EN 
 
 
OPINION OF THE EUROPEAN CENTRAL BANK 
of 9 March 2011  
on the strengthening of the financial system  
(CON/2011/21) 
 
Introduction and legal basis  
On 3 March 2011 the European Central Bank (ECB) r eceived a request from the Spanish State Secretary 
for Economic Affairs for an opinion on Royal Decree-Law 2/2011 of 18 February 2011 on the 
strengthening of the Spanish financial system (hereinafter the ‘Royal Decree-Law’).  
The ECB’s competence to deliver an opinion is based  on Article 127(4) of the Treaty on the Functioning 
of the European Union and on the third and sixth inde nts of Article 2(1) of Council Decision 98/415/EC 
of 29 June 1998 on the consultation of the European  Central Bank by national authorities regarding draft 
legislative provisions1, as the Royal Decree-Law relates to the Banc o de España and to rules applicable to 
financial institutions insofar as they materially influe nce the stability of financial institutions and markets. 
In accordance with the first sentence of Article 17.5 of the Rules of Procedure of the European Central 
Bank, the Governing Council has adopted this opinion. 
 1.  Purpose of the Royal Decree-Law 
The Royal Decree-Law states that it has two goals. Th e first is to strengthen the solvency of Spanish 
credit institutions by establishing a demanding top-qua lity capital requirement in order to dispel any 
doubts about such institutions’ solvency. The second is to accelerate the final phase of the restructuring 
processes of credit institutions by virtue of the framework created by Royal Decree-Law 11/2010 on 
savings banks’ governing bodies and other aspects of their legal regime. The Royal Decree-Law also 
states that these two goals will guarantee the financia l sector’s function of generating credit within the 
economy. In the case of savings banks, this role is  made compatible with the indispensable goal of 
continuing their social activities.  
The Royal Decree-Law is organised around two sets of  provisions: the first establishes stricter capital 
requirements and the second adapts the Spanish resolu tion fund, the Fund for Or dered Bank Restructuring 
(hereinafter the ‘FROB’), which was set up by Royal Decree-Law 9/2009 of 26 June 2009 on bank 
                                                 
1  OJ L 189, 3.7.1998, p. 42.  
2 restructuring and reinforcement of credit institution’s own funds2 to provide recapitalisation where 
required in order to facilitate complia nce with such capital requirements. 
In particular, the Royal Decree-Law establishes for all cr edit institutions a core capital ratio of 8% of their 
risk-weighted assets by 31 December 2010. This ratio  is 10% for institutions having less capacity to 
access capital markets as shown by reliance on wholesale funding higher than 20% of net loans and less 
than 20% of equity being held by private investor s. Institutions not fulfilling these requirements from 10 
March 2011 must submit a compliance strategy and sche dule to the Banco de España, together with a 
recapitalisation plan, if they intend to receive s upport from the FROB. These institutions must aim to 
comply with the capital requirements by 30 Septem ber 2011 or, subject to the Banco de España’s 
authorisation for justifiable reasons, by the end of 20 11, or, where an initial pub lic offerings is planned, 
by the first quarter of 2012. A breach of capital requirements is treated as a serious or very serious infringement of Law 26/1988 on discipline and intervention of credit institutions. 
Where capital needs cannot be met through the market, the FROB acts as a backst op, in compliance with 
domestic and Union provisions on competition and Stat e aid. Savings banks applying for recapitalisation 
via the FROB must transfer their financial activiti es to a commercial bank. The FROB’s investments, 
limited to a maximum period of five years and carried  out using competitive procedures, are subject to a 
recapitalisation plan based, inter alia , on specific goals to reduce stru ctural costs, comply with good 
corporate governance practices and extend credit to  businesses and households. The validity of every 
recapitalisation plan is subject to Union State aid rules. 
 2. General observations 2.1 The Spanish Government has already adopted an d published the Royal-Decree Law on an urgent 
basis, thus giving it immediate legal effect. Ther efore, this opinion relates to the parliamentary 
debate in the validation phase of the Royal Decree-La w, to any further legislative amendments to it 
and to its subsequent implementa tion. Regarding the latter, the ECB expects to be consulted on any 
proposed implementing legislation to be adopted  under the Royal Decree-Law that materially 
influences the stability of financial institutions and markets. 
2.2 Again the ECB reiterates the legal obligation on the Spanish authorities under Article 4 of Decision 
98/415/EC to ensure effective compliance with th eir duty to consult the ECB, in particular by 
consulting it at an appropriate stage in the law-making process.   
2.3  The ECB welcomes the fact that the Royal Decr ee-Law is broadly in line with the conclusions and 
recommendations of the International Monetary Fu nd’s (IMF) Staff Report on Spain of 29 June 
2010
3 and of the Financial Stability Board’s (FSB) peer review of Spain of 27 January 20114. It 
also welcomes the implementation by the Royal Decree-Law of measures that follow the Basel III 
                                                 
