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26 January 2011

Spanish plan for the strengthening of the financial sector


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The plan increases the capital requirements for credit entities and strengthens the Fund for the Orderly Restructuring of the Banking Sector (FROB) as a backstop for cases where the capital needed is not obtained through the market.


The Spanish Government has presented a plan for the strengthening of the financial sector. The plan has two key goals:

·         To restore market confidence in the soundness of the Spanish economy and the credibility of its financial institutions; and

·         To facilitate funding of financial institutions, ensuring credit flows to the real economy to secure growth and employment.

Throughout the crisis, the Spanish financial sector, subject to regulation and supervision based on a careful and rigorous application of international standards, has shown remarkable resilience despite difficulties. Today, the strength of the Spanish financial system is outstanding, with a level of core capital for the entire system that exceeds 8% of risk weighted assets.

Nevertheless, currently there remains some uncertainty in the markets on the robustness of the financial sector. The Government considers it therefore necessary to undertake a series of actions designed to dispel any doubts about the solvency of Spanish credit institutions and their resilience, even in adverse scenarios. Thus, facilitating access by the institutions to financial markets, and securing the channeling of credit to the economy.

Plan for the strengthening of the financial sector The plan increases the capital requirements for credit entities and strengthens the FROB as a backstop for cases where the capital needed is not obtained through the market. More precisely, it implies:  

·         Immediate application of the definition of core-capital foreseen under Basel III for 2013.

·         Increase in the core capital requirement for all credit institutions up to a minimum of 8%. This ratio will be even higher for those institutions that are not listed on the Stock Exchange, have a small presence of private investors, and are dependent upon wholesale funding markets for over 20% relative to their assets – since they have less ability to access capital markets when necessary.

·         This new capital ratio will be set relative to the risk-weighted assets existing in the institutions' balance sheets as of December 31st, 2010, so that credit creation is not discouraged.

·         The Bank of Spain will immediately analyze which credit entities currently fail to meet the new requirements and the amounts of additional capital needed to reach the new capital levels.

·         The entities with capital shortages will have to present to the Bank of Spain a strategy for closing the detected gap in order to be able to attract the capital needed to reach the required level by Fall.

 






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