bank resolutionand legal challenges....

Bank resolution and legal challenges.The Spanish Experience

Dr. Enrique Sanjuan.Senior Judge in the Court of Appeal of Almería.Professor of Law at University of Málaga.

ENRIQUE SANJUÁN. SPAIN.2017 2

On one hand, we have the act named Law 22/2003. This is the law whatwe should applicate when one or more companies, one or more naturalperson or whoever, must go into insolvency

Ley 22/2003, de 9 de julio, Concursal.- ( ADDITIONAL DISPOSITION) : Disposición adicional segunda. Régimen especial aplicable aentidades de crédito, empresas de servicios de inversión y entidades aseguradoras.


ADDITION

AL DISPO

SITION

special cases of insolvency matters.

FINANCIAL COMPANIES

CREDIT COMPANIES

INSURANCE COMPANIES


Therefore, we have two different system in our insolvency law:


1º. Firstly the normative for the companies, natural person or other which have juridical personality.

012º. Likewise, we have the body of normative over the financial system companies. And inside this, we are holding several and different systems according to the kind of company that we are keeping in mind.

03

If you are in an insolvency of a financial company you must applicate according to this:

1. The normative that regulates the issue of this company. The administrative law essentially.

2. The specific fields in this normative for this companies.

3. The general law of insolvency.

4. Leading cases from The Supreme Court


EU SYSTEM.

But we are inside de European Union. And therefore we need toadapt our normative if the issue is regulated by it or we mustharmonize our regulation ( as all) to that.

- CROSS-BORDER CASES INSIDE EU. ( EU SYSTEM)• Regulation (EU) No 806/2014

INSIDE MATTERS ( SPANISH SYSTEM HARMONIZED WITH EU SYSTEM).• Ley 10/2014, de 26 de junio, de ordenación, supervisión y solvencia de entidades de crédito.

CROSS-BORDER CASES OUTSIDE EU. (SPANISH SYSTEM AND INTERNATIONAL CONVENTIONS)• Several


EU NORMATIVE

SPANISH F. INSIDE CASES

EU F. INSIDE CASES

SPANISH LAW

GENERAL NORMATIVE F. OUTSIDE CASES


MAIN LAW

Remember the first one from which we have the others:

- Ley 22/2003, de 9 de julio, Concursal.

And so:

Disposición adicional segunda. Régimen especial aplicable a entidades de crédito, empresas de servicios de inversión y entidades aseguradoras.


And from this:

Ley 11/2015, de 18 de junio, de recuperación y resolución de entidades de crédito y empresas deservicios de inversión.Real Decreto 1012/2015, de 6 de noviembre, por el que se desarrolla la Ley 11/2015, de 18 dejunio, de recuperación y resolución de entidades de crédito y empresas de servicios de inversión,y por el que se modifica el Real Decreto 2606/1996, de 20 de diciembre, sobre fondos de garantíade depósitos de entidades de crédito.Ley 9/2012, de 14 de noviembre, de reestructuración y resolución de entidades de crédito.Real Decreto-ley 6/2013, de 22 de marzo, de protección a los titulares de determinadosproductos de ahorro e inversión y otras medidas de carácter financiero.Real Decreto-ley 14/2013, de 29 de noviembre, de medidas urgentes para la adaptación delderecho español a la normativa de la Unión Europea en materia de supervisión y solvencia deentidades financieras.Ley 10/2014 de 26 de junio de ordenación, supervisión y solvencia de entidades de crédito


MAIN FEATURES.

FROB:

SIMILARY TO SRB ( SINGLE RESOLUTION BOARD IN EU).

TOOLS:

THE SAME TO RESOLUTION 806/2014.


FROB.PUBLIC AGENCY OF

SPAIN FOR FINANCIAL COMPANIES

RESTRUCTURATION.


FUNDS

The own funds of the FROB will be constituted by the endowments established for this purpose in the General Budgets of the State.

Likewise, these own funds may be increased through the capitalization of loans, credits or any other debt operations of the FROB in which the General State Administration appears as a creditor.

