## FINANCIAL SECTOR ASSESSMENT PROGRAM UPDATE SPAIN THE REFORM OF SPANISH SAVINGS BANKS TECHNICAL NOTE MAY 2012 ## Source details **Canonical URL:** [FINANCIAL SECTOR ASSESSMENT PROGRAM UPDATE SPAIN THE REFORM OF SPANISH SAVINGS BANKS TECHNICAL NOTE MAY 2012](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12141.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12141.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12141.pdf.json) --- ### Executive summary: weaknesses revealed and reforms undertaken - Weaknesses revealed by the crisis: - SSBs had become universal banks, expanded activities across Spain, and contributed to the build-up of excess capacity and risk concentration. - Representation of a broad variety of stakeholders’ interests, including political constituencies, in SSB decision-making bodies may have affected risk-taking and strategy. - Inability to raise capital in the absence of a traditional shareholding structure limited market discipline mechanisms. - Blurred competences between the central government and the autonomous communities (ACs) slowed the intervention process. - Major reforms and progress: - Consolidation strategy pursued through “institutional protection schemes” (SIPs) to provide mutual solvency and liquidity support. - Increased capital requirements prompted SSBs to spin-off their banking business into newly created commercial banks operating under exclusive supervision of the Banco de España (BdE). - Fit and proper requirements and conflict-of-interest rules for SSB governing bodies were strengthened. - Several SSBs were intervened and resolved; the number of institutions fell from 45 to 11 (with a likely further decline). - Remaining issues and suggested improvements: - SSBs no longer perform banking activity but retain legal status as banks—this leaves unaddressed the financial soundness of SSBs as bank shareholders. - Governance could be further improved to shield the ownership function from commercial-bank management, mitigate conflicts of interest, and enhance transparency and accountability. - Law envisages transformation of SSBs that lose control or lower participation below thresholds into foundations, but complex legal and institutional issues related to State and AC competences must be addressed. - Recommended: a comprehensive framework for SSBs as major or significant shareholders and for “special foundations” that might hold significant bank shares. ### Main recommendations (summary) - Improve SSBs framework to enhance rules on financial strength of SSBs as shareholders, governance arrangements, and transparency and accountability mechanisms: - Improve clarity and disclosure toward third parties about the financial regulatory requirements applying to SSBs. - Streamline the governance structure of SSBs. - Introduce incompatibility requirements regarding SSBs and commercial banks’ governing bodies. - Tighten conflict-of-interest rules for representatives in SSBs governing bodies. - Enhance fit and proper requirements for SSBs governing bodies. - Introduce independent members in SSBs governing bodies. - Revisit rules on the appointment process to mitigate undue political interference in SSBs governing bodies. - Require disclosure of Sistema Institucional de Protección (SIPs) among SSBs. - Update required contents of corporate governance report to take into account the new role of SSBs as major shareholders. - Priority: Medium; Timeframe: 12 months. - Devise a law for SSBs as a major or significant shareholder, providing basic State-level features: - Governance rules on the foundations’ governing bodies and on the relationship between foundations as significant shareholders and commercial banks. - Investment criteria and related disclosure and monitoring mechanisms. - A tailored supervisory framework. - Priority: Medium; Timeframe: 12/18 months. ### Institutional background and pre-reform features - Historical/legal features: - SSBs (cajas de ahorros) originated from the 18th century Montes de Piedad and had a social mission. - By law, SSBs must pursue a wide array of goals, including promoting savings among the popular classes, maximizing institution value and financial soundness, enhancing competition, providing charitable or social-cultural services, and contributing to regional development. - Ownership and capital structure: - SSBs do not have share capital; equity mainly consists of reserves from retained earnings. - Until recent reforms, SSBs were required to allocate at least half of their profits to reserves; the remainder funded social projects (obra social). - Capital instruments included cuotas participativas, participación preferente, and subordinated debt; few cuotas participativas were issued. - Corporate governance and regulatory allocation: - Governing bodies: General Assembly, Board of Directors, and Control Committee. - Stakeholders represented as “insiders” and “outsiders”; national law capped representation of founding and public entities at 50 percent and reserved between 5 and 15 percent for employees. - BdE retained powers over solvency, liquidity, risk limits, provisions, and accounting. - ACs exercised competence over corporate governance, consumer protection, reporting requirements; mergers among SSBs required AC approval. - Central government had responsibilities in issuance of sanctions, in cooperation with BdE. ### From boom to crisis: market share, risk buildup, and drivers - Deregulation and business-model change: - Deregulation began mid-1970s; universal banking permitted, direct lending coefficients lifted (not fully abolished until 1992), and branching barriers removed by 1988. - SSBs reduced regional specificity and became strong competitors to commercial banks. - Market share and funding trends: - Market share (total assets) increased from around 20 percent in 1980s to 40 percent in 2010. - SSBs’ share of total assets funded by domestic deposits trended downward from over 80 percent in the early 1980s to 64 percent in 2010. - Risk concentration and capacity: - Growth accompanied by increased lending to construction, real estate developers, and household mortgages, financed increasingly through wholesale markets. - Excess capacity: as of end-2009, there was almost one branch for every 1,000 inhabitants in Spain (almost twice the euro-area average). - Low employees-per-branch and lower assets-per-employee compared with euro-area averages. - Institutional drivers: - Insiders vs outsiders influenced objectives: larger SSBs put more emphasis on economic goals; political influence affected branch openings and lending. - Regional legal heterogeneity and AC approval requirements impeded consolidation. ### Systemic shock, immediate impacts, and restructuring objectives - Systemic shock impacts: - Dislocation of wholesale credit markets, burst of the real estate bubble, and sharp downturn triggered