basic, though formally non-binding, character. ACs have the right to authorize creation of a savings bank subject to a (non-binding) positive report from the Bank of Spain.
    - Mergers must be authorized by corresponding ACs, subject to a non-binding positive report from the Bank of Spain.
  - Dissolution and liquidation
    - The State can intervene and liquidate savings banks that do not comply with “basic” regulations and legislation, particularly solvency regulations which are clearly “basic.”
    - ACs can authorize liquidation and dissolution of cajas when violations of norms occur within their responsibility.
  - Territorial application for multisite savings banks
    - For structure and organization, a savings bank operating in more than one region is subject to regulations of the AC of origin—where it is headquartered.
    - For activities, a savings bank operating in more than one region is subject to the regulations of all ACs in which it operates—territorial criterion (applies, for instance, to allocation of the caja’s obra social across regions).
  - Distribution of profits
    - The Bank of Spain can prevent distribution of profits when the own funds of the savings bank are below 80 percent of the minimum own-funds requirement.
    - The Bank of Spain can authorize an allocation of less than 50 percent of a caja’s profits to reserves if the caja’s own funds exceed by more than 33 percent the minimum requirement.
    - The Ministry of the Economy can authorize—upon request from the Bank of Spain—a reduction in the allocation of profits to reserves to avoid interruption of obras sociales, and is also empowered to authorize distribution of profits and the obra social of savings banks founded by the Catholic Church.
    - In all other circumstances, ACs are empowered—and in some cases have complete discretion—to authorize the distribution and use of profits.
  - Discipline, sanctioning and supervision
    - The State can apply discipline mechanisms and sanctioning powers when savings banks violate “basic” norms, particularly solvency, stability, monetary and financial policy norms. The Law of Discipline and Intervention of Credit Institutions applies with equal force to banks and cajas. The European Central Bank can impose sanctions when a savings bank violates reserve requirements.
    - ACs can discipline and sanction savings banks that violate norms in areas attributed to ACs.
    - The Bank of Spain and the ACs are empowered to supervise and inspect savings banks. ACs must share with the Bank of Spain information obtained through supervisory activities. Bank of Spain and ACs can cooperate through formal agreements.
    - The CT has acknowledged potential conflicts among ACs jointly regulating/supervising multisite savings banks and empowers the State to enact basic legislation to resolve such conflicts and regulate relations among ACs.

### Observations on ACs’ practices and institutional weaknesses
- Table 3 (not reproduced here) illustrates that some large ACs (Madrid, Valencia, País Vasco and Cataluña) have substantial regulatory and supervisory norms on licensing, regulation, supervision and transparency, and sanctioning.
- ACs play a significant role in safeguarding transparency and consumer protection, and in authorizing the allocation of profits.
- ACs hold veto powers over merger proposals, and powers to impose authorization requirements for equity investments (Madrid, País Vasco, Cataluña) and lending (País Vasco, Cataluña).
- Institutional weaknesses identified:
  - Lack of independence of ACs’ supervisors from the ACs’ executive governments—and possibly from the supervised cajas—appears as a weakness in the current institutional framework.
  - Constraints imposed on the compensation of members of governing bodies may limit cajas’ capacity to use compensation as an incentive device.

*Source: _cr06215 - 20. The “bases” shall define a minimum common ground to ensure the unity of the*

### 27. The ACs’ powers to prevent mergers of cajas across Spain’s regions raises concerns

### 27. The ACs’ powers to prevent mergers of cajas across Spain’s regions raises concerns

### Scope and central concern
- The Autonomous Communities’ (ACs’) powers to prevent mergers of cajas across Spain’s regions raise concerns about the scope for further consolidation since consolidation has already drastically shrunk the number of cajas headquartered in any industrial AC.
- These powers raise the question whether those powers will constrain the ability of the cajas to adapt to the long-term challenges posed by the ongoing integration of European banking.