2  See Opinion CON/2009/62.   
3  Available on the IMF’s website at http:// www.imf.org/external/pubs/ft/scr/2010/cr10254.pdf. 
4  Available on the FSB’s website at http://www.financialstability board.org/search/?sp_q=peer+review+of+Spain&adv=1. 
3 Accord, such as the definition of core capital in line with ‘common equity tier 1’ and the 
introduction of a capital buffer technique, which is similar to the relevant provisions of the new 
Basel framework. Although the calculation of capita l ratios is different to that under the Basel III 
Accord, the ECB welcomes the fact that the ne w capital requirements are a step in the right 
direction that improves the resilience of financial institutions.  
 3.  Specific comments 3.1 Capitalisation measures  
The Royal Decree-Law provides for several pos sibilities for the capitalisation of all credit 
institutions and for specific measures for the capita lisation of savings banks. It contains an 
implementation procedure which has a very demanding timetable. These measures are welcomed by the ECB, with two observations: (a) the exact methods of capitalisation of the banking sector require a critical evaluation of the asset side of credit institutions’ balance sheets in the current 
downturn stage of the cycle and in unusual situations  for some parts of the market, in particular the 
real estate sector: although up until now the Banco de  España has taken a conservative approach to 
such valuations, the opportunity offered by th e Royal Decree-Law should be used to strongly 
address any remaining doubt about such valuations ; (b) given appropriate capitalisation efforts to 
credibly address credit institutions’ balance sheet  vulnerabilities related to challenging cyclical 
conditions for the Spanish economy,  the advancement of some two years in the global calendar for 
the implementation of the Basel III Accord for cr edit institutions’ capital could be demanding on 
such institutions and may increase the risk of adve rse temporary effects on the credit flows to the 
real economy. It should be kept in mind that  the studies by the Basel Committee on Banking 
Supervision/FSB Macroeconomic Assessment Gr oup indicated relatively modest macroeconomic 
transitional costs for introducing Basel III under the envisaged phase-in arrangements. However, 
this would not be the case under the advanced implementation provided for in the Royal Decree-Law. Such effects should nevertheless be carefu lly assessed given the particular situation of the 
Spanish economy. Furthermore, it should be noted that the Basel Committee had specifically opted for transitional provisions to reconcile the needs in  relation to higher financial stability and credit 
availability.  
3.2 Banco de España’s powers 
The ECB emphasises that in order to achieve  the underlying key goal of restoring market 
confidence in the soundness of the Spanish financial system, the Royal Decree-Law should provide the Banco de España with all the powers needed  to ensure that a sound supervisory technical 
assessment will be inherent in any necessary intervention to strengthen the financial conditions of 
credit institutions. In this context, the ECB welcom es the powers attributed to the Banco de España 
to further raise the higher capital requirements est ablished by the Royal Decree-Law, in accordance 
with the upcoming Union-wide stress test to be conducted by the European Banking Authority in 
4 cooperation with the ECB. Moreover, the ECB welc omes the fact that credit institutions intending 
to request the FROB’s intervention have to prepare a recapitalisation plan that must be approved by 
the Banco de España, and that the latter will also  be authorised to regularly monitor credit 
institutions’ compliance with the measures contained in the recapitalisation plan and to intervene 
when needed. 
3.3 Recapitalisation via the FROB 
The FROB has an initial allocation of EUR 9 000 million and a debt capacity of 
EUR 27 000 million, with an e xplicit, unconditional and irrevo cable guarantee from the Kingdom 
of Spain. Its debt capacity can additionally be  extended up to EUR 90 000 million. Thereby, the 
overall EUR 99 000 million potential capacity that th e FROB may make use of should suffice to 
cover the recapitalisation needs of the savings  banks sector even under a very conservative 
valuation of their assets. At the same time, the ag reement of the Ministry for Economic Affairs and 
Finance is needed for the FROB to issue debt beyond EUR 27 000 million.  
3.4 Corporate governance of savings banks 
The ECB welcomes the continuation of the reforms to the governance of savings banks started by 
Royal Decree-Law 11/2010 of 9 July, which was aimed at improving the professionalism and dedication of the members of their decision-making bodies. An essential requirement to maintaining public trust and confidence in the banking system, critical elements to the proper 