rapid de-leveraging and risk re-pricing. - Credit growth collapsed. - SSBs’ nonperforming loans (NPLs) soared, reaching almost 10 percent of gross loans as of end-2010, compared to about 1 percent in 2007. (Figure includes an estimate of repossessed real estate assets.) - SSBs’ loan-loss-provision buffers declined from almost 100 percent in 2007 to about 40 percent in 2010. - Limited ability to raise equity capital and prospect of more demanding Basel III requirements reduced capital generation capacity. - Restructuring objective and strategy: - Main objective: promote consolidation through mergers or integration; intervene and absorb non-viable institutions into stronger entities. - Expected benefits: economies of scale, improved cost-efficiency, restored capital generation capacity. - Initial strategy did not aim at fundamentally changing the basic model of SSBs. ### Institutional support and instruments used in the reform - FROB (Fondo de Reestructuración Ordenada Bancaria) launched June 2009 to encourage orderly consolidation and strengthen capital buffers. - SIPs (Sistema Institutional de Protección) established under June 2010 law as contractual agreements to protect and improve liquidity and solvency while maintaining separate legal entities: - SIP pillars: - Relinquishment by participants to a central SIP body (a newly established bank controlled by participant savings banks) of capacity to determine and implement business strategies and internal risk control and management tools; central body expected to fulfill regulatory requirements on a consolidated basis. - Mutual liquidity and solvency pacts and pooling of results to an extent not lower than 40 percent of respective resources. - Commitment to stability: agreements to last for a minimum term of 10 years and not be broken without the BdE first analyzing viability after fragmentation. - Practical weaknesses: some ACs retained veto powers; complications on scope of functions transferred; uncertainties over consolidation perimeter and tax regime. ### Legal and corporate reforms (2010–2012) and key regulatory numbers - July 2010 reforms: - Cuotas participativas amended: voting rights granted and individual holding limit of 5 percent removed, overall issuance limit of 50 percent retained. - Ceiling on voting rights of public entities reduced from 50 to 40 percent. - General fit and proper criteria for regional government representatives; elected political representatives prohibited from governing bodies; cooling-off period of two years when a representative took decisions regarding SSBs while in office. - Required commercial and professional expertise and integrity tightened for at least the majority of Board members. - Two new corporate models introduced: indirect performance of financial activities through a commercial bank; transformation into a “special foundation.” - February 2011 measures: - Banks required to comply, by end-September 2011, with a “principal capital” of at least 8 percent of total risk-weighted assets. - Minimum threshold set equal to 10 percent for credit institutions excessively relying on wholesale funding (more than 20 percent of total funding) and with limited private-sector equity holding (less than 20 percent). - If capital could not be raised through the market, FROB could purchase equity share capital. - Result: nearly all SSBs, alone or under SIPs, spun off banking into newly created commercial banks; two new credit institutions (Banca Civica and Bankia) carried out IPOs in July 2011. - February 2012 decree (RDL 2/2012): - Reaffirmed governing bodies for SSBs performing banking indirectly: General Assembly, Executive Board, and optionally Control Committee. - Established that an SSB cannot devote more than 10 percent of its profits to expenses other than social works. - Specified conversion into a “special foundation” if SSB loses control of the commercial bank or if its share of voting powers falls below 25 percent (noting potential incoherence between control concept and 25 percent threshold). ### Reform achievements and measurable outcomes - Ability to raise external equity capital and market discipline: - Separation means financial activities are carried out by commercial banks able to access markets and subject to investor monitoring. - Minority shareholder safeguards expected to limit controlling-shareholder behaviors benefiting SSBs exclusively. - Supervisory clarity: - Commercial banks under exclusive BdE supervision for prudential supervision and early intervention/resolution. - BdE retains intervention powers at “holding” level and supervisory powers over SSBs to monitor solvency or leverage. - Professionalism and governance: - Fit and proper criteria strengthened; majority of SSB boards must comply with banking expertise criteria. - Independent directors required: listed entities must have at least 1/3 independent directors; FROB-recouped institutions required to have majority non-executives. - RDL 11/2010 introduced limits on maximum size of representatives in SSB governing bodies and established incompatibility requirements for politically elected officials. - Consolidation and capacity reduction: - Number of institutions declined from 45 to 11 and was bounded to fall to 9 with auctions of two weak institutions (Catalunya Banc and NCG Banco) under FROB management. - Since mid-2008, number of branches reduced by 17 percent and number of employees reduced by 14.3 percent. - Average size (assets) of a “new” SSB increased from €29.4 billion to €99.2 billion. - Market-share distribution remained skewed with two large players (La Caixa and BFA-Bankia) and a smaller number of bigger institutions. ### Outstanding issues, risks, and financial-strength concerns - Corporate-structure anomaly: - Many SSBs became holding companies that do not perform banking activities but retain banking licenses; anomaly pronounced for smaller institutions with minor stakes in commercial banks yet maintaining SSB legal status via SIPs. - Financial strength of SSBs as controlling shareholders: - Predominant source of income for most SSBs as holding companies derives from controlling stakes in commercial banks; used to finance social work. - Questions about SSBs’ ability to backstop capital needs of controlled institutions; assessing controlling shareholders’ financial strength matters for the soundness of controlled commercial banks. - Prior limited capacity of SSBs to raise external capital remains in the control chain. - Policy considerations discussed: - Put in place a self-contained regime to ensure SSB financial strength given absence of shareholders behind SSBs. - Possibility of BdE ad hoc de-consolidation if an SSB’s position is not relevant for the group, with consequences for consolidation of losses and recognition when market values diverge from nominal values. - Introduce a rule that SSBs above