### Empirical evidence on consolidation
- Table 4. Number of Cajas per Autonomous Region
  - Andalucía: 1988 — 14; 2003 — 6; Difference — -8
  - Aragón: 1988 — 2; 2003 — 2; Difference — 0
  - Asturias: 1988 — 1; 2003 — 1; Difference — 0
  - Baleares: 1988 — 2; 2003 — 2; Difference — 0
  - Canarias: 1988 — 2; 2003 — 2; Difference — 0
  - Cantabria: 1988 — 1; 2003 — 1; Difference — 0
  - Castilla y León: 1988 — 11; 2003 — 6; Difference — -5
  - Castilla-La Mancha: 1988 — 4; 2003 — 2; Difference — -2
  - Cataluña: 1988 — 11; 2003 — 10; Difference — -1
  - Extremadura: 1988 — 4; 2003 — 2; Difference — -2
  - Galicia: 1988 — 4; 2003 — 2; Difference — -2
  - Madrid: 1988 — 1; 2003 — 1; Difference — 0
  - Murcia: 1988 — 1; 2003 — 1; Difference — 0
  - Navarra: 1988 — 2; 2003 — 1; Difference — -1
  - País Vasco: 1988 — 6; 2003 — 3; Difference — -3
  - La Rioja: 1988 — 1; 2003 — 1; Difference — 0
  - C. Valenciana: 1988 — 9; 2003 — 3; Difference — -6
  - Ceuta y Melilla: 1988 — 1; 2003 — 1; Difference — 0
  - Total: 1988 — 77; 2003 — 46; Difference — -31

### AC powers and procedural requirements (selected Autonomous Communities)
- Madrid
  - Licensing/Authorization: Consejería entitled to grant licenses; requirements include minimum capital, limits on scope of activities, appropriate accounting and internal organization and control procedures, probity and honorability of members of the governing bodies.
  - Withdrawal: License can be revoked for interruption of activities for more than six months, false information, insufficient capital, exclusion from the Deposit Guarantee Fund; Consejero must propose withdrawal, finally authorized by the Government of the Autonomous Community of Madrid.
  - Mergers: Must be authorized by the Government of Madrid. Requirements include: none of the merged entities must be in a liquidation process; preserve rights and guarantees of physical and legal persons; guarantee continuation of the obra social and labor stability to the maximum extent possible; approved by General Assemblies and Boards of Directors; new entity must be registered in the Bank of Spain and in the Community of Madrid. Mergers between cajas originated in different Autonomous Communities must be jointly approved by the governments of both communities, who must determine representation shares of the public sectors of both communities.
  - Equity investments: Investments that result in control and represent more than 5 percent of capital must be authorized by the Consejería; investments that represent more than 2 percent of the consolidated assets of the savings bank’s business group must also be approved.
  - Supervision and sanctions: Delegated to the Consejería, empowered to impose sanctions classified as very severe, severe, and minor. Sanctions to entities can include fines up to the maximum of 1 percent of capital or 300,000 euros (very severe); fines up to the maximum of 1/2 percent of capital or 150,000 euros (severe); fines of up to 60,000 euros (minor). Sanctions to individuals include fines of up to 150,000 euros and loss of membership in governing body for a maximum period of 5 years and inability to hold managerial positions in any other credit or financial entity for up to 10 years (very severe); fines up to 90,000 euros and inability to hold management positions for up to 1 year (severe); fines up to 15,000 euros (minor). All sanctions—except private rebukes—will be registered in the registry of savings banks and in the registry of members of the governing bodies.
  - Reporting: Cajas must report changes in status of Board of Directors and Audit Committee members, replacement of General Directors, openings/transfers/closures of branches; registered in Registro de Cajas de Ahorro de la Comunidad de Madrid and Registro de Altos Cargos de las Cajas de Ahorro con Domicilio en la Comunidad de Madrid.
  - Use of profits and obra social: Consejería approves use of profits and plans of obra social.
  - Remuneration and independence: Members of governing bodies cannot receive remuneration except compensations for expenditures; must act independently of appointing entities.

