Opinion of the European Central Bank of 9 March 2011 on the strengthening of the financial system (CON/2011/21)
Date: 2011-03-09
Institutions: European Central Bank
Subjects: Spain, credit institution, financial requirements, financial solvency, financial stability, national law

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) received 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 indents 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 Banco de España and to rules applicable to 

financial institutions insofar as they materially influence 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.  The  first  is  to  strengthen  the  solvency  of  Spanish 

credit  institutions  by  establishing  a  demanding  top-quality  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  financial  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 resolution fund, the Fund for Ordered 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.  

 
 
 
 
                                                 
restructuring  and  reinforcement  of  credit  institution’s  own  funds2  to  provide  recapitalisation  where 

required in order to facilitate compliance with such capital requirements. 

In particular, the Royal Decree-Law establishes for all credit 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 investors. Institutions not fulfilling these requirements from 10 

March  2011  must  submit  a  compliance  strategy  and  schedule  to  the  Banco  de  España,  together  with  a 

recapitalisation  plan,  if  they  intend  to  receive  support  from  the  FROB.  These  institutions  must  aim  to 

comply  with  the  capital  requirements  by  30  September  2011  or,  subject  to  the  Banco  de  España’s 

authorisation for justifiable reasons, by the end of 2011, or, where an initial public 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 backstop, in compliance with 

domestic and Union provisions on competition and State aid. Savings banks applying for recapitalisation 

via  the  FROB  must  transfer  their  financial  activities  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  structural  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 and published the Royal-Decree Law on an urgent 

basis,  thus  giving  it  immediate  legal  effect.  Therefore,  this  opinion  relates  to  the  parliamentary 

debate in the validation phase of the Royal Decree-Law, to any further legislative amendments to it 

and to its subsequent implementation. 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  their  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 Decree-Law is broadly in line with the conclusions and 

recommendations  of  the  International  Monetary  Fund’s  (IMF)  Staff  Report  on  Spain  of  29  June 
20103  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  
3  
4  

See Opinion CON/2009/62. 
Available on the IMF’s website at http://www.imf.org/external/pubs/ft/scr/2010/cr10254.pdf. 
Available on the FSB’s website at http://www.financialstabilityboard.org/search/?sp_q=peer+review+of+Spain&adv=1. 

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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 capital ratios is different to that under the Basel III 

Accord,  the  ECB  welcomes  the  fact  that  the  new  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  possibilities  for  the  capitalisation  of  all  credit 

institutions  and  for  specific  measures  for  the  capitalisation  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  the  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 credit institutions’ capital could be demanding on 

such institutions and may increase the risk of adverse 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  Group  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  carefully  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 welcomes the powers attributed to the Banco de España 

to further raise the higher capital requirements established by the Royal Decree-Law, in accordance 

with the upcoming Union-wide stress test to be conducted by the European Banking Authority in 

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cooperation with the ECB. Moreover, the ECB welcomes 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 explicit, unconditional and irrevocable 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 the 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 agreement 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 the establishment of effective corporate governance 

practices.  The  Royal  Decree-Law  contains  two  rules  in  this  regard:  (a)  it  imposes  on  decision-

makers of all savings banks the duties under law which apply to members of the Board of Directors 

of  limited  and  public  limited  companies  by  shares;  and  (b)  makes  the  governance  code  currently 

applicable to listed companies mandatory for those 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  options  for  capitalisation  available  under  the  Royal 

Decree-Law. The Banco de España, as the banking supervisor, is the competent authority to require 

savings  banks  to  implement  robust  governance  arrangements  and  for  the  sake  of  political 

independence,  more  powers  could  be  established  to  guarantee  such  indisputable  competences.  In 

this  regard,  supervisory  experience  should  be  used  to  obtain  all  the  necessary  information  and  to 

decide on the sufficient level of expertise and integrity of board members and senior management, 

which  should  be  subject  to  periodic  review.  To  this  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  safeguard  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 

4 

governance of credit institutions are needed to complement capitalisation 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  representatives  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  financial  sector  supervisors,  insulating  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 persons in the FROB’s governing body. While the 

use  of  public  money  by  the  FROB  justifies  a  role  for  the  Ministry  for  Economic  Affairs  and 

Finance, its previously existing veto right already 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  eventual  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: approving or amending the compliance strategy and 

schedule; requiring higher capital ratios to be applied 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  requirements,  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. 

5 

 
 
 
 
Done at Frankfurt am Main, 9 March 2011. 

[signed] 

The President of the ECB 

Jean-Claude TRICHET 

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