a certain size (e.g., based on assets) be required to transfer banking business and/or be transformed into foundations. ### Governance, disclosure, and supervisory overlaps - Governance role and shareholding function: - Reform does not establish specific criteria guiding SSBs in exercise of shareholding rights to preserve arms’ length independence of management. - Two tiers of regulation (State and ACs) can create ambiguity in decision-making (e.g., merger approvals). - Recommendation: further refinements to ensure transparency and accountability in exercising shareholding rights. - Overlaps in supervisory competences: - SSBs are regulated at State and ACs level; as major shareholders they are subject to BdE prudential requirements. - BdE and MoE mechanisms exist (e.g., suspension of “political rights” of a shareholder) when a significant shareholder’s influence is detrimental. - Recommendation: clearer separation of oversight competences between the State and ACs. - Corporate governance arrangements and board composition: - Streamline SSBs’ governing bodies; consider maintaining Control Commission where useful. - Introduce legally binding independent director requirements for non-listed commercial banks formed under a SIP and for SSB boards. - Reinforce separation of President and CEO roles. - Extend fit and proper criteria to all Board members of SSBs. - General Assembly to set ownership policies; Board to manage relationships with commercial banks. - RDL 2/2012: entities undergoing merger to comply with unified code of good corporate governance applicable to listed companies (including independent director requirement). ### Incompatibility, appointment processes, and disclosure of SIPs - Incompatibility requirements and appointment processes: - Tighten incompatibility so SSB governing-body members or senior managers shall not perform equivalent functions in the controlled commercial bank. - Apply two-year cool-off period for political representatives regardless of prior participation in deliberations. - Revisit threshold for public entity representation (now 40 percent), possibly distinguishing among local powers. - Disclosure and transparency of SIP agreements and corporate governance reports: - SIPs function like shareholders’ agreements; currently SIPs for listed banks are public; SIP disclosure for unlisted banks depends on CNMV price-sensitivity tests. - Recommendation: broaden and legally mandate public disclosure of SIP contents to enhance transparency, facilitate investor entry, enhance accountability, and provide minority shareholders monitoring tools. - Corporate governance reports should be supplemented to reflect SSBs’ role as controlling shareholders; require disclosure of ownership policies, voting-rights exercise criteria, and detailed investment-strategy criteria. - Generalize framework agreements regulating arms-length relationships between SSB and controlled bank with monitoring mechanisms (e.g., Control Commission). ### Rationale for a more stringent regime and international references - Justifications for more stringent rules for SSBs: - SSBs represent varied stakeholders including political constituencies and perform a social mandate; broad public interest in verifying exercise of governance and economic rights. - Transparency measures encourage external investors and system competitiveness. - International references: - OECD “Guidelines for Corporate Governance of State-owned Enterprises,” Basel Committee principles, and Santiago Principles for sovereign wealth funds emphasize disclosure and governance standards. - Examples of crisis-era state vehicles: UK (UKFI), Denmark, Greece; Germany’s special fund; Netherlands’ legislative proposal for a holding company. - Institutional-investor principles emphasize disclosure of voting policies and conflict-of-interest transparency; legal binding requirements may be preferable to “comply or explain.” ### Toward a governed transition and a special regime for transformed SSBs/foundations - Anticipated evolution and social-work implications: - Progressive dilution of SSBs may significantly reduce resources for social work. - Outcomes may vary: transformed institutions could be minority passive shareholders or retain active roles. - Example: Generalitat de Catalunya drafting legislation on regional foundations holding bank shares to channel resources to social activities. - Legal coherence and “special foundations” concerns: - Law foresees transformation into “special foundations” when SSB loses control or voting powers fall below 25 percent; concern that less than 25 percent may still confer significant influence. - Ley de Fundaciones 50/2002 does not address issues when foundations maintain significant bank shareholdings. - Recommendation: State-level special regime based on financial-stability grounds to harmonize principles across ACs. - Suggested elements of a special regime: - Governance: - Disclosure of shareholders’ agreements. - Strengthening incompatibility requirements. - Setting and disclosing general ownership policies. - Enhance independent directors on commercial banks’ boards when foundations are significant shareholders. - Rules on foundations’ management-board composition and fit and proper criteria complementing BdE requirements. - Establish an oversight body and clarify appointment criteria for foundation management. - Regulate possible undue interference by the bank over foundation activity. - Investment criteria: - Design foundations to resemble institutional investors with diversified assets and balanced portfolios aimed at long-term community value. - Foundations to gradually divest bank shares or subscribe to capital increases based on bank viability plans. - Investment strategies should be verifiable against benchmarks and subject to transparency mechanisms to monitor related-party exposures. - Supervisory framework: - Requirements to be overseen by a competent authority, potentially building on the Protectorate’s functions with independence safeguards. *Source: International Monetary Fund, Monetary and Capital Markets Department. FINANCIAL SECTOR ASSESSMENT PROGRAM UPDATE SPAIN THE REFORM OF SPANISH SAVINGS BANKS TECHNICAL NOTE MAY 2012.