- Valencia
  - Authorization: Ministry of Economy and Finance (Conseller de Economía, Hacienda y Administración Publica) via Instituto Valenciano de Finanzas (IVF) can authorize creation of new savings banks and approve statutes; IVF can authorize changes in statutes.
  - Mergers and sales: Must be approved by the Conseller; mergers between cajas from different communities must be jointly authorized by the Consellers of the two communities.
  - Appointment/removal: Generalitat holds 25 percent of seats in the general assembly; consejeros generales appointed by Valencia’s legislative body; IVF can remove the Director General through disciplinary action.
  - Marketing and obra social: Cajas must request IVF approval for marketing activities with economic and financial contents; IVF approves plans for the obra social and establishes guidelines and priorities.
  - Supervision and sanctions: Delegated to the IVF, empowered to sign cooperation agreements with the Bank of Spain and to impose sanctions classified by severity. When a caja’s solvency or liquidity are at risk, the entity can be intervened or its management substituted by the Conseller, who can revoke the license; Conseller must take over operations if liquidation has been approved.
  - Reporting: Cajas must report changes in Board and Audit Committee members, issuance of securities, and openings/transfers/closures of branches in Valencia and other communities; registered in Registro de Cajas de la Comunidad Valenciana.

- País Vasco (Euskadi)
  - Authorization: Departamento de Hacienda y Finanzas empowered to grant licenses and approve statutes.
  - Withdrawal/Intervention: Government of the Community can intervene or withdraw license upon proposal from the Departamento when viability and stability are at risk.
  - Mergers and acquisitions: Must be authorized by the Departamento upon joint request with economic evaluation; requirements include none of merged entities in liquidation process and preservation of stakeholders’ and creditors’ rights.
  - Investment and lending restrictions: Departamento empowered to classify/select assets for investment; can force savings banks to request authorization to invest in real estate, shares, monetary assets, or to extend large loans or increase single name credit concentrations.
  - Use of profits and obra social: Departamento responsible for approving use of profits and plans of obra social.
  - Supervision and sanctions: Delegated to the Departamento, with sanctions categorized as very severe, severe, and minor. Very severe sanctions to entities include fines up to the maximum of 1 percent of capital or 300,000 euros, withdrawal of the license, and publication of the violation and penalties imposed. Sanctions to individuals include fines up to 150,000 euros, loss of membership for a maximum of 5 years, and inability to hold management positions for up to 10 years. Severe sanctions to entities include fines up to the maximum of 1/2 percent of capital or 150,000 euros; severe sanctions to individuals include fines up to 90,000 euros and inability to hold management or administration positions for up to 1 year. Minor sanctions to entities include fines of up to 60,000 euros.
  - Reporting and registries: Licensed savings banks registered in Registro de Cajas de Ahorro de Euskadi, including statutes and internal rules; registry records changes in statutes, mergers, acquisitions, dissolutions, liquidations, and sanctions. Cajas must report changes in status of Board of Directors, Audit Committee, and General Director, to be registered in Registro de Altos Cargos de las Cajas de Ahorro de la Comunidad Autónoma del País Vasco.

