Council Decision of 23 July 2012 addressed to Spain on specific measures to reinforce financial stability (2012/443/EU)

Article 1 U.K.

1. The Commission, in consultation with the ECB, the EBA and the IMF, has agreed with the Spanish authorities the specific financial-sector policy conditions attached to the financial assistance. Those conditions are laid down in the MoU to be signed by the Commission and the Spanish authorities. The detailed financial terms shall be laid down in a Financial Assistance Facility Agreement.

Spain shall adequately recapitalise and thoroughly restructure its banking system. In that regard, Spain shall develop in coordination with the Commission and in consultation with the ECB a strategy for the future structure, functioning and viability of the Spanish banks which will identify how to ensure that they are able to operate without further state support. This strategy will be further specified in the MoU, developing further the policy conditions embedded in this Decision.

2. The key components of this strategy shall be an overhaul of the weak segments of the Spanish banking sector and a strengthening of the regulatory and supervisory frameworks for the banking sector.

3. The overhaul of the weak segments of the Spanish banking sector shall be comprised of the following three elements:

(a) identification of individual bank capital needs through a comprehensive asset quality review of the banking sector and a bank-by-bank stress test, based on that asset quality review. On the basis of the stress test results, banks in need of capital injection will be divided in three different groups. Each group will be subject to the obligation to present restructuring and resolution plans, and all the complementary and subsequent measures, as provided in the MoU;

(b) recapitalisation, restructuring and/or resolution in an orderly way of weak banks, based on plans to address any capital shortfalls identified in the stress test. These plans will be based in the principles of viability, minimising the cost for taxpayers (burden sharing) and limiting distortions of competition. To that effect, Spain will adopt legislation to: (i) allow the implementation of Subordinated Liability Exercises, including mandatory forms of burden sharing, and (ii) upgrade the bank resolution framework in order to incorporate relevant resolution powers for FROB and the Deposit Guarantee Fund (DGF), and taking into account the EU regulatory proposal on crisis management and bank resolution, including special tools to resolve unviable banks;

(c) segregation of assets in those banks receiving public support in their recapitalisation effort and their transfer of the impaired assets to an external Asset Management Company (AMC), to realise their long-term value. Spain, in close consultation with the Commission, the ECB and the EBA and with the technical assistance of the IMF, will prepare a comprehensive legislative framework for the establishment and functioning of the AMC, in order to make it fully operational by November 2012.

4. In order to ensure a sound framework for the banking sector, Spain shall also strengthen the regulatory and supervisory frameworks as well as reinforce governance. The strategy and conditionality, which is comprehensively specified in the MoU, shall, inter alia, include the following measures:

(a) requiring Spanish credit institutions to increase their Common Equity Tier (CET) 1 ratio to at least 9 % according to the definition of capital established in the EBA recapitalisation exercise;

(b) requiring, from 1 January 2013, Spanish credit institutions to apply the definition of capital established in the Capital Requirements Regulation (CRR);

(c) re-assessing the legal framework for loan-loss provisioning. In particular, on the back of the experiences of the financial crisis, the Spanish authorities shall make proposals to revamp the permanent framework for loan loss provisioning, taking into account the temporary measures introduced during the past months, as well as the EU accounting framework;

(d) further strengthening, the operational independence of the Banco de España; in line with the international recommendations and standards, transferring the sanctioning and licensing powers of the Ministry of Economy with respect to the banking sector to the Banco de España;

(e) further enhancing the supervisory procedures of Banco de España based on an internal audit;

(f) reviewing the governance arrangements of the financial safety net agencies (FROB and DGF) to avoid potential conflicts of interest;

(g) strengthening the rules on the governance of the savings bank sector and of the banks owned by savings banks;

(h) amending consumer protection and securities legislation to limit the sale by banks of subordinate debt instruments (or instruments not covered by the DGF) to non-qualified retail clients, and strengthening compliance monitoring by the authorities;

(i) taking steps to minimise the cost to taxpayers of bank restructuring. After allocating losses to equity holders, the Spanish authorities will require burden sharing measures from hybrid capital holders and subordinated debt holders in banks receiving public capital;

(j) committing to capping pay levels of executive and supervisory board members of all State-aided banks;

(k) enhancing the public credit register.

5. The authorities will provide to the Commission, the ECB, EBA and the IMF, under strict conditions of confidentiality, the data needed for monitoring of the banking sector.

6. The Commission, in liaison with the ECB and EBA, will verify at regular intervals that the policy conditions attached to the financial assistance are fulfilled, through missions and regular reporting by the Spanish authorities, on a quarterly basis. Monitoring of the FROB activities in the context of the programme will take place regularly.