* ### 2012. The views expressed in this document are those of the staff team and do not necessarily reflect ### FINANCIAL SECTOR ASSESSMENT PROGRAM UPDATE SPAIN THE REFORM OF SPANISH SAVINGS BANKS TECHNICAL NOTE MAY 2012 ### Executive Summary - The crisis revealed several weaknesses in the Spanish savings banks (SSBs) framework: - SSBs had become universal banks, expanded activities across Spain, and contributed to the build-up of excess capacity and risk concentration. - Representation of a broad variety of stakeholders’ interests, including political constituencies, in SSB decision-making bodies may have affected risk-taking and strategy. - Inability to raise capital in the absence of a traditional shareholding structure limited market discipline mechanisms. - Blurred competences between the central government and the autonomous communities (ACs) slowed the intervention process. - Authorities undertook major reforms with notable progress: - A consolidation strategy pursued through “institutional protection schemes” (SIPs) to provide mutual solvency and liquidity support. - Increased capital requirements prompted SSBs to spin-off their banking business into newly created commercial banks operating under exclusive supervision of the Banco de España (BdE). - Fit and proper requirements and conflict-of-interest rules for SSB governing bodies were strengthened. - Several SSBs were intervened and resolved; the number of institutions fell from 45 to 11 (with a likely further decline). - Remaining issues and suggested improvements: - Although SSBs no longer perform banking activity, they retain legal status as banks—this peculiar arrangement offers oversight advantages but leaves unaddressed the financial soundness of SSBs as bank shareholders. - Governance could be further improved by measures to shield the ownership function from commercial-bank management, mitigate conflicts of interest, and enhance transparency and accountability. - The law envisages transformation of SSBs that lose control or lower participation below thresholds into foundations, but complex legal and institutional issues related to State and AC competences must be addressed. - A comprehensive framework for SSBs as major or significant shareholders and for “special foundations” that might hold significant bank shares is recommended to enhance preparedness and stability. ### Main Recommendations (summary of Table 1) - Further improve the SSBs framework to enhance rules on financial strength of SSBs as shareholders, governance arrangements, and transparency and accountability mechanisms, in particular by: - Improving clarity and disclosure toward third parties about the financial regulatory requirements applying to SSBs. - Streamlining the governance structure of SSBs. - Introducing incompatibility requirements regarding SSBs and commercial banks’ governing bodies. - Tightening conflict-of-interest rules for representatives in SSBs governing bodies. - Enhancing fit and proper requirements for SSBs governing bodies. - Introducing independent members in SSBs governing bodies. - Revisiting rules on the appointment process to mitigate undue political interference in SSBs governing bodies. - Requiring disclosure of Sistema Institucional de Protección (SIPs) among SSBs. - Updating required contents of corporate governance report to take into account the new role of SSBs as major shareholders. - Priority: Medium; Timeframe: 12 months. - Devise a law for SSBs as a major or significant shareholder, providing for basic features at the State level that include: - Governance rules on the foundations’ governing bodies and on the relationship between foundations as significant shareholders and commercial banks. - Investment criteria and related disclosure and monitoring mechanisms. - A tailored supervisory framework. - Priority: Medium; Timeframe: 12/18 months. ### Spanish Savings Banks: Institutional Background Before the Reform - Historical and legal features: - SSBs (cajas de ahorros) originated from the 18th century Montes de Piedad and had a social mission. - By law, SSBs must pursue a wide array of goals, including: - Promote savings among the popular classes and prevent their exclusion from the financial system. - Maximize the value of the institution and strengthen its financial soundness. - Enhance competition and avoid abuse of monopoly. - Provide services with a charitable or social-cultural character to the community. - Contribute to regional development. - Ownership and capital structure: - SSBs do not have share capital; equity mainly consists of reserves from retained earnings. - Until recent reforms, SSBs were required to allocate at least half of their profits to reserves; the remainder funded social projects (obra social). - Capital instruments available included cuotas participativas, participación preferente, and subordinated debt; few cuotas participativas were issued due to constraints. - Corporate governance: - Governing bodies: General Assembly, Board of Directors, and Control Committee (reporting to General Assembly). - Stakeholders represented as “insiders” (employees, depositors, private founders) and “outsiders” (local and regional governments, public founders). - Voting rights varied by regional law; national law capped representation of founding and public entities at 50 percent and reserved between 5 and 15 percent for employees. - Regulatory allocation: - BdE retained powers over solvency, liquidity, risk limits, provisions, and accounting. - ACs exercised competence over corporate governance, consumer protection, reporting requirements; mergers among SSBs required AC approval. - Central government had responsibilities in issuance of sanctions, in cooperation with BdE. ### From Boom to Crisis - Deregulation and business-model changes: - Deregulation began mid-1970s; SSBs allowed universal banking, compulsory direct lending coefficients gradually lifted (not fully abolished until 1992), and branching barriers removed by 1988. - SSBs reduced regional specificity, expanded services, and became strong competitors to commercial banks. - Market share and funding trends: - Market share (total assets) increased from around 20 percent in 1980s to 40 percent in 2010. - SSBs’ share of total assets funded by domestic deposits (public and private sector, excluding credit institutions) trended downward from over 80 percent in the early 1980s to 64 percent in 2010. - Risk concentration and capacity: - Growth accompanied by increased lending to construction companies, real estate developers, and household mortgages, financed increasingly through wholesale markets. - Excess capacity: as of end-2009, there was almost one branch for every 1,000 inhabitants in Spain (almost twice the euro-area average). - Low employees-per-branch and lower assets-per-employee compared with euro-area averages. - Institutional drivers of behavior: - Relative importance of insiders vs outsiders influenced objectives: larger SSBs saw economic goals (profit maximization) gain importance, especially where insiders held more influence. - Political influence affected performance: local governments and political parties were significantly involved, with evidence that politically close provinces saw more branch openings and lending; chairmen who were political appointees often correlated with worse performance. - Regional legal heterogeneity and requirement of AC approval for mergers impeded consolidation. ### Reforms: From Savings Banks to (Indirect) Commercial Banks - Structural changes