Royal Decree-Law 2/2012, of 3 February, on the Sanitization of the Financial Sector.

Head of State

"BOE" No. 30, of 4 February 2012 Reference: BOE-A-2012-1674

INDEX

Preamble................................................................ 3

TITLE I. Sanitization of Credit Institutions......................................... 7 Article 1. Measures for the sanitization of the balance sheets of credit institutions............. 7 Article 2. Integration Processes............................................. 7

TITLE II. Modification of Royal Decree-Law 9/2009, of 26 June, on Banking Restructuring and Strengthening of Own Resources of Credit Institutions............................. 9 Article 3. Modification of Royal Decree-Law 9/2009, of 26 June, on Banking Restructuring and Strengthening of Own Resources of Credit Institutions....................... 9

TITLE III. Modification of Royal Decree-Law 11/2010, of 9 July, on Governance Bodies and Other Aspects of the Legal Regime of Savings Banks.............................................. 13 Article 4. Modification of Royal Decree-Law 11/2010, of 9 July, on Governance Bodies and Other Aspects of the Legal Regime of Savings Banks............................... 13

TITLE IV. Remuneration....................................................... 16 Article 5. Remuneration in entities receiving public financial support for their sanitization or restructuring.............................................. 16

Additional Provisions...................................................... 17 First Additional Provision. Exceptional treatment of preferred shares and other instruments in circulation................................................ 17 Second Additional Provision. Regime applicable to Savings Banks that are part of an institutional protection system................................................. 17

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Third Additional Provision. Application of the regime provided for in Law 26/2006, of 17 July, on Mediation of Private Insurance and Reinsurance, to entities participating in integration processes.......................................................... 17 Fourth Additional Provision. Increase in the endowment of the Ordered Banking Restructuring Fund............................................................ 18 Fifth Additional Provision. Calculation of losses in cases of mandatory reduction of share capital in joint-stock companies and dissolution in joint-stock and limited liability companies............................................................ 18

Repealing Provisions..................................................... 18 Single Repealing Provision. Repeal of legislation.................................. 18

Final Provisions......................................................... 18 First Final Provision. Modification of Law 31/1985, of 2 August, on the Regulation of the Basic Rules on Governing Bodies of Savings Banks....................... 18 Second Final Provision. Modification of Law 13/1994, of 1 June, on the Autonomy of the Bank of Spain............................................................. 18 Third Final Provision. Modification of Royal Decree-Law 2/2011, of 18 February, for the strengthening of the financial system........................................... 22 Fourth Final Provision. Modification of Royal Decree-Law 16/2011, of 14 October, creating the Deposit Guarantee Fund for Credit Institutions....................... 23 Fifth Final Provision. Competence Titles.................................... 23 Sixth Final Provision. Power of Development..................................... 23 Seventh Final Provision. Entry into Force........................................ 23

ANNEX I.................................................................... 23 ANNEX II................................................................... 24

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CONSOLIDATED TEXT

Last modification: 15 November 2012

STATEMENT OF MOTIVES

I

Four years after the start of the international financial crisis, problems of confidence in the financial sector and credit restriction persist. Despite the various measures carried out both by States at the individual level and in a coordinated manner at the international level, continued problems of liquidity and financing, along with the strong deterioration of the assets of credit institutions, have increased difficulties in accessing financing with severe effects on the real economy.

In this context, the duration, intensity, and extent of the crisis have highlighted the fundamental problems affecting the Spanish banking sector, which prevent it from fulfilling its essential role of channeling credit to the real economy, supporting business activity, employment, and consumption.

The main burden on the Spanish banking sector is the magnitude of its exposure to assets related to the real estate sector, assets that have suffered strong deterioration due to the recent evolution of the economy.

Indeed, doubts regarding the valuation of such assets and the notable increase in loans classified as doubtful generate perverse effects both on the financial sector itself, hindering Spanish entities' access to wholesale financing, and on the real sector by aggravating credit restriction.

