# EUR-Lex - 52012PC0406 - EN

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# 52012PC0406

**Proposal for a COUNCIL DECISION addressed to Spain on specific measures to reinforce financial stability /* COM/2012/0406 final - 2012/0198 (NLE) */**

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EXPLANATORY MEMORANDUM

CONTEXT OF THE
PROPOSAL

Spain has recently come under increasing
pressure in financial markets. Market uncertainty has centred on the situation
of the banking sector, which has been adversely affected by the burst of the
real estate and construction bubble and the economic recession that followed.
As a result, several Spanish banks have accumulated large stocks of problematic
assets raising concerns about viability of some of these banks.

On 9 June, the Eurogroup was informed about
Spanish authorities' intention to apply for financial assistance to
recapitalize its banking sector. The Eurogroup stated that it was willing to
respond favourably to such a request and committed to granting Spain financial
assistance, covering estimated capital requirements with an additional safety
margin, estimated as summing up to EUR 100 billion in total.

On 25 June 2012, the Spanish Government
requested external financial assistance in the context of the ongoing
restructuring and recapitalisation of the Spanish banking sector. A formal
request was submitted following the publication on 21 June 2012 of the results
of the first stage of the independent evaluation of the balance sheets of
banks. The assistance is sought under the terms of the Financial Assistance for
the Recapitalisation of Financial Institutions by the EFSF.

Following this request, the European
Commission in liaison with the ECB, the European Banking Authority (EBA) and
the IMF conducted an independent assessment of the eligibility of Spain's
request for such assistance. This assessment concluded that Spain fulfils the
eligibility conditions.

The Heads of State and Government at the
Euro Area Summit of 29 June 2012 specified that the assistance will
subsequently be taken over by the ESM, once this institution is fully
operational, without gaining seniority status. When a single supervisory
mechanism for banks in the euro area, involving the ECB, is established, the
ESM could have the possibility to recapitalise the banks directly via a new
instrument.

2012/0198 (NLE)

Proposal for a

COUNCIL DECISION

addressed to Spain on specific measures to
reinforce financial stability

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the
Functioning of the European Union (TFEU), and in particular Article 136(1)(a)
in accordance with the procedure of Article 126(6) thereof,

Having regard to the proposal from the
European Commission,

Whereas:

(1)       Article 136(1)(a) TFEU
foresees the possibility of adopting measures specific to the Member States
whose currency is the euro with a view to strengthening the coordination and
surveillance of their budgetary discipline.

(2)       Abundant availability of
external financing at low cost in the 2000s fuelled a credit-driven domestic
demand and asset boom in Spain, concentrated in particular in real estate The
burst of the real estate and construction bubble and the economic recession
that followed has adversely affected the Spanish banking sector. As a result,
with the exception of a few large and internationally diversified credit
institutions, Spanish banks have largely lost access to wholesale funding
markets on affordable terms and, thus, have become highly dependent on
Eurosystem refinancing. In addition, their borrowing capacity has been severely
limited by the impact of rating downgrades on collateral availability.

(3)       The sizeable contraction
of the economy in recent years, which is affecting employment and unemployment
in a very negative way, has deteriorated substantially the budgetary position
in Spain. According to a Commission services' update of the 2012 Spring
Forecast, the general government deficit is projected at 6.3% of GDP in 2012,
which compares to an expected deficit of 5.3% of GDP in the 2012 stability
programme and the draft 2012 budget law. Gross public debt rose to 68.5% of GDP
in 2011, and according to the Commission services’ update of the 2012 Spring
Forecast it is expected to surge to 80.9% of GDP in 2012 and to 86.8% in 2013,
based on a no-policy-change scenario, thus exceeding the Treaty reference value
in all years. Risks related to the macroeconomic scenario and the budgetary
targets, as well as to additional financial rescue measures, may contribute to
a further increase in public debt. In view of these developments, on 10 July
2012 the Council issued a recommendation to Spain under Article 126(7) TFEU to
put an end to the present excessive deficit situation by 2014.

(4)       The Spanish authorities
have taken a number of important measures to address the problems in the
banking sector. These measures include the clean-up of banks balance sheets,
increasing minimum capital requirements, restructuring of the savings bank
sector, and significantly increasing the provisioning requirements for loans
related to Real Estate Development (RED) and foreclosed assets. These measures,
however, have not been sufficient to alleviate market pressure.

(5)       In February 2011, the
Spanish authorities raised the minimum capital ratio requirement (“capital
principal”) to 8% of banks' risk weighted assets and gave banks until September
2011 to comply with this new regulation. For banks more dependent on wholesale
funding and characterized by a limited market access the minimum capital ratio
was increased to 10%. In February and May 2012, new legislation required banks
to build higher provisions and capital buffers against possible losses on both
performing and non-performing loans on the legacy stock of construction and
real estate assets. The expected overall volume of these new provisioning
requirements amounted to approximately EUR 84 billion.