Additionally, for the fulfillment of its purposes, the FROB may raise financing by issuing fixed-income securities, receiving loans, requesting the opening of loans and performing any other borrowing operations.


GUARANTEES AND GAINS.

The General State Administration may grant guarantees to guarantee the economic obligations required of the FROB.

The unencumbered equity of the FROB must be materialized in public debt or other assets with high liquidity and low risk.

Any benefits accrued and accounted for in the annual accounts of the FROB will be paid into the Treasury.


TOOLS.In our Law 9/2012, we have the next structure:


RESOLUTION

a) Selling the entity.

b) The transmission of the assets or the passive from the company to a bridge

bank.

c) The transmission to other company that it was

created for this: Management assets

Company or bad Bank.

d) Helping in the Financial capital with money from

the other private banks to the purchaser

REESTRUCTURATION

EARLY ACTION

We have had experiences in all of the points and with all of the whole tools that I said.

1. One of the selling matter was the Banco Popular issue. In this case, the Commission

and the Minister of Spain decided that other Bank

would buy the whole stocks of the Banco Popular.

2. In another theme, the Bank (Banco Madrid) filled to

insolvency procedure.

3. And in other, like Bankia, the public Treasure, injected

more than twenty million euros.


BUT SEVERAL MORE.


2017

BANCO POPULAR

2014

CAJA RURAL MOTA


• BANCO CEISS• BANCO GALLEGO• BANCO DE CAJA DE ESPAÑA DE INVERSIONES SALAMANCA Y SORIA• BANCO MARE NOSTRUM• BANCO GRUPO CAJATRES.• BANKIA• LIBERBANK• CAIXA D'ESTALVIS

2013

• BANCO DE VALENCIA

2014

EVOLUTION OF THE STRUCTURE OF THE BANKING SYSTEM ( source RTVE)2009 2013


At the presentWe have reduced the number of the bank from 55 to 16 units: 2015


PUBLIC AID.


TIMELINE

- On March 10, 2015, the Banco de España agreed to intervene Banco Madrid, 100% owned by the BPA, which was intervened that same day by the National Andorran Institute of Finance (INAF) due to the announcement of the Department of the United States Treasury to consider the Andorran entity as a foreign financial institution subject to major concern in the field of money laundering.

- On 13 July, the Executive Service of the Commission for the Prevention of Money Laundering and Monetary Offenses (Sepblac) reported to the Anti-Corruption Prosecutor's Office the management team of Banco Madrid in detecting indications of crimes such as money laundering and other suspicious transactions

- On the 16th, the new Banco Madrid managers, appointed by the Bank of Spain, decided to request the voluntary competition of creditors from the financial entity. On the same day, the National Securities Market Commission (CNMV) the management company Banco Madrid Gestión and the investment services company Interdin Sociedad de Valores; and blocked Banco Madrid's deposits, investment funds and Sicavs


- On July 17, Madrid's Commercial Court No. 1 suspended the creditors' tender procedure pending the Ordinary Banking Restructuring Fund (FROB) to decide whether to open a resolution process or to restructure the entity.

- On the 18th, the Deposit Guarantee Fund (FGD) announced that it would shortly contact the bank's customers to proceed with payment of the guaranteed amounts "Up to a maximum limit of 100,000 euros per holder of cash deposit". The Guarantee Fund made this announcement once the FROB confirmed that it would not proceed to the rescue of Banco Madrid "not complying with the legal requirements", since it was a small entity. Therefore, the entity was forced to liquidate by bankruptcy. In this contest of creditors, it would be seen if it was possible for the depositors to recover the rest of the money. This was the first time since the beginning of the financial and debt crisis that the law was enforced in Spain to compensate customers of insolvent financial institutions.


- On March 25, 2015, the Commercial Court of Madrid number 1 declared in a voluntary creditors' tender to Banco Madrid and ordered the commencement of its liquidation, which proceeded to dissolve the entity and to replace the provisional administrators appointed by the Bank of Spain by insolvency administrators.

- On March 31, 2015, the Executive Committee of the National Securities Market Commission (CNMV) agreed to transfer to Cecabank the assets and funds of which Banco de Madrid was a depositary, as well as to assign to Renta 4 Banco the management of the institutions collective investment (mutual funds); all provisionally.