Another major consequence of the current crisis and the contraction in demand for financial services is the oversizing of the Spanish banking sector. The excess installed capacity it presents and the cost structure derived from it hinder the efficiency and competitiveness of our entities.

In this context, the effects of the regulatory and supervisory efforts developed to date, at the international, community, and national levels, have been limited, failing to prevent the worsening of the conditions under which Spanish entities must operate.

Since the beginning of the crisis in 2008, measures adopted at the international level have been inspired by the will to correct the market failures in the financial sector that the turbulence evidenced. The objective was to avoid or, at any rate, limit the consequences of future financial crises on the rest of the economy. These measures included an intensification of prudential supervision, both at the level of specific entities and from a macroprudential perspective, and the adoption of more demanding requirements for own resources and liquidity for credit institutions. As a complement to this new regulatory and supervisory framework, enhanced guarantee schemes, liquidity promotion mechanisms, and even public funds to assist in their recapitalization and restructuring were made available to entities with problems.

In the Spanish case, the milestones characterizing the reform of the financial system to date include the establishment of the Fund for the Acquisition of Financial Assets (FAAF) to provide liquidity support to credit institutions and the strengthening of intervention, discipline, and resolution procedures for entities through Royal Decree-Law 9/2009, which created the Ordered Banking Restructuring Fund (FROB), articulating a temporary support mechanism as an incentive for a readjustment of the sector's capacity.

Subsequently, the legal regime of savings banks was reformed through Royal Decree-Law 11/2010, of 9 July, on Governance Bodies and Other Aspects of the Legal Regime of Savings Banks, with the aim of achieving greater professionalism of Savings Banks and, above all, equipping them with the capacity to access basic capital markets.

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Finally, with Royal Decree-Law 2/2011, of 18 February, for the strengthening of the financial system, the solvency level of all credit institutions was strengthened, increasing the minimum capital requirements both in terms of quantity and quality.

All these measures have been aimed at eliminating the cyclical weaknesses of Spanish credit institutions in the context of liquidity scarcity that has existed since the start of the crisis. However, to date, no provisions conducive to achieving the sanitization of the balance sheets of credit institutions, negatively affected by the deterioration of their assets linked to the real estate sector, have been adopted. Aware of the impact this deterioration has on the solidity of our financial system, it is imperative to design a comprehensive reform strategy that affects the valuation of these assets and leads to the sanitization of the balance sheets of Spanish credit institutions in a transparent process, to the extent that credibility and confidence in the Spanish system are recovered.

Having sanitized balance sheets is a basic requirement for financial entities to fulfill their essential function of channeling savings towards efficient investment projects that foster activity, growth, and employment. To this end, measures are adopted that will allow financial entities to start the 2013 fiscal year with their accounts sanitized, which will improve confidence, credibility, and strength of the system. Furthermore, it will facilitate better access of entities to capital markets, which will contribute to the fluidity of credit to the real economy.

The other two fundamental axes of this renewed financial reform impulse are the creation of incentives that promote an adequate and efficient adjustment of excess capacity and the strengthening of the governance of entities resulting from integration processes. A final fundamental characteristic of this reform is that its cost must be entirely borne by the financial sector.

II

Title I contains measures relating to the sanitization of the financial sector. Essentially, it involves articulating new requirements for additional provisions and capital, exclusively oriented towards covering the deterioration in bank balance sheets caused by assets linked to real estate activity. In this way, an improvement in the prudential treatment of credit risk that may still be weighing down the balance sheets of the Spanish financial sector must be achieved, while trying to dispel the uncertainties that have been hindering its normalization and the recovery of its function of channeling savings to the real economy.

The central axis of the sanitization of balance sheets is articulated through a new coverage scheme for all financings and assets assigned or received in payment of debt related to the real estate sector. This new regime is established as long as the extraordinary uncertainties persist, due to the lack of markets sufficiently deep in volume and importance of transactions, regarding the valuation of assets related to land for real estate development in Spain and with real estate constructions or developments in Spain of all types of assets, both in progress and completed. These new requirements respond to the actual situation as of today of the real estate assets of credit institutions, conceived in a realistic manner to obtain a reasonable estimate of the deterioration for the entire portfolio of these assets, which must be recognized in accordance with the accounting framework applicable in Spain. A new requirement for supplementary capital of the highest quality (core capital) is also imposed, on the same basis of coverage of doubtful or substandard assets or assigned in payment derived from the financing of land for real estate development.