- Cataluña
  - Authorization and withdrawal: Consejería de Economía y Finanzas empowered to grant and deny licenses and approve statutes; Government of the Generalitat solely empowered to withdraw the license. Licensing includes a transitory period not exceeding two years.
  - Intervention: Government of the Generalitat, upon proposal from Departamento de Economía y Finanzas or the Bank of Spain, can decree intervention when viability and stability are at risk; Consejero can intervene in emergencies but decision must be immediately ratified by the Government of the Generalitat.
  - Mergers and acquisitions: Must be authorized by the Government of the Generalitat. Requirements include none of merged entities in liquidation process; preserve rights of creditors and depositors. Generalitat’s authorization will be published in newspapers and official bulletins. Statutes approved by the Consejero, except change of address of headquarters which must be authorized by the Government of the Generalitat.
  - Investment and lending restrictions: Departamento de Economía y Finanzas empowered to classify/select assets for investment within State framework; Government can force request for authorization to invest in real estate, shares or monetary assets, or to extend large loans or increase single name credit concentrations. Limits or coefficients must be based on total assets or own resources.
  - Use of profits and obra social: Profits applied to reserves and obra social according to official rules; Generalitat provides guidance and general directions indicating priorities while respecting each savings bank’s choice among alternative projects. Departamento empowered to approve General Assemblies’ decisions regarding uses of obra social.
  - Supervision and sanctions: Supervision delegated to Departamento de Economía y Finanzas; savings banks subject to public protectorate of the Generalitat guided by principles to promote legal activities, check social roles, and guard independence and reputation. Sanctions imposed by the Departamento include private rebuke, public reprimand communicated to other savings banks of Cataluña, fines of up to fifty million pesetas, and withdrawal of the license (license withdrawals imposed by Government of the Generalitat). Procedural and sanctioning regimes to be further developed reglamentariamente.
  - Reporting and registries: Licensed savings banks registered in Registro de Cajas de Cataluña, which records statutes, changes, mergers, acquisitions, dissolution and liquidation processes, and sanctions. Cajas must report opening and closure of branches including those outside Cataluña and appointments/changes in Board, Audit Committee, and General Director; these are registered in Registro de Altos Cargos de las Cajas de Ahorro de Cataluña and reported to the Bank of Spain.

### Analysis implications and policy considerations (drawn from text)
- The combination of:
  - AC-level authorization requirements for mergers and cross-community mergers needing joint approvals,
  - AC-imposed conditions on mergers (e.g., preservation of obra social, labor stability, verification that no merged entity is in liquidation),
  - AC powers to approve equity investments above specified thresholds (e.g., >5 percent of capital; >2 percent of consolidated assets in Madrid),
  - AC supervisory, sanctioning, reporting, and intervention powers,
  may create significant regulatory obstacles to cross-regional consolidation among cajas.
- Given that the number of cajas declined from 77 in 1988 to 46 in 2003 (difference -31), the remaining ability to further consolidate may be constrained if ACs exercise these powers restrictively.
- The multiplicity of procedural approvals (including publication requirements, joint authorizations, and registry conditions) and substantive conditions (preservation of obra social, representation shares of public sectors) could limit agility in adapting to "the long-term challenges posed by the ongoing integration of European banking."

*Source: _cr06215 - 27. The ACs’ powers to prevent mergers of cajas across Spain’s regions raises concerns*

### 28. This section analyzes the issues raised by public representation, and the challenge of

### _cr06215 - 28. This section analyzes the issues raised by public representation, and the challenge of

### A. Public Representation and Political Influence
- Substantial representation of the public sector in savings banks’ governing bodies raises concerns about scope for, and effects of, political influence.
- Historical evolution:
  - Pre-constitutional period: significant public intervention and political influence.
  - Liberalization beginning in 1977 reduced public sector participation and broadened representation to different social groups.
  - LORCA law and Constitutional Tribunal rulings (STC 48 and 49/1988) allowed local governments—particularly municipalities—to increase representation shares, temporarily reversing public-sector disengagement.
  - Law 44—Ley Financiera—of 2002 marked another institutional shift.
- Reforms since the Ley Financiera:
  - Public sector representation ceiling reduced to 50 percent.
  - Irrevocability of consejeros institutionalized.
  - Reforms aimed to ensure cajas’ loans and investments would not be considered public aid under European Commission (EC) regulations.
- Remaining concerns and mitigating factors:
  - Reduction to 50 percent may not eliminate perceptions of other channels for political influence (e.g., links via representatives of other interest groups such as “impositores,” depositors and workers).
  - Public sector representatives often come from different parties, reflecting the political makeup of the government bodies they represent (mitigating factor).
  - Irrevocability helps armor against political influence, but the possibility of reelection can affect independence; effectiveness will be tested over successive electoral cycles.
  - Press coverage suggests political parties still argue over high-level appointments at cajas.
- Comparative turnover evidence (Table 5: Executive Turnover in Banks and Cajas, 1986–2000):
  - Observations (institution/year): 1246 (Commercial banks) and 859 (Cajas)
  - Turnover of directors: 18.8 (Commercial banks), 20.7 (Cajas)
  - Permanence of directors (years): 5.3 (Commercial banks), 4.8 (Cajas)
  - Turnover of presidents: 13.2 (Commercial banks), 16.4 (Cajas)
  - Permanence of president (years): 7.6 (Commercial banks), 6.1 (Cajas)
  - Turnover of general director: 31.2 (Commercial banks), 13.1 (Cajas)
  - Permanence of general director (years): 3.2 (Commercial banks), 7.6 (Cajas)
  - Source: Presente y futuro de las cajas de ahorros. Fundación CaixaGalicia, 2003.

