Banks must hold more capital, with public support to get it

Automatic summary, not yet reviewed

1. Credit institutions must hold core capital of at least 8% of their risk-weighted assets. The requirement rises to 10% for institutions heavily reliant on wholesale funding that have not placed at least 20% of their capital with third parties.
2. If an institution temporarily falls below the minimum, but by less than 20%, the Bank of Spain may impose restrictions: limiting dividends, variable pay, the social welfare fund, payments on preferred shares, or share buybacks. It may also require more capital if the institution fails a stress test.
3. Core capital is defined by adding share capital, issuance premiums, reserves, positive valuation adjustments, minority interests, and instruments subscribed by the FROBFROB Fondo de Reestructuración Ordenada Bancaria: a public fund created in 2009 to support and restructure credit institutions., and subtracting losses, negative adjustments, and intangible assets. It broadly follows the Basel III definition for 2013.
4. Failure to meet the capital requirements is sanctioned under the Law on Discipline and Intervention of Credit Institutions: it is a very serious offense if the shortfall lasts more than six months below 80% of the required level, and serious if it is between 80% and 100%.
5. The FROB may buy ordinary shares of banks and credit cooperatives that need to strengthen their own funds, even if they are not in financial difficulty, provided they submit a recapitalization plan approved by the Bank of Spain. The price will be set by independent experts, the FROB will join the governing body in proportion to its stake, and it must divest within a maximum of five years.
6. Savings banks requesting FROB support will have three months to transfer all their financial business to a bank. Institutions that do not meet the required capital by March 10, 2011 will have 15 business days to submit a strategy to the Bank of Spain and must comply by September 30, 2011, with possible extensions of up to three months or, exceptionally, until the first quarter of 2012 if there is a stock market listing.

Who it affects

• Banks, savings banks, and credit cooperatives: They must reach a minimum core capital level of 8% or 10% and, if they fail, submit a compliance strategy to the Bank of Spain.
• Institutions requesting FROB support: They receive public capital in exchange for shares, a recapitalization plan with commitments to cut costs and increase lending to small and medium-sized businesses, and corporate governance rules.
• Savings banks requesting FROB support: They must transfer their financial business to a bank within three months.
• Directors and executives of non-compliant institutions: They can be affected by restrictions on variable pay and dividends, and by the sanctioning regime.

Words worth knowing

Capital principal (core capital)

The institution's highest-quality own funds that absorb losses: share capital, reserves, and similar items, minus losses and intangible assets.

FROB

Fondo de Reestructuración Ordenada Bancaria: a public fund created in 2009 to support and restructure credit institutions.

Financiación mayorista (wholesale funding)

Money banks obtain from large investors and other markets, rather than from customer deposits.

Activos ponderados por riesgo (risk-weighted assets)

The bank's assets (loans, investments) valued according to the risk they carry, used as the base for calculating required capital.

Prueba de resistencia (stress test)

An exercise checking whether an institution could withstand very adverse economic scenarios.

It summarizes the law as published in the BOE. It is written by artificial intelligence and may contain mistakes: the official text is what counts. Read the official text · How we make summaries