functioning of the banking sector as a whole, is th e establishment of effective corporate governance 
practices. The Royal Decree-Law contains two ru les in this regard: (a) it imposes on decision-
makers of all savings banks the duties under law wh ich apply to members of the Board of Directors 
of limited and public limited companies by shar es; and (b) makes the governance code currently 
applicable to listed companies mandatory for t hose savings banks being capitalised by the FROB. 
External influences on the professional and dedicated governance and management of savings banks should be avoided, irrespective of the op tions for capitalisation available under the Royal 
Decree-Law. The Banco de España, as the banking s upervisor, is the competent authority to require 
savings banks to implement robust governan ce arrangements and for the sake of political 
independence, more powers could be established to  guarantee such indisputable competences. In 
this regard, supervisory experien ce should be used to obtain all the necessary information and to 
decide on the sufficient level of expertise and in tegrity of board members and senior management, 
which should be subject to periodic review. To th is end, the Banco de España should have the 
statutory power and ability to assess the fitness and propriety of board members and senior 
managers of savings banks on a regular basis.  
Corporate governance arrangements should also saf eguard an independent risk management 
function which has access to the respective board. These arrangements should ensure that the risk 
management function is properly resourced and that its responsibilities are carried out 
independently and effectively. Overall, the post- crisis global and Union parameters for the sound 
5 governance of credit institutions ar e needed to complement capitali sation measures, irrespective of 
their method under the new law, in order to be successful in accessing capital markets.   
3.5 Governance of the FROB 
The Royal Decree-Law introduces a reform to the FROB’s governing body which has the effect of 
terminating the majority held by the representativ es of the supervisor until now. The IMF in its 
Financial Sector Assessment Program , and the FSB in its peer reviews, demonstrate the need to 
strengthen the independence of fi nancial sector supervisors, in sulating them from any objective 
other than financial stability and market integrity.  The relevant reform in the Royal Decree-Law 
introduces the presence of politically-appointed pers ons in the FROB’s governing body. While the 
use of public money by the FROB justifies a ro le for the Ministry for Economic Affairs and 
Finance, its previously existing veto right alr eady provided the right balance between autonomous 
prudential decision-making by the FROB and the protection of public finances. Any increase in 
possible political intervention in the process of  capitalisation, temporary nationalisation and 
management of credit institutions, and in their ev entual sale, is inconsistent with the above 
recommendations, in an area where only prudential and stability considerations are relevant. The 
ECB notes, however, that the Vice-Governor of the Banco de España is appointed President of the 
FROB’s governing body. In addition,  the Banco de España  is given important responsibilities in the 
overall process. These responsibilities include: approv ing or amending the compliance strategy and 
schedule; requiring higher capital ratios to be applie d to individual institutions as a result of stress 
tests carried out for the whole system; authorising extensions for compliance for up to six months; deciding on restrictions to dividend distribution, to managerial remuneration, etc. in the case of temporary non-compliance with capital requireme nts, and approving the recapitalisation plan 
required prior to capital subscription by the FROB . Moreover, the capital subscription by the FROB 
is temporary and divestment needs to be within a maximum period of five years.  
3.6  Takeover bids  
Finally, the ECB supports the exemption from the duty to make a takeover bid for any entity which 
has achieved control of a listed company as a result of the restructuring or integration procedure under the Royal Decree-Law on the FROB or of intervention by the Deposit Guarantee Fund (DGF), when these have been financed by FROB or  DGF. The ECB finds that this approach is in 
line with the principle that the restructuring should be  of the lowest cost possible to the taxpayer, as 
making a public offer would increase such cost.    
 This opinion will be published on the ECB’s website.    
6 Done at Frankfurt am Main, 9 March 2011. 
 
[signed] 
 
The President of the ECB 
Jean-Claude TRICHET