### B. Barriers to the Raising of Capital and Performance Incentives
- Limits to raising capital:
  - Legal form precludes issuance of shares; cajas rely largely on retained profits.
  - Over the past ten years, cajas channeled over 70 percent of after-tax profits into their revenue reserve every year.
  - Since 1985, cajas can raise capital by issuing subordinated debt (Tier 2) and preferred participations (qualifying preferred participations as Tier 1; non-qualifying as Tier 2).
- Implications of equity-raising limitations:
  - (i) Reduced scope to expand where operations require more capital than available (e.g., acquisitions).
  - (ii) Limited capacity to replenish capital after major losses.
  - (iii) Lack of a share instrument deprives cajas of a market signal to assess institution performance continuously.
- Cuotas participativas (since 1990) as partial remedy:
  - Considered part of Tier 1 capital (see Box 1).
  - Not standard equity: grant no voting rights; issuance generally more heavily regulated than corporate stocks.
  - Help address implications (i) and (iii), but inadequate in financial distress where voting rights are crucial for decisions such as replacing management or restructuring.
- Issuance experience and limits:
  - By end-2005 no cuotas participativas had been issued; reasons include ample caja capital and access to alternative, cheaper sources of capital.
  - Preferred participations (participaciones preferentes) were used intensively by some cajas during 1999–2001; their share in regulatory capital was capped to 30 percent in 2003.
  - Law 19/2003 of July 4, 2003: outstanding amount of participaciones preferentes cannot be greater than 30 percent of Tier 1 capital, without prejudice to Bank of Spain restrictions.
- Features of cuotas participativas that may deter issuance:
  - First, although variable-income, legal framework allows cajas to smooth returns to cuota-holders through a dividend stabilization fund, diminishing variable-income nature and adding uncertainties.
  - Second, cajas’ discretion to allocate profits to the obra social could give rise to concerns about dilution of cuota-holders’ shares in profits; practical concern limited because cuota-holders have no voting rights.
  - Third, a perceived “first-mover-disadvantage” may delay issuance: first issuers incur transaction costs (e.g., advertising investors’ rights through the CNMV) and face investor aversion toward new instruments; uncertainties likely to fade with market acceptance.
- Remedies in distress:
  - Cajas have not suffered systemic crises; individual distress resolved through mergers among cajas.
  - In distress, cuotas participativas would likely be of limited help; remedies include sale of assets or support from the deposit guarantee fund.
  - Therefore, it is important for cajas to maintain a solid equity position and a risk profile that accounts for difficulties in promptly bringing in substantial new capital.
  - In practice, cajas as a group have higher capitalization.

