Proposal for a COUNCIL DECISION addressed to Spain on specific measures to reinforce financial stability
Date: 2012-07-16
Institutions: European Commission
Subjects: European Central Bank, Spain, banking system, central bank, economic recession, economic stabilisation, euro area, financial aid, management audit, stability programme

EUROPEAN COMMISSION 

Brussels, 16.7.2012  
COM(2012) 406 final 

2012/0198 (NLE) 

Proposal for a 

COUNCIL DECISION 

addressed to Spain on specific measures to reinforce financial stability 

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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. 

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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) 

(2) 

(3) 

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. 

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. 

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 

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(5) 

(6) 

(7) 

(8) 

(9) 

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. 

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. 

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. 

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.  

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. 

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 

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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:  

1. 

2. 

3. 

Article 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.  

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.  

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

(a) 

(b) 

(c) 

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; 

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;  

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). 

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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. 

This Decision is addressed to the Spain. 

Article 2 

Article 3 

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

Done at Brussels,  

For the Council 
The President 

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