The adjustment of entities to these new requirements must be executed during this same year 2012, so that, before 31 March, they must present to the Bank of Spain their adjustment strategy to duly comply with the sanitization exercise. In this way, the positive effects on confidence, transparency, and sustainability of our financial sector must be achieved without further delay.

Furthermore, a flexibility mechanism has been established for those entities that require structural organizational modifications to undertake the adjustments derived from the new legal requirements. In this way, the deadlines for compliance with the adjustments are extended. Credit institutions that carry out integration processes during the 2012 fiscal year will have an additional twelve-month period to comply with the new requirements. For credit institutions to be able to benefit from the regime provided for, it is necessary that the integration process meets a series of requirements. These requirements are oriented to ensure that the integration process has a significant minimum volume, that it includes commitments and objectives such as the adoption of measures to improve the corporate governance of the entities, the increase of credit to families and small and medium-sized enterprises, or the placement on the market of real estate assets owned by the entities.

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III

On its part, Title II makes some adjustments to Royal Decree-Law 9/2009, of 26 June, on Banking Restructuring and Strengthening of Own Resources of Credit Institutions, to facilitate the role of the FROB in the new regulatory context.

With regard to Article 9 of Royal Decree-Law 9/2009, relating to instruments for the strengthening of own resources of credit institutions, this royal decree-law makes certain necessary adjustments or updates. The channel of FROB financial support for the acquisition of shares is restricted, except for competitive divestment processes, which may be accompanied by other types of aid tools. Furthermore, the divestment period is reduced from five to three years. Finally, the possibility for the FROB to divest, within one or two years, the titles acquired from the issuing entities of the same or from third investors proposed by the beneficiary entity of its action, is suppressed.

Regarding Article 10 of Royal Decree-Law 9/2009, the main modification introduced is the expansion of the instruments that the FROB can acquire to include those convertible into shares, which surpasses the previous framework limited to preferred shares.

IV

Title III provides for the modification of Royal Decree-Law 11/2010, of 9 July, on Governance Bodies and Other Aspects of the Legal Regime of Savings Banks.

On the one hand, the simplification of the organizational structure and operational requirements of Savings Banks that exercise their activity indirectly is intended. Thus, the governance bodies are reduced to the General Assembly and the Board of Directors, with the Control Commission being optional. Likewise, it is stated that the number of members of the governance bodies as well as the periodicity of their meetings will be determined by the statutes of the Savings Bank taking into account the economic size and the activity of the entity, in order to produce an adjustment and readjustment of the organizational structure of Savings Banks to a new reality, in which they have divested themselves of all the financial activity they developed.

On the other hand, a limit is established on the disposal of the surpluses obtained by Savings Banks so that, without prejudice to compliance with the provisions on own resources, indirect exercise Savings Banks cannot allocate more than 10% of their freely disposable surpluses to expenses other than those corresponding to social work. This is without prejudice to the authorization of higher percentages necessary to cover essential operating expenses of the entities. Provisions are also introduced to simplify the functioning, periodicity, and form of convocation of General Assemblies.

Continuing with the line of simplifying the functioning of indirect exercise Savings Banks, they are expressly exempted from compliance with obligations regarding customer service, which in any case must be fulfilled by the credit institution through which they exercise their activity. The Bank of Spain may also adapt or exempt from compliance with organizational requirements in matters of internal control, audit, and risk management contained in Law 13/1985, of 25 May, and its development regulations.

Finally, a reference is introduced to the case where Savings Banks reduce their participation so that it does not reach 25% of voting rights, a case in which they must also renounce the authorization to act as a credit institution, even if they maintained a position of control.