- Limited market assessment and contestability:
  - Two dimensions where market contestability is limited compared with commercial banks:
    - First: lacking owners, cajas cannot be purchased by private parties; standard ownership rights (e.g., voting) do not apply.
    - Second: cajas do not issue tradable equity instruments, so day-to-day decisions are not fully assessed via equity price signals.
  - On takeovers:
    - Cajas cannot be purchased by private individuals or institutions due to legal nature, but can acquire other companies and credit institutions.
    - Cajas’ assets and branches can be purchased by individuals, private companies and commercial banks.
    - Mergers and acquisitions among cajas require approval of the Autonomous Communities.
  - On market assessment of day-to-day decisions:
    - Non-listing of many cajas means managers’ decisions are less continuously reflected in capital markets.
    - Debt instruments issued by cajas reflect market value only to a limited degree.
- Transparency and governance reforms:
  - Starting in 2005, cajas that issue traded instruments must publish an annual Governance Report to enhance transparency and market oversight.
  - A CNMV-led working group opened consultation to propose corporate governance improvements for publicly traded firms and savings banks; a special subgroup focuses on savings banks.
  - A Corporate Governance Code that unifies previous recommendations and current legislation is being considered; a first draft has been released for comments, with specific recommendations for savings banks to follow later.

### Box 1 — Capital Instruments Available to Spanish Savings Banks: Cuotas Participativas and Participaciones Preferentes
- Available capital instruments:
  - Cuotas participativas (Tier 1)
  - Participación preferente (Tier 1 for qualifying preferred participations; Tier 2 for non-qualifying)
  - Subordinated debt (Tier 2)
- Legal requirements:
  - Cuotas participativas and participación preferente must be issued as securities publicly traded in exchanges; subordinated debt may or may not be publicly traded.
  - Preferred shares and subordinated debt can be issued by all financial institutions; cuotas participativas are specific to cajas.
- Cuotas participativas specifics:
  - Introduced in Spanish legislation in 1990 (Decree 664); modified by Ley Financiera of 2002 and Decree 302 of 2004.
  - Grant no voting rights; holders have economic rights (participation in profits through variable dividends).
  - Base to compute minimum allocation of profits to the obra social excludes the part of profits that corresponds to cuota-holders.
  - In liquidation, holders have right to their share of liquidation value; in premature amortization, right to receive market value.
  - Constitutional Tribunal removed a clause granting investors preferential subscription right over new cuotas (suit filed by Comisiones Obreras).
  - Issuance and dividend distribution must be approved by the General Assembly; operational issuance decisions can be delegated to the Board of Directors.
  - General Assembly can approve creation of a group representing cuota-holders with voice but no voting power in the General Assembly.
  - Legal limits: volume of cuotas issued cannot exceed 50 percent of the entity’s net worth; no natural or legal person can acquire more than 5 percent of cuotas issued.
- Participaciones preferentes specifics:
  - Subordinated debt instrument granting fixed dividend when issuer obtains profits; no right to dividends when institution suffers losses.
  - Legal framework approved in 2003 enabled issuance in Spain; before 2003 many cajas issued participaciones preferentes abroad via special purpose vehicles.

### Box 2 — Savings Banks and Capital Instruments in Norway
- Norway introduced primary capital certificates (PCCs), broadly similar to cuotas participativas but providing voting rights and tradability.
- PCCs accounted for 16.1 percent of savings banks capital (including subordinated debt) in 2000; used mainly by large savings banks.
- PCC characteristics:
  - Property and dividend rights: confer property rights over capital and profits; dividends can be distributed or accumulated in a dividend stabilization fund; in liquidation PCC holders receive share of capital and dividend stabilization fund after creditors.
  - Voting rights: not proportional to share of capital; PCC holders choose one quarter of members of the general assembly; other interest groups (depositors, employees, public sector representatives) choose remaining three quarters. Proposal to increase PCC holders’ representation to 40 percent under analysis.
  - Other: securities convertible into PCCs can be issued; issuance requires qualified majority vote of two thirds of the general assembly; ownership of PCCs is unrestricted except no individual or legal person can hold more than 10 percent of PCCs of a single savings bank.