implemented: - Most SSBs spun off banking business into newly formed commercial banks in exchange for controlling shares, separating banking activities from social activities. - These new commercial banks operate under the exclusive supervision of the Banco de España (BdE). - Institutional Protection Schemes (SIPs) used initially to promote consolidation and mutual solvency/liquidity support. - Strengthened fit and proper requirements and conflict-of-interest rules for SSB governing bodies. - Outcomes to date: - Several SSBs have been intervened and resolved. - Consolidation reduced the number of SSB institutions from 45 to 11, and the number is likely to decline further. ### Reforms Achievements and Remaining Gaps - Achievements: - Major progress in consolidating capacity and separating banking operations from social functions. - Tighter supervision over the banking activities via BdE jurisdiction. - Strengthened governance standards and conflict-of-interest rules. - Remaining gaps and challenges: - SSBs retain legal status as banks despite no longer performing banking activity; this hybrid status creates unique oversight implications. - Financial soundness of SSBs as shareholders remains unaddressed even though it is crucial to assess the soundness of the controlled commercial bank. - Governance risks remain where SSBs can continue to exercise dominant or significant influence over commercial banks. - Legal and institutional frictions between State and AC competences complicate transformations of SSBs into foundations. ### Toward a New Role for Spanish Savings Banks - Need for a defined strategy and legal framework: - Reform is a moving target in a systemic crisis; merits exist in preserving a well-defined regulatory and oversight framework. - The law foresees transformation of SSBs that lose control or reduce participation below thresholds into foundations, but complex State/AC competence issues need resolution. - Leaving outcomes solely to market-driven progressive dilution may be non-linear and face stakeholder resistance; governance of the transformation process is necessary. - Recommended elements for a framework for transformed SSBs / “special foundations”: - Spell out sound features for SSBs that transform into foundations, including governance arrangements, investment criteria, disclosure and monitoring mechanisms, and a tailored supervisory framework. - Consider whether financial stability could provide a legal basis at the State level to harmonize principles given current institutional division of competence between State and ACs. *Source: International Monetary Fund, Monetary and Capital Markets Department. FINANCIAL SECTOR ASSESSMENT PROGRAM UPDATE SPAIN THE REFORM OF SPANISH SAVINGS BANKS TECHNICAL NOTE MAY 2012.* ### 12. Despite the traditional retail-oriented business model and forward-looking ### _cr12141 - 12. Despite the traditional retail-oriented business model and forward-looking ### Systemic shock and immediate impacts on Spanish savings banks (SSBs) - Dislocation of wholesale credit markets, burst of the real estate bubble, and sharp economic downturn triggered rapid de-leveraging and risk re-pricing by Spanish banks. - Credit growth collapsed. - SSBs’ nonperforming loans (NPLs) soared, reaching almost 10 percent of gross loans as of end-2010, compared to about 1 percent in 2007. (The figure includes an estimate of repossessed real estate assets.) - SSBs’ loan-loss-provision buffers declined from almost 100 percent in 2007 to about 40 percent in 2010. - Limited ability to raise equity capital and the prospect of more demanding Basel III capital requirements reduced SSBs’ capital generation capacity. ### Objectives and strategy of the restructuring - Main objective: promote consolidation of the SSB sector through mergers or other integration processes; intervene and absorb non-viable institutions into stronger entities. - Expected benefits from consolidation: economies of scale, improved cost-efficiency, restored capital generation capacity. - Initial reform strategy did not aim at fundamentally changing the basic model of SSBs. ### Institutional support and instruments - Fondo de Reestructuración Ordenada Bancaria (FROB) launched in June 2009 to encourage orderly consolidation and strengthen capital buffers of credit institutions involved in integration-cum-restructuring. - SIPs (Sistema Institutional de Protección) established under June 2010 law as contractual agreements to protect and improve liquidity and solvency of participating institutions while maintaining them as separate legal entities. - SIP structure three basic pillars: - Relinquishment by participants to a central SIP body (a newly established bank controlled by participant savings banks) of capacity to determine and implement business strategies and internal risk control and management tools; central body expected to fulfill regulatory requirements on a consolidated basis. - Mutual liquidity and solvency pacts and pooling of results to an extent not lower than 40 percent of respective resources. - Commitment to stability: agreements to last for a minimum term of 10 years and not be broken without the BdE first analyzing viability after fragmentation. - Practical weaknesses noted: some Autonomous Communities (ACs) retained veto powers; complications on scope of functions transferred to central entity; uncertainties over consolidation perimeter and tax regime. ### Legal and corporate reforms (2010–2012) - July 2010 legal reform provided SSBs with different business options and improved capacity to raise capital: - Cuotas participativas amended: voting rights granted and individual holding limit of 5 percent removed, while overall issuance limit of 50 percent of a SSB’s capital was retained (no significant issuances followed). - Governing bodies of SSBs reformed and professionalized; ceiling on voting rights of public entities reduced from 50 to 40 percent. - General fit and proper criteria for regional government representatives established; elected political representatives prohibited from serving in governing bodies; cooling-off period of two years introduced when a representative took decisions regarding SSBs while in office. - Required commercial and professional expertise and integrity tightened for at least the majority of Board members. - Two new corporate models introduced: - Indirect performance of financial activities through a commercial bank to which SSBs transfer all financial operations (open to individual SSBs or SIP groups). - Transformation of a SSB into a “special foundation” by transferring business to another credit institution; compulsory when SSB ceases to have a significant stake or is intervened under Law 26/1988. - February 2011 measures: - Banks required to comply, by end-September 2011, with a “principal capital” of at least 8 percent of total risk-weighted