There are the first rumors about the long-awaited Spanish financial reform. In Madrid tomorrow, Friday, the Government will present to the Council of Ministers the decree law which lists the measures to put the most compromised banking system in the Eurozone in order. The newspaper El Pais this morning published the draft of the decree, still subject to modifications, but from which the salient features of the provision emerge.
FROB – The Fund for the Orderly Restructuring of Banks (Frob), controlled mainly by the Banco de España, will have an important (and disturbing) new power, that of liquidating, "without the consent of the shareholders", credit institutions unable to repay the aid public "within a reasonable time". It was Brussels, at the time of the signing of the Memorandum of understanding (Mou) for the 100 billion euro credit line, that asked to move in this direction. The Frob will determine the economic value of the entity to be liquidated and will pass the assets and liabilities to a "bridge bank", which will subsequently be sold. The toxic assets, mainly linked to the real estate market, will instead pass to the so-called bad bank which will try to maximize their selling price. The part that fails to be sold will be liquidated and will follow the current regulatory framework. But the real news is that Frob will not need the consent of the shareholders or third parties to proceed with the liquidation of the assets.
STATE-SAVING FUND AND ECB – The main objective of Frob remains that of intervening to rescue institutions in difficulty. A bank could be recapitalized through securities of the same bank-saving fund: in this way it will have five years (extendable up to seven) to repay the aid. But Frob could choose to intervene with a direct injection of capital, deciding whether to inject cash or bonds issued, optionally, by the Madrid Treasury or by the State-saving Fund. In this way the bank in difficulty will be able to use these securities as guarantees in interbank transactions, deposit them with the ECB to obtain cash or sell them directly on the secondary market, especially as regards the debt issued by the State-saving Fund which enjoys the highest rating.
BAD BANK – The unknowns surrounding the structure, financing and management of the "bad bank" still leave many perplexed. The only example with which the situation can be compared is the Irish Bad bank. The national asset management company, through state funds, paid 32 billion euros for real estate assets with a nominal value of 74 billion. However, this 56% discount was insufficient to generate a profit: market prices were even lower and the Irish state company had to sell at even lower prices reducing its ability to repay the state. Certainly not the most appropriate example for Spain. This Friday, the Troika experts will meet in Madrid with government representatives to decide how to structure the Bad bank, but they ensure that "the meeting will have a purely technical nature, there will be no political negotiations". Spain must present the Bad Bank legislation "by the end of August" and this must be operational in November. But the questions he still has to answer are many: who will be the shareholders of the "bad bank"? What will be the participation of Frob? What types of assets can be moved to the bad bank? Only the real estate ones?
SAVERS – In the Mou, the EU invites the Spanish Government to provide that shareholders and creditors assume the losses before injecting further public funds into a bank. And so Frob with the new reform will have to respect the principle according to which "the shareholders and members of the institutes, according to their holdings, will be the first to bear their losses". And “the subordinated creditors of the banks will bear in case losses deriving from the restructuring or resolutions after the shareholders”.
CHANGE AT THE TOP – Finally, a change will be decreed at the top of Frob to avoid conflicts of interest: no banker will be able to sit on the board of the bank-saving fund anymore. It was another of the conditions imposed by the EU in the Mou.
