16 October 2012

Commission publishes report on the Financial Sector Adjustment Programme for Spain

On 4 July, the mission concluded a staff level agreement for a financing package of up to €100 billion for recapitalisation and restructuring of the Spanish financial sector. The Memorandum of Understanding (MoU) was signed on 23 July. This report by European Commission staff provides an overview of the challenges faced by Spain and its financial sector, discussions with the authorities, and the objectives and design of the financial sector adjustment programme.

Financial Assistance for the Recapitalisation of Financial Institutions by the European Financial Stability Facility (EFSF)

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 European Stability Mechanism (ESM), once this institution is fully operational, without gaining seniority status. The Memorandum of Understanding (MoU) was signed on 23 July. The full implementation of this MoU will take into account all other relevant considerations contained in the Euro Area Summit statement of 29 June, 2012. The execution of the entire range of the programme is very closely monitored by the European Commission and the ECB, and also partly by the European Banking Authority (EBA) and the EFSF. The IMF is also closely involved.

The main objective of the financial sector programme in Spain is to increase the long-term resilience of the banking sector as a whole, thus restoring market access for the Spanish banks. The conditionality attached to the financial support provided to Spain concentrates on the financial sector. It consists of two main building blocks: first, a clear roadmap to bank-by-bank recapitalisation and restructuring in line with European Union (EU) State aid rules (bank-specific conditionality); and second, horizontal conditionality applying to the banking sector or the regulatory and supervisory framework at large. A key component of the overall strategy is to deal effectively with the impaired assets by transferring such impaired assets into a separate vehicle, i.e. asset management company. By improving the quality and transparency of banks' balance sheets in this manner, the programme aims to facilitate an orderly downsizing of bank exposures to the real estate sector, restore banks' market-based funding, reduce banks’ reliance on central bank liquidity support, and allow them to carry out their financial intermediation function. Additionally, it is essential to enhance the risk identification and crisis management mechanisms at the level of banks and of supervisors which reduce the probability of occurrence and severity of future financial crises.

In parallel to the financial sector conditionality, Spain committed to comply fully with its commitments and obligations under the excessive deficit procedure (EDP) and the recommendations under the European Semester. Fulfilling Spain's obligations under the EDP and the recommendations to address macro-economic imbalances within the framework of the European Semester is key to ensure the effectiveness of the bank recapitalisation facility. Progress in meeting these obligations under the relevant EU procedures will be closely monitored in parallel with the regular review of programme implementation.

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