(6)       As of April 2012, the
total gross financial contribution by the Spanish State (excluding bond
issuance guarantees) amounted to about EUR 34 billion (3.2% of GDP). The
capital support was provided via the Fund for Orderly Bank Restructuring (FROB)
endowed with a capital of EUR 15 billion, of which EUR 9 billion were already
paid in. The State has also provided guarantees to bank senior bond issues
amounting to about EUR 86 billion (out of this total, about EUR 58 billion
guarantees are outstanding). Although the FROB still had a remaining funding
capacity of about EUR 27 billion (as of April 2012), available domestic public
sector support will not be sufficient to provide a sufficiently large backstop
for conducting the required system-wide clean-up of the banking sector.

(7)       Concerns about the need
for further banking sector recapitalisation have contributed to increasing
market pressures on Spanish government bonds. Sovereign bond yields have
reached levels of well over 500 bps. in late June 2012 and early July 2012,
increasing the funding costs for the Spanish sovereign. The rising interest
burden adds to the challenge of consolidating public finances in Spain and
correcting the excessive deficit. Therefore, comprehensive banking sector
restructuring and recapitalisation is an important element in reducing pressure
on public finances.

(8)       On 25 June 2012, the
Spanish authorities officially requested financial assistance in the context of
the ongoing restructuring and recapitalisation of the Spanish banking sector.
The assistance is sought under the terms of the Financial Assistance for the
Recapitalisation of Financial Institutions by the EFSF. The assistance provided
is subject to specific financial sector conditionality. This conditionality
should be fully consistent with the coordination measures adopted within the
framework of the EU Treaties, in particular those contained in this Decision.

(9)       Increasing long-term
resilience of the Spanish banking sector is critical to preserve financial
stability in Spain and limit the contagion of financial stress to other
euro-area economies and, thus to avert adverse effects on the proper
functioning of the economy and of economic and monetary union. Measures taken
so far to address these problems have not been fully sufficient. Further
measures are therefore necessary in addition to obligations of Spain under the excessive
deficit procedure and the recommendations to address macroeconomic imbalances
within the framework of the European Semester. In particular, Spain should
implement additional specific measures to effectively deal with legacy assets,
restore market-based funding, reduce banks’ reliance on central bank liquidity
support, and to enhance the risk identification and crisis management
mechanisms.

(10)     As part of the overall
strategy, it is key to effectively deal with the legacy assets by requiring a
clear segregation of problematic assets of aided banks from the banks' balance
sheets. This should apply, in particular, for loans related to RED and
foreclosed assets. Such segregation would remove any remaining doubts about the
quality of the banks' balance sheets, allowing them to better carry out their
financial intermediation function.

(11)     In addition, improving the
transparency of banks' balance sheets in this manner can facilitate an orderly
downsizing of bank exposures to the real estate sector, restore market-based
funding, and reduce banks’ reliance on central bank liquidity support.

(12)     Ensuring a sound framework
for the Spanish banking sector requires that the risk identification and crisis
management mechanisms are enhanced. An effective strategy should comprise of
changes aimed at strengthening of the regulatory and supervisory framework,
taking into account the experiences of the financial crisis. In addition,
corporate governance shall be enhanced in line with international best
practices,

HAS ADOPTED THIS DECISION:

Article 1

1.           Spain shall adequately
recapitalise and thoroughly restructure its banking system. In that regard,
Spain shall develop in coordination with the European 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.

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;

(b)     recapitalization, restructuring and/or
resolution in an orderly way of weak banks, based on plans to address any
capital shortfalls identified in the stress test;

(c)     segregation of assets in those banks
receiving public support in their recapitalization effort and their transfer of
the impaired assets to an external Asset Management Company (AMC).

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 shall inter
alia include the following measures:

(a)     Spanish credit institutions shall be
required to increase their Common Equity Tier (CET) 1 ratio to at least 9%;

(b)     From 1 January 2013, Spanish credit
institutions shall be required to apply the definition of capital established
in the Capital Requirements Regulation (CRR);

(c)     The legal framework for loan-loss
provisioning shall be re-assessed. 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)     The operational independence of the
Banco de España shall be further strengthened; the sanctioning and licensing
powers of the Ministry of Economy with respect to the banking sector shall be
transferred to the Banco de España;

(e)     The supervisory procedures of Banco de
España shall be further enhanced based on an internal audit;

(f)      The governance arrangements of the
financial safety net agencies (FROB and FGD) shall be reviewed to avoid
potential conflicts of interest;

(g)     The rules on the governance of the
savings bank sector and of the banks owned by savings banks shall be
strengthened;

(h)     Consumer protection and securities
legislation, and compliance monitoring by the authorities, shall be strengthened.

Article 2

This Decision is addressed to the Spain.

Article 3

This Decision shall be published in the Official
Journal of the European Union.

Done at Brussels,

For
the Council

The
President