- On March 2016, Banco Madrid's clients had recovered more than 95.6% of their deposits of up to 100,000 euros and 97.7% of the assets in mutual funds; either by the administrators of the insolvency proceedings - which ended up giving up the investment funds after a pulse with the National Securities Market Commission - and the Deposit Guarantee Fund (FGD), which had been returning up to 100,000 euros per depositor.

- On July 26, 2016, Banco Madrid caused a decrease in the registration of credit institutions as a result of the decision of the Governing Council of the European Central Bank (ECB), which revoked the authorization granted to that company to act as Credit institution.


What was done?

Interventionby the FROB.

Applicationfor

declaration of insolvency.

Declarationof Insolvencyby the Court

Suspensionof the

procedurepending

resolution of assistance to

the Bank

Refusal of redemption.

Bankruptcyliquidation

Transfer of funds and portfolios

managed to other

operators


TIMELINE

- The FROB injected initially a credit for 4,465 million euros.

- On May 7, 2012, the news of a new injection of capital by the FROB of an amount of up to 10 billion euros was published.

- On May 9, 2012, Bankia's parent company Banco Financiero y de Ahorros (BFA) was nationalized. The state took over the entire capital of BFA and, consequently, became the owner of 45% of Bankia.

- The credit initially made by the FROB to BFA for 4,465 million euros at the time of its formation was impossible to pay, so that the State, according to the emergency plan proposed when the loan was formalized, converted that credit into shares of the FROB in BFA, and also contributed another 19,000 million euros, the largest bailout of a financial institution Spanish, whereby the FROB nationalized 100% of BFA and remained the sole owner of the entity. At the time, BFA owns 45% of Bankia (the rest was owned by private investors who contributed capital during the IPO), the State became the majority shareholder of this entity.


- On June 9, 2012, Economy Minister Luis de Guindos announced that Spain had requested and obtained from the European Union a ransom of up to 100,000 million euros that the State would use to clean up the Spanish financial system, especially Bankia, through FROB.

- On November 27, 2012, the Banking Order Restructuring Fund (FROB) approved the Restructuring Plan of the Banco Financiero y de Ahorros Group (BFA-Bankia Group), which includes "Banco Financiero y de Ahorros, SA" ( BFA) and its subsidiary "Bankia, SA" (Bankia) (hereinafter referred to as the "Restructuring Plan") and its referral to the Bank of Spain, which approved it on the same date. The European Commission approved the Restructuring Plan on 28 November 2012. [State Aid SA 35253 (2012 / N) Spain Restructuring and Recapitalization of the BFA Group].


Measures A and B: Guarantees on liabilities

Since 2009, the BFA Group has received State guarantees worth EUR 34 963 million under the approved Spanish guarantee scheme22.

Out of the total amount granted, the BFA Group has issued State-guaranteed unsecured debt for a total amount of EUR 34 768 million

out of which EUR 24 268 million remain outstanding, as of 30 October 2012.

In addition, the BFA Group benefited from an ad hoc liquidity guarantee granted by the Kingdom of Spain of up to EUR 19 billion

approved in the context of the Conversion Decision. To date, none of the guarantees

approved under the Conversion Decision have been utilised by the BFA Group.


Measure C: FROB convertible preference shares

On 29 June 2010, the FROB decided to support the merger of the seven founding savings banks into BFA by subscribingEUR 4 465 million in newly issued convertible preferenceshares under the FROB recapitalisation scheme. The aidrepresented [0-5]% of the BFA Group's RWA as of March2010. The securities subscribed for by the FROB have anannual yield of 7.75% the first year, with annual step-ups forthe following years until redemption. The first coupon paidon the preference shares held by the FROB was paid in December 2011, but the securities were converted intoordinary shares before the second coupon was paid.


Measure D: capital relief through the FROB's intervention in Banco de Valencia

Therefore, by rescuing BdV with State resources, the FROB prevented the conversion of the BFA Group's credit line of EUR 1 759 million to BdV into subordinated debt of BdV.