In these cases of loss of control or reduction of participation below the indicated limit, Savings Banks will lose their status as credit institutions and will transform into a special foundation. Certain specificities are established for foundations of a special nature of state scope.

V

Title IV contains the regime applicable to the remuneration of administrators and executives of credit institutions that have required or may need in the future financial support from the Ordered Banking Restructuring Fund. This regime starts from a distinction between entities majority-owned by the Fund and those otherwise assisted by it, imposing stricter rules in the case of the former. The rules contained in this title merely continue the path marked by the recommendations of the Financial Stability Board (FSB) and the European Commission, Directive 2010/76/EU of 24 November 2010, and the norms that have incorporated the latter into Spanish law. Likewise, the established regime has taken into consideration the content of the Report on Remuneration issued on 27 January last by the Bank of Spain in response to the request of the Minister of Economy and Competitiveness.

VI

Likewise, in the final part of the law, a special and more flexible treatment is introduced for those credit institutions that have preferred shares or debt instruments mandatorily convertible issued before the entry into force of this royal decree-law in circulation. They may include in the compliance plan they develop the request to defer the payment of the remuneration provided for despite the absence of profits or distributable reserves or the existence of a deficit of own resources. At the same time, the third transitional provision of Royal Decree-Law 2/2011, of 18 February, for the strengthening of the financial system, is modified, flexibilizing some requirements of these mandatorily convertible debt instruments for their calculation as core capital.

Finally, in order to facilitate the management of financial guarantees granted by financial entities in favor of the Bank of Spain, the European Central Bank, or other national central banks of the European Union, the sixth additional provision of Law 13/1994, of 1 June, on the Autonomy of the Bank of Spain, is modified. This will result in a reduction in the operational cost of such actions and will also have a favorable impact on the operations that financial entities carry out with the Eurosystem, highlighting, in particular, greater operational ease for receiving financing from the same.

In short, the adoption of the measures contemplated in this Royal Decree-Law leads to the strengthening of the financial sector by undertaking the necessary sanitization of its financial situation. The effects of the real estate crisis on the balance sheets of entities have generated a spiral of uncertainty over the entire sector that cannot be prolonged any longer. It is therefore imperative and inescapable in the current economic context to intervene legislatively in order to eliminate uncertainties regarding our financial stability and contribute to strengthening confidence in our financial system, achieving the generation of positive dynamics that generate credit and facilitate access to financing for our companies and families. It is for this reason that the adoption of such measures requires resorting to the procedure of royal decree-law, meeting the requirements of Article 86 of the Spanish Constitution regarding its extraordinary and urgent necessity.

In virtue thereof, making use of the authorization contained in Article 86 of the Spanish Constitution, at the proposal of the Minister of Economy and Competitiveness, and after deliberation by the Council of Ministers in its meeting on 3 February 2012,

I HEREBY ORDER:

TITLE I

Sanitization of Credit Institutions

Article 1. Measures for the sanitization of the balance sheets of credit institutions.

1. The estimation rules contained in Annex I shall apply to financings and assets assigned or received in payment of debts related to land for real estate development and with real estate constructions or developments, corresponding to the activity in Spain of credit institutions, both existing as of 31 December 2011 and resulting from the refinancing of the same at a later date, and which as of the aforementioned date had a risk classification other than normal, to determine their impairment.

2. On the total of the financings of the nature indicated in paragraph 1 that, as of 31 December 2011, were classified as normal risk, a coverage of 7% of their outstanding balance as of that date shall be constituted, only once. The amount of this coverage may be used by entities exclusively for the constitution of the specific coverages that prove necessary as a consequence of the subsequent reclassification as doubtful or substandard assets of any of said financings or of the assignment or receipt of assets in payment of said debts.

3. (Repealed)

4. Without prejudice to what is provided in paragraph 1 of Article 2, credit institutions and consolidatable groups of credit institutions to which paragraphs 1 to 3 above apply must comply with what is provided therein before 31 December 2012.

To this end, before 31 March 2012, they must present to the Bank of Spain a plan in which they detail the measures they intend to adopt. The plan presented must be approved by the Bank of Spain.

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