assets. - Minimum threshold set equal to 10 percent for credit institutions excessively relying on wholesale funding (more than 20 percent of total funding) and with limited equity holding (less than 20 percent) by the private sector. - If capital could not be raised through the market, FROB could act as a backstop by purchasing equity share capital. - Result: nearly all SSBs, alone or under SIPs, spun off banking into newly created commercial banks; two new credit institutions (Banca Civica and Bankia) carried out IPOs in July 2011. - February 2012 decree on cleaning up banks’ balance sheets (RDL 2/2012): - Reaffirmed governing bodies for SSBs performing banking indirectly: General Assembly, Executive Board, and optionally Control Committee. - Encouraged ACs to streamline governing bodies’ size and established some general rules. - Established that an SSB cannot devote more than 10 percent of its profits to expenses other than social works. - Specified conversion into a “special foundation” if SSB loses control of the commercial bank or if its share of voting powers falls below 25 percent (while noting potential incoherence between control concept and 25 percent threshold). ### Reform achievements - Ability to raise external equity capital and enhanced market discipline: - Separation of social and commercial banking means financial activities are carried out by “ordinary” commercial banks able to access markets to raise equity capital and subject to investor monitoring. - Minority shareholder safeguards expected to limit controlling-shareholder behaviors that benefit SSBs exclusively. - Supervisory framework clarity: - Commercial banks under exclusive supervision of BdE for prudential supervision and early intervention/resolution measures. - BdE retains intervention powers at “holding” level; can intervene SSBs, take control, impose recognition of losses, and write down equity. - BdE retains supervisory powers over SSBs to monitor solvency or leverage. - Professionalism and governance: - Fit and proper criteria strengthened; board members subject to duties applicable to directors of commercial companies. - At least the majority of board of directors of SSBs needs to comply with professionalism criteria related to banking expertise. - Presence of independent directors in spin-off commercial banks and listed entities required to have at least 1/3 independent directors; FROB-recouped institutions required to have majority non-executives on board. - Non-listed commercial banks resulting from transfers tend to have at least two independent directors following CNMV recommendation. - RDL 11/2010 introduced limits on maximum size of representatives in SSB governing bodies and established incompatibility requirements for politically elected officials. - Consolidation and capacity reduction: - Number of institutions declined from 45 to 11 and was bounded to fall to 9 with auctions of two weak institutions (Catalunya Banc and NCG Banco) under FROB management. - Since mid-2008, number of branches reduced by 17 percent and number of employees reduced by 14.3 percent. - Average size (assets) of a “new” SSB increased from €29.4 billion to €99.2 billion. - Market-share distribution remained skewed with two large players (La Caixa and BFA-Bankia) and a smaller number of bigger institutions. ### Outstanding issues and risks - Corporate-structure anomaly: - Many SSBs became holding companies that do not perform banking activities but retain banking licenses; anomaly pronounced for smaller institutions with minor stakes in commercial banks yet maintaining SSB legal status via SIPs. - Financial strength of SSBs as controlling shareholders: - Predominant source of income for most SSBs as holding companies derives from controlling stakes in commercial banks; they use such income to finance social work. - Questions arise about SSBs’ ability to backstop capital needs of controlled institutions; from a financial stability perspective, the financial strength of controlling shareholders matters for assessing the soundness of controlled commercial banks. - The prior limited capacity of SSBs to raise external capital was a significant weakness; reforms resolved this for controlled banks but the problem remains in the control chain for SSB shareholders. - Recognized policy consideration: it may be important to have a framework ensuring financial strength of controlling shareholders and their ability to backstop banks as needed. - Possible regulatory measures discussed: - Consideration of putting in place a self-contained regime to ensure SSB financial strength given absence of shareholders behind SSBs. - Possibility of de-consolidation by BdE on an ad hoc basis if an SSB’s financial position is not particularly relevant for the group, with associated consequences for consolidation of losses and recognition of relevant losses when market values diverge from nominal values. - Consideration could be given to introducing a rule that SSBs of a certain size (e.g., based on assets) would be required to transfer their banking business and/or to be transformed into foundations. *Source: IMF staff report excerpt from _cr12141 (pages provided).* ### 25. The reform of SSB’s corporate governance does not fully address the issue of ### 25. The reform of SSB’s corporate governance does not fully address the issue of ### Governance role and shareholding function of SSBs - Reform does not establish specific criteria to guide SSBs in the exercise of their shareholding rights over commercial banks to preserve arms’ length independence of management. - Transparency and accountability mechanisms regarding SSBs’ ownership objectives are important given SSBs’ broad and diversified possible objectives. - Two tiers of regulation (State and ACs level) for SSBs can create ambiguity in decision-making (example: merger approvals). - When two commercial banks controlled by SSBs intend to merge, approval is ultimately taken by the General Assembly of the SSBs; the merger may be decided based on different stakeholders’ interests rather than business viability. - It is unclear whether ACs’ approval is needed for mergers that imply integration of institutions through which SSBs indirectly carry out their banking activity. - Some ACs retain the right to vet SIP agreements, raising the possibility that mergers of controlled banks may require AC approval if a new SIP or shareholders’ agreement is created to maintain the legal status of “savings bank.” - Recommendation summary: - The new role assumed by SSBs as major shareholders may require further refinements to ensure transparency and accountability in exercising shareholding rights. ### Overlaps in supervisory competences - SSBs, as credit institutions, remain regulated and supervised at State and ACs level; as major shareholders of commercial banks they are subject to BdE prudential supervisor