Measure E: the conversion of the preference shares held by the FROB in BFA

On 27 June 201227 BFA converted the preference shares held by the FROB. As a result of the conversion the FROB became the sole shareholder of BFA.


Measure F: Recapitalisation of September 2012

On 4 September 2012, the BFA Group benefited from an urgent recapitalisation measure via a new capital injection of EUR 4.5

billion in the form of ordinary shares into BFA. Subsequently, BFA granted a subordinated loan, qualifying as Tier II capital, for the same amount to Bankia. The subordinated loan has an annual

interest rate of [5-10]%. Given that the FROB was already the sole shareholder of BFA, no valuation of the BFA Group was needed. The FROB will, in any event, continue to be the sole shareholder

of BFA.

The losses suffered by BFA as a result of, among other reasons, the partial recording of higher loan-loss provisions required by

Royal Decree Laws 2/2012 and 18/2012 left it with a shortfall of regulatory capital. Once the second capital injection by the FROB in BFA was implemented, the BFA Group had a solvency ratio of

8.2%. The urgent recapitalisation measure was carried out in anticipation of the submission of the restructuring plan for the BFA Group that should lead to its final recapitalisation by the

FROB. The measure was approved by the Commission pursuant to the Urgent Recapitalisation Decision.


Measure G: Recapitalisation of November 2012

Following the results of the MoU Stress Test and the series of measures proposed by the BFA Group in the RestructuringPlan (including a series of subordinated liabilities exercisesand the transfer of some impaired assets and real estate loans to the AMC), a capital injection by the FROB of EUR 17 959 million is still needed for the BFA Group to meet the new regulatory solvency levels in Spain taking into considerationthe results of the MoU Stress Test.


Measure H: segregation of impaired assets to the Asset Management Company

The BFA Group will benefit from an impaired asset measurewhereby it transfers assets to the AMC. The aim of thatmeasure is to remove uncertainty about the future value of its most problematic asset portfolio and allow the BFA Groupto concentrate on the implementation of the RestructuringPlan.


PAYMENT RETURNED

Till the present Bankia has returned1.628 million of the total.


What was done?

PUBLIC AID INTERVENTION PUBLIC AID EU RESOLUTION FROB CONTROL AN EXECUTION REESTRUCTURATION


This is the more recent experience about the application of our normative and the Directive 806/2014.

Banco Popular Español (BPE) is a Spanish bank founded in 1926, a subsidiary ( now) of Banco Santander since June 2017

2017: On May 16, Banco Popular informed the CNMV that it had instructed JP Morgan and Lazard to conduct a preliminary market survey to assess whether there was interest in a purchase.

2017: On June 1, the bank announced the agreement to sell its stake in Targobank (48.98%) to Credit Mutuel for 65 million euros.


•2017: On June 7, following the resolution of the bank by the single European mechanism of resolution of bankinginstitutions as unfeasible, Banco Santander bought the bank at auction for the price of one euro, becoming partof the Santander Group. It was the first bank intervened by the European authorities. The purchase came afterthe bank, whose accounts were heavily burdened by real estate assets, lost more than 50% of its value on thestock market in recent days and "suffered a significant deterioration in its liquidity position." As part of theexecution of the resolution, Popular shareholders lost 100% of their investment in the shares after amortizationand zeroing of all securities. Holders of additional tier 1 capital and tier 2 capital instruments (hybrid andsubordinated debt) also lost their investment.his operation gave rise to numerous claims by former BancoPopular investors, both retailers and wholesalers.

•On the same day, Banco Santander appoints President of Banco Popular to José Carcía Cantera to replace EmilioSaracho.

•2017: On July 13, Banco Santander announced that it had decided to compensate Banco Popular's small investorsby offering 99% of Popular customers and employees who attended the capital increase in 2016 and whoinvested less than 100,000 euros possibility of fully recovering its investment in seven years. To this end, up to980 million euros will be issued in "loyalty bonds" and those affected will have to resign to take legal actionagainst the bank.These are perpetual debt bonds for the amount of the invested that could not be executed in aterm of less than seven years, leaving from Santander unilaterally the decision of when they would be paidpersonlly to each client. Such bonds are considered a product of high bank risk that would need the authorizationof the National Commission of the Stock Market (CNMV).

