VP Almunia: State aid control

22 October 2012

Speaking at the Barcelona Graduate School of Economics Inaugural Lecture, Almunia explained how the European Commission has been using the instruments of State aid control to push towards the restructuring of banks since 2008.

The cases we have handled so far fall under four main categories.

• The first includes banks affected early by the crisis which are implementing their restructuring plans – such as Royal Bank of Scotland, Lloyds and Northern Rock in the UK, a number of German Landesbanken, KBC in Belgium or ING in the Netherlands, to name a few.
• The second category covers Greece, Ireland and Portugal – the three euro area countries receiving financial assistance under a programme. Here the action has a broader scope and includes not only the restructuring of their banking systems but also macro-economic and financial-stability conditionality.
• Then we have the very few cases that we can regard as unfinished business. One particularly complex case in this group is that of Dexia, which is still being discussed.
• The fourth and last category comprises Spanish banks, which are being restructured and recapitalised with money lent by the EFSF/ESM. To that end, Spain and the Eurogroup signed a Memorandum of Understanding in July, which detailed the conditions under which such process must be conducted.

After the memorandum was agreed, an independent stress test of the 14 most important banks was carried out and its results were published on the 28th of September representing 90 per cent of Spain’s banking system. The memorandum foresees that – as a result of the exercise – the analysed entities could be allocated between four groups.

The first one, actually called Group zero, would include those entities that already had at least a Core tier 1 capital ratio of 9 per cent of their risk-weighted assets and that would keep a capital ratio of at least 6 per cent even under a drastic stress situation. The stress tests have revealed that seven entities (Santander, BBVA, CaixaBank, KutxaBank, Unicaja, Sabadell and Bankinter) do not have any additional capital needs. Banks in this group are thus excluded from the recapitalisation and restructuring process.

The next group, or Group 1, includes the four already nationalised entities, controlled by the FROB: Bankia, Catalunya Caixa, Nova Caixa Galicia and Banco de Valencia. We knew at the outset that these entities had heavy capital needs even in the central scenario, without stress.

The third group, or Group 2, would include those entities that would not be able to reach the necessary 9 per cent capital ratio in the market, thus needing public support. The final group, or Group 3, includes the entities which, having capital needs, would present a recapitalisation plan that shows they can get the money from the market, thus not needing public support. The stress tests found that the banks in groups 1, 2 and 3 have aggregate capital needs of about €60 billion, without taking into account tax effects and possible mergers.

Since the capital needs of the banks in Group 1 were broadly known already at the moment of signature of the MoU, the Bank of Spain, the Commission and the management of the four entities have been working on their restructuring plans during the summer, and the Commission will take a decision approving them by the end of November. At that moment, the ESM will transfer the necessary funds to the FROB, which, in turn, will inject the necessary capital.

Banks in Group 2 – including entities such as CEIS, BMN, Liberbank and Caja3 – have already started working on their respective restructuring plans, which have to be approved by the Commission before the end of the year. By then, as with group 1, the banks will receive the necessary capital.

Those banks that consider that would be able to raise the capital from the market must present recapitalisation plans by the end of this month. If the plans are convincing, the banks will have until the end of June 2013 to obtain the capital. If they have not been able to get the capital they need by then, these banks will be recapitalised with public funds after presenting a restructuring plan; otherwise no further action will be needed. Apparently, Banco Popular would be in this category, and may not be the only one. We will know the details before the end of the month.

With a view to reassure markets on the solvency of Group 3 banks during the period until their full recapitalisation, the FROB will use ESM money to inject the so-called “CoCos” – debt instruments convertible in equity under given circumstances – in case their capital needs represent more than 2 per cent of the risk-weighted assets.

The restructuring plans for the banks in groups 1 and 2, plus those in group 3 that have received CoCos, will be prepared and assessed case by case, but the process will have a few common features.

• First, the restructuring plans of banks in Groups 1 and 2 will include the full absorption of losses by private capital, while part of the hybrid capital will also absorb losses and the rest will be converted in the new capital. Therefore the burden sharing of current shareholders and hybrid-asset holders will reduce the need of public money and, thus, the contribution of the taxpayer.
• Second, once the restructuring plans are approved, banks will start transferring impaired assets to the SAREB – the bad bank created last week. This bad bank will be set up and operational in December. The profits of the bad bank depend on the transfer price of the assets: the lower the price, the higher the likelihood of selling the asset at a profit.
• Third, the restructuring plans of the intervened entities will include all the necessary structural measures that, together with the transfer of the bad assets to the SAREB, will guarantee the viability of the entity. This usually entails a significant reduction of the size of their balance sheet and the implementation of a sustainable and sound business plan. Restructuring plans will also include a series of behavioural commitments, such as acquisition bans or bans on price leadership aiming at minimising the competition distortions induced by the public support received.

Of course, the transfer of assets to the SAREB involves State aid and therefore adds to the compensatory measures. So any banks transferring assets to the SAREB will be subject to the same restructuring obligations and the same conditionality as other banks that receive public capital, in proportion to the amount of aid received.

The objective of these conditions is twofold. On the one hand, to guarantee that banks will not require more public capital under a foreseeable scenario. On the other hand, to minimise the amount provided by the taxpayer. Taken together, these two conditions maximise the likelihood that the taxpayer recovers most of the investment once the public participations in the entity are sold at market prices. According to this calendar, the whole Spanish financial system will be fully capitalised by mid-2013 at the latest.

Full speech

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