requirements. - Potential overlap or inconsistency in two tiers of regulation (e.g., on corporate governance rules) may hinder actions. - BdE can take action vis-à-vis SSBs as major shareholders as for any other shareholder; example: - When influence of a significant shareholder is judged detrimental to sound and prudent management of a credit institution, the MoE, upon proposal of the BdE, may suspend the “political rights” (i.e., voting and other governance rights) of such shareholder. - Recommendation: - A clearer separation of oversight competences between the State and ACs is warranted. ### Evolving role amid consolidation and need for a governed transition - Ongoing consolidation may result in fewer and larger banks where an SSB acting alone or in concert with other SSBs could control institutions. - Even if diluted, SSBs can remain relevant and not all may list, limiting transparency. - Need to govern the transformation process to provide a sound framework for the ownership structure and accompany transition toward a more market-driven environment. ### Financial strength and investment limitations of SSBs - Current rule: SSBs cannot devote more than 10 percent of their profits to expenses other than social works, subject to compliance with capital requirements. - The scope of this rule is unclear and may not allow SSBs to perform as holding companies or to backstop banks as needed. - Historical limits: broadly required SSBs to invest 50 percent of their retained earnings in reserves, and the other 50 percent in social work — it is unclear whether such limits are still valid. - Note: While in theory SSBs may still issue cuotas participativas to finance themselves on the market, such possibility is unlikely given the current structure. ### Corporate governance arrangements and board composition - Corporate governance could be streamlined and strengthened given SSBs’ changed role. - Size of SSBs governing bodies could be further streamlined. - In some cases maintaining the Control Commission (now not mandatory) could be useful for its check-and-balance function. - A legally binding requirement to have a certain number of independent directors—which would be enforced by the CNMV—could be introduced for non-listed commercial banks formed under a SIP. - Similar independent director requirements could be introduced for SSBs’ boards, even without capital support by the FROB. - Distinction between President and Chief Executive Officer roles could be reinforced by requiring different persons to perform them. - Fit and proper criteria should be extended to—not just, at least, the majority but—all members of the SSBs’ Board of Directors. - The General Assembly would be in charge of general ownership policies and objectives; the Board would be more involved in relationships with the commercial banks. - Legal precedent: - Recent amendment introduced by the RDL 2/2012 provides that entities undergoing a merger process to comply with increased provisioning and capital requirements shall comply with the unified code of good corporate governance applicable to listed companies (including a requirement to have independent directors). ### Incompatibility requirements and appointment process - Current practice allows persons having an executive post in the board of a SSB to serve, as non-executive, in the board of the commercial bank controlled by the SSB. - There are limits in the total number of non-executive positions that a person can have in boards. - Recommendation: - Tighten incompatibility requirements so anyone in a SSB governing body—or having a senior management position—shall not perform equivalent functions in the controlled commercial bank or other entities controlled by the banking group. - Apply the two-year cool-off period for political representatives regardless of whether a person participated in adoption of any deliberation regarding a SSB. - Consider regulation of cases where persons with executive roles in a political party or trade union would serve in governing bodies of commercial banks controlled by SSBs. - Appointment process: - The threshold for representation of public entities (now at 40 percent) could be further reduced, possibly distinguishing among different local powers or public entities. - Rules could be revisited to filter undue political interference and favor a broad, but not concentrated, variety of stakeholders’ interests. ### Disclosure and transparency of SIP agreements and corporate governance reports - SIP agreements function similarly to shareholders’ agreements and contain provisions relevant for governance (e.g., appointment of directors, major decisions). - Currently SIPs regarding banks with listed equity are made public. - For unlisted banks issuing debt instruments, SIPs are disclosed if CNMV qualifies the SIP agreement as price-sensitive information. - Only certain provisions of SIPs will be made public, such as those concerning the governance of the commercial bank. - Recommendation: - Broaden public disclosure requirements on the contents of SIPs, regardless of the above-mentioned criteria, and make this requirement legally mandatory to enhance transparency, help entry of potential investors, enhance accountability of controlling shareholders, and provide minority shareholders a monitoring tool. - Revisit SIP contents in light of SSBs’ potential role as minority, passive shareholders. - Corporate governance reports: - SSBs must publish and submit to the CNMV a corporate governance code with information on remuneration policies, related party lending, credit operations with political constituencies or public institutions, risk control system, conflicts of interest for members of governing bodies. - Failure to submit such report, or submission of false or misleading information, is sanctioned as a grave infraction under law 24/1988 on financial instruments (Ley del Mercado de Valores). - Recommendation: - Supplement report contents to reflect SSBs’ role as controlling shareholders and have CNMV monitor them. - Require SSBs to disclose ownership policies on exercise of voting rights in banks, including criteria guiding selection of directors. - Require disclosure of detailed criteria for investment strategies. - Generalize framework agreements regulating arms length relationships between SSB and controlled bank with appropriate monitoring mechanisms (e.g., Control Commission). ### Rationale for more stringent regime and international references - Some additional requirements for SSBs may be more stringent than for other controlling shareholders, justified by: - SSBs’ representation of a variety of stakeholders including political constituencies. - SSBs’ performance of a social mandate and broad public interest in verifying exercise of governance and economic rights over banks. - Transparency measures can allow adequate monitoring of banks’ business value and reinforce incentives for external investors to bring new funds, favoring entry of participants in capital base and system competitiveness. - Comparative references and international practices (overview): - OECD “Guidelines for Corporate Governance of State-owned Enterprises” and Basel Committee principles apply to state-owned banks. - Santiago Principles for sovereign wealth funds emphasize public disclosure of governance framework, objectives, appointment procedures, oversight, investment policy, and key factors guiding ownership rights exercise. - Examples of state-owned vehicles established during the financial crisis: UK (UKFI), Denmark, Greece; Germany’s special fund; Netherlands’ legislative proposal for a holding company. - Institutional investors’ role: OECD Principles emphasize disclosure of voting policies and transparency on conflicts of interest; legal binding requirements may be preferable to “comply or explain” rules; care to prevent abuse of concerted action. *Source: _cr12141 - 25. The reform of SSB’s corporate governance does not fully address the issue of* ### 35. Despite major reforms, the overall piecemeal strategy remains somewhat ### _cr12141 - 35. Despite major reforms, the overall piecemeal strategy remains somewhat ### Assessment of the current strategy and challenges - The authorities face an "extremely challenging" task of devising a strategy in a systemic crisis environment, making the reform of SSBs a "moving target". - Keeping the current legal status of SSBs preserves legal certainty through a well-established framework, but risks exist if the market-driven progressive divestment of SSBs-shareholders does not proceed smoothly due to significant stakeholder resistance. - The piecemeal strategy is described as "somewhat unclear" and needs to be well thought through. ### Anticipated evolution of SSBs and implications for social work - Some SSBs may be significantly diluted, which would "significantly reduce the resources through which they finance their social work." - It is uncertain whether transformed institutions would act as minority, passive shareholders or retain other roles; outcomes "may vary according to the circumstances." - Example initiative: the Generalitat de Catalunya is drafting legislation on regional foundations holding shares in banks to ensure resources are channeled into social activities. ### Legal definition and coherence concerns for "special foundations" - The law envisages transformation of SSBs into "special foundations" when they do not exercise "control" over the newly-established commercial bank or their share of voting rights falls below 25 percent. - Concern: "These double criteria may not, however, be fully coherent since a bank with less than 25 percent of voting rights may still exercise significant influence over a commercial bank." - The legislator "has not clarified yet what a 'special foundation' would be and what regulation would be applied if this possibility materializes." ### State vs. Autonomous Community (AC) regulatory uncertainty - The sparse regime provides that if the main scope of activity of a foundation exceeds the territory of an AC, such foundation will be regulated at the State level. - Uncertainty exists whether the determination should consider: - where the social mandate ("obra social") is performed, or - whether the investment side (investment in and financing through a bank operating throughout Spain) is also relevant. - It may be advisable "to provide more specific criteria" given ambiguous cases (e.g., social work predominantly in one AC but investments in banks operating nationwide). ### Foundations legal regime gaps and need for adaptation - Foundations are governed by Ley de Fundaciones 50/2002 for activities in more than one AC or in one AC without specific legislation; provisions include rules on economic activity, governing bodies composition and requisites, auditing, public register enrollment, and oversight by a Protectorate. - The Ley de Fundaciones does not address specific issues arising when SSBs transformed into foundations maintain a significant shareholding in commercial banks. - Risks if no safeguards: governance may lack transparency, be subject to undue political interference, have non-professional or non-independent management, and lack capacity to financially buttress banks' capital. ### Financial stability as legal underpinning and harmonization rationale - The State could base a special regime at the State level on financial stability grounds, given financial stability is a responsibility of the State. - Suggested approach: State law would set general principles and ACs would exercise legislative powers in line with those principles. - If a foundation, acting alone or in concert, lowers its participation under a certain threshold (or under other indicators based on assets and liabilities of the foundation or the relevant commercial bank), it might fall within the remit of the ACs. - Alternative in problematic competence allocation scenarios: design a State-level framework transforming SSBs into institutional investors (unit trusts) holding and managing financial assets, while social activity remains under the Ley de Fundaciones. ### Suggested elements of a special regime (policy recommendations) - Governance - Disclosure of shareholders’ agreements. - Strengthening incompatibility requirements. - Setting up and disclosing general ownership policies. - Enhancing presence of independent directors on commercial banks’ boards where foundations are significant shareholders. - Rules on composition of foundations’ management boards and fit and proper criteria complementing BdE requirements on significant shareholders. - Establishment of an oversight body; address who appoints foundation management and by what criteria. - Regulate the possibility of undue interference by the bank over the foundation’s activity. - Investment criteria - Design foundations to resemble institutional investors with diversified financial assets and balanced portfolios aimed at creating long-term value for the local community. - Foundations would gradually divest bank shares or subscribe to capital increases based on a bank viability plan. - Investment strategies should be verifiable against benchmarks and subject to transparency mechanisms to monitor investments in competing or related companies and related-party lending. - Note: "Morphing foundations into institutional investors would require a significant change of their business model." - Supervisory framework - Implementation of requirements could be overseen by a competent authority, potentially building upon the Protectorate’s functions, provided independence safeguards are in place. *Source: Extract from the IMF chapter section on SSB reform and foundations.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12141.pdf_