Royal Decree-Law 4/2016 of 2 December on Urgent Financial Measures

OFFICIAL STATE GAZETTE No. 292 Saturday, December 3, 2016 Sec. I. Page 84765 I. GENERAL PROVISIONS HEAD OF STATE 11476 Royal Decree-Law 4/2016, of December 2, on urgent measures in financial matters. I In recent years, the Spanish financial sector has undergone a profound transformation. The positive results are evident, as Spanish financial entities have passed the tests conducted by the European Banking Authority and have resumed their primary assigned function, namely channeling savings into investment, which is apparent in the recovery of positive credit flows to the real economy. Nevertheless, some of the key actors in the recovery and transformation of the Spanish financial sector, the FROB (Fund for Orderly Bank Restructuring) and the Asset Management Company for the Management of Assets Arising from the Restructuring of Banking Institutions (hereinafter, SAREB), require certain specific modifications to their legal regime, the urgency of which is justified by reasons of public interest. Parallel to this, the project for a Banking Union is being developed within the Economic and Monetary Union, with one of its fundamental elements being the existence of a common resolution authority, the Single Resolution Mechanism. To ensure the fulfillment of its objectives, and on a transitional basis, Member States must make bridge financing available to the Single Resolution Board until full mutualization of the Single Resolution Fund is achieved. This royal decree-law consists of 3 articles regulating certain aspects related to the Single Resolution Fund, the specific accounting regime of SAREB, and the divestment period for the FROB in entities in which it participates. II Regarding Article 1, the Banking Union is currently one of the most relevant projects for deepening the integration of the Member States of the Economic and Monetary Union. Among the objectives of the Banking Union are reducing the fragmentation of European banking systems and ending the link between banking risk and sovereign risk to reduce the probability of new financial crises. One of the pillars of the Banking Union project is the Single Resolution Mechanism, in force since 2015. This mechanism is tasked with resolving financial entities in Member States that are part of the Banking Union. The Single Resolution Mechanism relies on the Single Resolution Fund, which began operations on January 1, 2016, and will be progressively funded by bank contributions during a transitional period between 2016 and 2024, until it reaches a size equivalent to 1% of guaranteed deposits. Initially, the Fund will be compartmentalized by country and will be progressively mutualized over an eight-year period. On December 8, 2015, ECOFIN agreed that Member States participating in the Banking Union would make a loan facility available to the Single Resolution Board to guarantee sufficient financing for the Single Resolution Fund. These individual loan facilities will be used solely as a last-resort mechanism. The authorization for the Minister of Economy, Industry and Competitiveness to sign the loan facility agreement with the Single Resolution Board and the enabling of the General Secretariat of the Treasury and Financial Policy to carry out the operations derived from that contract must be done urgently, as the deadline for signing this loan facility agreement ended in September 2016, with the Kingdom of Spain being one of the few Member States pending to conclude the contract with the Single Resolution Board. Therefore, the circumstances of extraordinary and urgent need required by Article 86 of the Spanish Constitution are present. III Regarding Article 2, Law 9/2012, of November 14, on the restructuring and resolution of credit institutions, provided that the Asset Management Company for the Management of Assets Arising from the Restructuring of Banking Institutions, S.A. (SAREB) should comply with the general obligations for the preparation of annual accounts with the necessary specifications to ensure the consistency of the accounting principles applicable to it with the mandate and general objectives of the company established in said law and those set by regulation. Within the framework of this regime, said Law 9/2012, of November 14, enabled the Bank of Spain to establish a valuation framework for SAREB's portfolio, which was specified through a circular. Without altering the substance of said framework, this modification more specifically specifies the scheme for recording any potential losses resulting from the application of accounting regulations, which will be recorded in the company's equity. Through this method of recording, it is ensured that its accounting regime is coherent with the long-term divestment mandate that SAREB must develop and which was considered in the Memorandum of Understanding on Sectoral Financial Policy Conditions agreed upon with international authorities. The effects of the application of this rule will be treated accounting-wise as a change in accounting policy. The extraordinary and urgent need for the reform is due to the fact that the volatility in the evolution of the real estate market has already had an impact on the entity's accounts, which has forced structural modifications. If measures are not taken before the 2016 closing of accounts, this volatility would have a serious impact again, with the legal consequences this implies, and would compromise the medium-term viability of the entity. All of this would constitute a subsequent breach of the conditions of the Memorandum of Understanding and a serious inconsistency with the mandate and general objectives of SAREB. IV Article 3 of this royal decree-law modifies the first transitional provision of Law 11/2015, of June 18, on the recovery and resolution of credit institutions and investment service companies, with the aim of extending the deadlines for divestment in participating companies. Article 31.4 of Law 9/2012, of November 14, on the restructuring and resolution of credit institutions, established a maximum period of five years, counted from the date of its subscription or acquisition, for the divestment by the FROB of ordinary shares or capital contributions that it had acquired within the framework of restructuring and resolution processes. Although Law 9/2012, of November 14, has been largely repealed by Law 11/2015, of June 18, the former remains applicable to restructuring and resolution procedures initiated prior to the entry into force of the latter legal text. The consequence of the transitional survival of this regime is that the FROB must proceed to divestment in the entities in which it participates within a determined time frame, namely the remaining time to complete the aforementioned five years, which is manifestly insufficient, as regulatory and technical requirements and experience demonstrate that divestment processes for this type of entity require a period longer than one year. Divesting these entities within said period would seriously hinder the fulfillment of one of the main objectives of resolution, which is to ensure the most efficient use of public resources, as it would have to occur quickly and outside of market conditions. It is precisely this risk that justifies the extraordinary and urgent need for the measure and, therefore, its adoption via royal decree-law. Therefore, the proposed modification extends the divestment period by two additional years, from the current five to seven, with the possibility that, if necessary for the better fulfillment of resolution objectives, this period may be further extended by the Council of Ministers. V The final part of this royal decree-law consists of a single repealing provision, in which the repeal of any provisions of equal or lower rank that oppose what is established in this royal decree-law is ordered, and two final provisions that regulate, respectively, the competence titles under which the royal decree-law is adopted and its entry into force regime, which will take place on the day of its publication in the "Official State Gazette". VI In the context indicated in Section I of this statement of reasons, it is of paramount importance to guarantee without delay the effectiveness of the reform in the three areas described, as explained in the explanation of each of them. For all the above, the measures adopted in this royal decree-law meet the circumstances of extraordinary and urgent need required by Article 86 of the Spanish Constitution as the enabling premise for resorting to this normative figure. By virtue thereof, using the authorization contained in Article 86 of the Constitution, upon proposal of the Minister of Economy, Industry and Competitiveness, and after deliberation by the Council of Ministers in its meeting on December 2, 2016, I HEREBY ORDER: Article 1. Authorization for the Minister of Economy, Industry and Competitiveness to grant a loan facility to the Single Resolution Board to cover the transitional needs of the Single Resolution Fund.

