10 April 2013

ECB opinion on the Deposit Guarantee Fund in Spain

The ECB has criticised Spain's plans to use a deposit guarantee fund intended to back up savers to compensate investors in some risky bank debt for losses made when the financial sector was bailed out.

The draft law specifies the measures that the Deposit Guarantee Fund (DGF), in addition to its core role of protecting insured deposits, may take to facilitate the implementation of the Union financial  assistance programme to recapitalise Spanish credit institutions. Pursuant to the draft law, the DGF may: (a) provide guarantees in the context of the financial assistance programme; (b) subscribe or  purchase shares not listed on an official market and issued by nationalised credit institutions and  credit institutions subject to restructuring or resolution processes in the context of the subordinated  liability exercises and actions to manage subordinated debt and hybrid capital instruments; (c)subscribe shares or subordinated debt issued by the Spanish impaired assets scheme, i.e. the  Asset Management Company for Assets Resulting from Bank Restructuring (the SAREB).

The ECB  supports rules which provide that the available financial means of deposit guarantee schemes may  be used to finance resolution, as this allows for synergies between such schemes and resolution  financing, but considers it of the utmost importance that this does not compromise in any way the  core function of deposit guarantee schemes in protecting insured deposits. Furthermore, in seeking  to achieve any of its statutory objectives, the DGF should choose the least costly measure. The ECB welcomes the rule requiring that costs of the DGF’s involvement in restructuring should be  lower than the costs of potential pay-outs of deposit guarantees and expects that this rule will be  implemented in a transparent manner, allowing for verification of the compliance with this rule in  practice.

The DGF’s powers under the draft law need to respect the requirement under the Memorandum of  Understanding on Financial-Sector Policy Conditionality of minimising the taxpayer’s burden. In this respect, the ECB understands that State resources will not be used to  finance the DGF’s new capabilities. The measures to be taken need to  carefully weigh the benefits (i.e. the potential positive contribution to the value of the Fund for  Orderly Bank Restructuring’s shareholding in banks, as well as the mitigation of the potential risk  of litigation by certain categories of creditors or shareholders of non-listed banks) against the costs,  in particular the reduced tax revenue for the State resulting from lower financial results of the banks owing to the extraordinary contributions to the DGF. In addition, it should be assessed whether the DGF’s limited funds would be best used for the benefit of retail investors or instead for other financial stability purposes, such as replenishing the DGF and thereby reinforcing market  confidence in its ability to carry out its core role. Finally, due consideration needs to be given to the  alternative that banks could rebuild their capital buffers instead of contributing funds to the DGS.

Furthermore, the principles of burden sharing as agreed in the MoU need to be respected. It is essential that the price paid by the DGF for the equity shares to be acquired from retail investors in the context of the subordinated liability exercises be fair. In the absence of a quoted price, the price needs to be the inferred market price, i.e. using the economic valuation of the banks only as a starting point, so that investors in listed banks would not be disadvantaged. In this respect, the ECB notes that the final version of the law expressly requires that (i) the purchase price be no higher than the market value of the shares; (ii) it should comply with Union rules on State aid; and (iii) the DGF is requested to commission an independent expert report to determine such market value.

Full opinion

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