•2017: On August 8, Banco Santander announced the largest private real estate operation in the history of Spain,following the agreement to sell to the Blackstone fund 51% of Banco Popular's real estate assets for more than5,000 million euros. Following the close of this sale, scheduled for the first quarter of 2018, Blackstone willassume the management of the assets integrated in the new joint venture, of which Popular will control 49% .


FEATURES OF THE BANCO POPULAR SELLING.


SRBEstablished by Regulation (EU) No 806/2014 on the Single Resolution Mechanism (SRM Regulation), the Single Resolution Board (SRB) has been operational as an independent European Union (EU) Agency since January 2015.

"The Single Resolution Board has been created to respond to the Euro area crisis and establishes one of the pillars of the Banking Union. By avoiding bail-outs and worst-case scenarios, the SRB will put the banking sector on a sounder footing – only then can we achieve economic growth and financial stability".


TOOLS & SCOPE


ON 7 June 2017 - The Single Resolution Board (SRB) has transferred all shares and capital instruments of Banco Popular Español S.A. (Banco Popular) to Banco Santander S.A (Santander). This means that Banco Popular will operate under normal business conditions as a solvent and liquid member of the Santander Group with immediate effect.

Due to its recent stressed liquidity situation, the European Central Bank (ECB) had decided that Banco Popular was “failing or likely to fail” on 6 June 2017 and notified the SRB accordingly.

The SRB and the Spanish National Resolution Authority – FROB – have decided that the sale was in the public interest as it protects all depositors of Banco Popular and ensures financial stability. The resolution scheme enters into force today, following the endorsement by the European Commission.


EXECUTION BY FROB


Execution and actions:

a) Reduction of share capital to zero euros (€0) by writing down the shares currently outstanding toestablish a non-distributable voluntary reserve.

b) Simultaneous execution of the capital increase to convert all the Additional Tier 1 capitalinstruments into share capital totalling one billion, three hundred and forty-six million, five hundredand forty-two thousand euros (€1,346,542,000), divided into shares of 1 euro par value each.Amendment of the bylaws.

c) Reduction of share capital to zero euros (€0) by writing down the shares subscribed by way of theconversion of the Additional Tier 1 capital instruments stipulated in the previous point, and toestablish a non-distributable voluntary reserve.

d) Simultaneous capital increase to convert all the Tier 2 capital instruments into newly issued sharestotalling six hundred and eight-four million, twenty-four thousand euros (€684,024,000), of 1 europar value each. Amendment of the bylaws.

e) Bank Sale:…


a) The process must be as transparent as possible, given the special circumstances of the case and, specifically, the need to preserve financial stability.

b) The key objective of the sale must be to maximise the sale price.

c) Notwithstanding the above, the process must not confer any unfair advantage on a potential purchaser.

d) The FROB will take the necessary steps to avoid conflicts of interest.


The sale price of the entity must bedistributed in the following order andmanner:• To settle all reasonable expensesincurred by the SRB and the FROB toprepare the resolution scheme andshare transfer, as per Article 20.6 ofRegulation (EU) No 806/2014 and Article25.4 of Law 11/2015.• To the holders of Tier 2 capitalinstruments on the date the agreementsset forth in the previous principle of lawwere executed, in accordance withArticle 25.5 of Law 11/2015.

CHALLENGES IN OUR LAW.

SHOULD WE MAINTAIN WITHIN OUR LAW A

DIFFERENT REGULATION ON FINANCIAL AND OTHER

COMPANIES?

SHOULD WE GIVE MORE TRANSPARENCY TO THESE

PROCEDURES?

IS THIS "A RESOLUTION" OF SALE? .IS IT DIFFERENT FROM

LIQUIDATION?

IS THERE AN INTERVENTION OF PUBLIC INSTITUTIONS

WITHIN PRIVATE FIRMS? IS THIS BETTER OR WORSE?


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