*Source: IMF staff analysis (content unit _cr06215).*

### 47. Unlike commercial banks, cajas cannot make use of stock options to compensate

### _cr06215 - 47. Unlike commercial banks, cajas cannot make use of stock options to compensate

### Executive compensation and governance (paragraph 47)
- "Unlike commercial banks, cajas cannot make use of stock options to compensate their executives—due to the absence of stock prices for cajas—and thus, are deprived of a potentially useful device to induce profit maximization."
- "However, this may also discourage excessive risk-taking, as the use of stock options to compensate executives has led to excessive risk-taking and corporate failures in other countries."
- "Savings banks, however, appear to have no difficulties to attract the best professionals, as executives receive compensation appropriate to market conditions."
- "As indicated in Table 3, compensation to non-executive members of governing bodies is restricted by law to “dietas por asistencia y desplazamiento”—expenditures related to their attendance of cajas’ meetings."

### System role, market share, and performance (paragraph 48)
- "The savings banks (cajas) have been a major force in extending services and in creating a highly competitive environment in the Spanish financial system."
- "They have close ties with the communities and they support social, cultural, and educational projects."
- "Cajas have endeavored to keep close to their customer base and have successfully adapted to the liberalization of the Spanish financial sector."
- "They have a large network of branches and a strong regional identity, and since 1980 have steadily increased their market share of customer deposits and total credit to the private sector—which is concentrated in lending to individuals and to small- and medium-size enterprises—to account for more than one-half of the system in 2005."
- "Cajas have built a strong capital base over the years and the system has suffered no systemic crisis."

### Conclusions and policy recommendations to strengthen governance (paragraph 49)
- "Notwithstanding the overall strengths of the savings banks system, the peculiar structure of savings banks—foundations that do not have owners—requires adequate arrangements that ensure good governance and help them maintain a strong market orientation."
- The following actions would help:
  - "Ensuring that the 2002 regulations on corporate governance are fully implemented, strengthening them if required in particular as regards outside influence on the savings banks’ decisions."
  - "Promoting new means to raise high-quality capital, such as the issuance of cuotas participativas to the market."
  - "Allowing savings banks to merge freely within and across Autonomous Communities provided the Bank of Spain has ruled favorably on the viability of the merged institution."
  - "Reducing over time the public sector representation ceiling, currently at 50 percent."

### Regulatory and supervisory division of responsibilities (paragraph 50)
- "The Autonomous Communities’ powers do not include solvency or financial stability issues, in line with rulings by the Tribunal Constitucional handed down over many years."
- "Looking to the future, eventual changes in the legal regime should clearly preserve the sole and exclusive role of the Bank of Spain in prudential oversight—solvency and financial stability issues—of all financial institutions, including savings banks."
- "In this regard, it is particularly important to avoid any possible inconsistency in the division of responsibilities between the Bank of Spain and the Autonomous Communities."
- "This would help ensure that Spanish financial supervision is consistent with the present trend observed in European and international markets towards avoiding fragmentation and enhancing harmonization."

### Resolution mechanisms and capital-raising constraints (paragraph 51)
- "Looking forward to the long term, a weakness of the current model is that its resolution mechanisms are basically restricted to mergers or asset sales."
- "Although mergers among cajas could be useful—though not necessarily optimal—to resolve the financial difficulties of smaller cajas, they could not be relied on to resolve systemically important cajas."
- "The incapacity of cajas to raise capital through instruments that grant voting rights precludes a potentially useful—less costly—vehicle to resolve cajas with problems—which could be particularly relevant for large cajas."
- Policy consideration:
  - "The Spanish authorities may wish to consider strengthening the current model by introducing alternative resolution mechanisms."
  - "One possibility would be to allow a caja to issue capital instruments with attached voting rights if the caja is in serious distress or its assembly wishes to do so."
  - "More broadly, the supervisor needs to remain particularly vigilant in order to ensure that the risk profile of cajas takes fully into account the difficulties of bringing in promptly substantial amounts of new capital."

* _cr06215 - 47. Unlike commercial banks, cajas cannot make use of stock options to compensate_*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06215.pdf_