1. The Minister of Economy, Industry and Competitiveness is authorized to sign the Loan Facility Agreement between the Kingdom of Spain and the Single Resolution Board, whereby an amount of up to 5,291,000 thousand euros is made available to the Single Resolution Board as a common support mechanism during the transitional period of the Single Resolution Fund. The conditions of said loan facility will be adjusted to those agreed upon by the Member States. The Minister of Economy, Industry and Competitiveness is also authorized to modify the loan facility, including its amount, as well as to grant other types of bridge financing to the Single Resolution Board that may be agreed upon within the framework of said transitional period.
2. The General Secretariat of the Treasury and Financial Policy is enabled to manage this loan facility and, in general, any that may be granted as bridge financing, to carry out the necessary operations and disbursements from treasury operations. The disbursements will be considered non-budgetary operations, charged to the expenditure budget of the General State Administration in each fiscal year for disbursement operations carried out between December 1 of the previous year and November 30 of the current year, for which the appropriate budgetary modifications will be carried out. Reimbursements will be charged to the revenue budget of the General State Administration of the year in which they occur.

cve: BOE-A-2016-11476 Verifiable at http://www.boe.es

OFFICIAL STATE GAZETTE No. 292 Saturday, December 3, 2016 Sec. I. Page 84766 Article 2. Modification of Law 9/2012, of November 14, on the restructuring and resolution of credit institutions. Letter c) of paragraph 10 of the seventh additional provision of Law 9/2012, of November 14, on the restructuring and resolution of credit institutions, is modified, and shall read as follows:

"c) The valuation adjustments that result necessary from the application of the preceding letter b) shall be calculated by asset units. To this effect, each category of assets individually described in Article 48.1 of Royal Decree 1559/2012 shall be considered an asset unit.

The valuation adjustments of the asset units, net of their fiscal effect, shall be recognized in the balance sheet charged to an account under the heading 'Adjustments for change in value', within Equity. The debit balance of this account shall be charged to the income statement when the result of the fiscal year is positive, for the total amount. For these purposes, the profit before taxes of the company shall be considered without taking into account the eventual accrual of remuneration for subordinated financing.

The adjustments referred to in the preceding paragraph pending to be charged to the income statement shall not be considered equity for the purposes of the mandatory reduction of share capital and mandatory dissolution due to losses, in accordance with the provisions of the legal regulation of capital companies."

Article 3. Modification of Law 11/2015, of June 18, on the recovery and resolution of credit institutions and investment service companies. Paragraph 1 of the first transitional provision of Law 11/2015, of June 18, on the recovery and resolution of credit institutions and investment service companies, shall read as follows:

"First Transitional Provision. Regime applicable to certain restructuring, recovery, and resolution procedures.

1. Restructuring and resolution procedures initiated prior to the entry into force of this law, as well as all ancillary measures that accompanied them, including financial support instruments and the management of hybrid instruments, shall continue to be regulated, until their conclusion, by the previous applicable regulations prior to the entry into force of this law.

Notwithstanding the above, in the restructuring and resolution procedures provided for in the preceding paragraph, the period referred to in Article 31.4 of Law 9/2012, of November 14, shall be 7 years. This period may be extended by agreement of the Council of Ministers adopted upon proposal of the Minister of Economy, Industry and Competitiveness and after a report from the Ministry of Finance and Public Function and the FROB, when deemed necessary for the better fulfillment of the resolution objectives."

Single Repealing Provision. Repeal of regulations. Any norms of equal or lower rank that oppose what is established in this royal decree-law are hereby repealed.

First Final Provision. Competence title. This royal decree-law is issued under the authority of Articles 149.1.6th, 11th, and 13th of the Constitution, which attribute to the State competences over commercial legislation, bases of the organization of credit and banking, and bases and coordination of the general planning of economic activity.

cve: BOE-A-2016-11476 Verifiable at http://www.boe.es

OFFICIAL STATE GAZETTE No. 292 Saturday, December 3, 2016 Sec. I. Page 84769 Second Final Provision. Entry into force. This royal decree-law shall enter into force on the day of its publication in the "Official State Gazette". Given in Madrid, on December 2, 2016. FELIPE R. The President of the Government, MARIANO RAJOY BREY cve: BOE-A-2016-11476 Verifiable at http://www.boe.es http://www.boe.es OFFICIAL STATE GAZETTE D. L.: M-1/1958 - ISSN: 0212-033X