Significant progress was made on recapitalising and
writing off non-performing loans in the Spanish banking
system in 2012. The banks’ real estate asset provisioning
requirements were stepped up significantly and capital
requirements were established on a bank-by-bank basis.
The overall capital shortfall detected was close to €60
billion. To fund the recapitalisation effort, the Spanish
and European authorities signed a Memorandum of
Understanding for a loan of up to €100 billion to be acti-
vated as Spain deemed fit. This step has yet to be taken,
apparently pending the outcome of various initiatives
being taken to attempt to enhance the capital structures
of the financial institutions affected: asset sales, private
fund-raising, asset transfers to the bad bank (“SAREB”),
etc. Once these steps have been finalised, the Spanish
authorities will be in a position to quantify exactly how
much of the facility to draw down. This amount will also
impact the public deficit forecasts. So far, the first tranche
of aid for the four entities in greatest need has been
approved: these banks received €37 billion in December
At the end of November, the European Commission
announced its approval of the plans for restructuring/
resolving the four entities majority-controlled by the
FROB: BFA/Bankia, NCG Banco, Catalunya Banc and Banco
de Valencia. This marked delivery of one of the key mile-
stones of the MoU, enabling these four Group 1 entities
to receive almost €40 billion from the European Stability
Mechanism (ESM) to cover their capital requirements
over the course of December; this amount was ultimately
reduced by a number of items, including loss-sharing by
holders of hybrid instruments such as preference shares
and subordinated debt. The SAREB, or bad bank, was
effectively set up in December and the problem assets
of the four Group 1 entities were transferred to the entity
with effect from 31 December 2012.
Inkemia listed on the MAB market
The development last year that had the biggest calming
effect on financial market tensions and sovereign risk
spreads was the ECB’s decision to take a more proac-
tive role in defending the euro, championing Europe’s
common ambitions and stabilising financing conditions
across the eurozone. When Mario Draghi announced
publicly, towards the end of July, the ECB’s commit-
ment to do “whatever it takes” to preserve the euro, and,
shortly thereafter, plans to establish a new and unlimited
bond-buying programme under certain terms, he largely
dissipated fears of a euro break-up. The subsequent
creation of the European Stability Mechanism has since
corroborated this pledge and underpinned the euro-
zone partners’ commitment to reinforcing the European
project, with the European Commission proposing legis-
lation for the creation of a single regional banking super-
visor in September.
Help from Europe
The MoU signed by the Spanish government and the
European Union classified the Spanish banks into four
groups as a function of the capital shortfalls revealed by
the stress tests: entities not requiring additional capital
(Group 0); entities requiring recapitalisation that had
already been nationalised with the FROB, the fund for
orderly bank restructuring, holding majority interests
(Group 1); entities whose capital shortfall was deemed
to require additional state aid (Group 2); and entities
requiring recapitalisation but considered to have the
means to do so without the help of the state (Group
3). Under the terms of the MoU, Group 1 entities would
receive the first tranche of European aid, followed by
Group 2 entities. In the case of Group 3 entities, the FROB
will purchase mandatorily convertible bonds (Cocos) as
required, although banks with relatively small capital
requirements were given until June 2013 to raise private
capital and thereby prevent state involvement.
On 31 August 2012, the government enshrined certain
of its commitments under the MoU in legislation that
established a new framework for restructuring and
resolving banks, which can now be liquidated by means
of business sales, the transfer of assets to a bridge bank
or the transfer of assets to the newly-incorporated
SAREB, popularly known as the bad bank.
The financial aid of up to €100 billion and the roughly
€84 billion increase in provisioning requirements in
respect of impaired assets as a result of two pieces of
legislation passed in 2012 are significant milestones on
the road to solving the Spanish banking system’s prob-
lems, as was vouched for by the Spanish equity and
sovereign debt markets, which posted stronger perfor-
mances throughout the second half of 2012.
Report 2012
Market Environment
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