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‘Beggars Can’t Be Choosers’: Spain and the Financial Crisis
Published online by Cambridge University Press: 27 October 2017
Abstract
This contribution analyses the viability of the new Spanish financial landscape which has been drawn by the European authorities and the national administration in order to overcome the progressive deterioration of social wealth in Spain since the beginning of the economic crisis in 2008.
The adoption and the implementation of a new legal framework during the last two years, establishing tougher requirements on capital adequacy, leverage ratios and counter-cyclical and other buffers, as well as the shaping of the Banking Union, are not enough to transform the Spanish banking system into the key tool for the creation of wealth.
There is a paradox of both legal and institutional outcomes. While, on the one hand, some positive changes in the functioning and the structure of the banking industry have been prompted by the regulatory reform, there are, on the other hand, some uncertainties linked to the recapitalisation costs of a relevant group of credit institutions and the persistence of serious structural problems of the Spanish economy.
Moving faster to full banking union will reduce financial market stress in Spain.
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- Research Article
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- Copyright © Centre for European Legal Studies, Faculty of Law, University of Cambridge 2013
References
1 Some measures which were taken included the cleaning up of banks’ balance sheets, increasing minimum capital requirements and the restructuring of different financial institutions related to real estate development (RED) and foreclosed assets. Despite providing innovative responses to the vulnerabilities of the banking system, these measures did not alleviate market pressure; see the International Monetary Fund (IMF) Press Release No 12/172, 11 May 2012.
2 The Governor of the Bank of Spain (Banco de España (BdE)), an institution whose independence was enshrined by law in 1994 (Law 13/1994) (BdE Autonomy Act), was severely criticised for being involved in the regular assessment of the macroeconomic policies of the Spanish government rather than concentrating on its basic mission, namely supervising the credit institutions. This policy was an utter failure for several reasons, particularly because of the absence, at the time, of an authority tasked with undertaking supervisory tasks, both at the national and the supra-national levels. In addition, the Basel II Framework, which is widely seen as having contributed to the 2008 banking crash by allowing banks to under-state risk and hold too little capital against unexpected losses (under Basel II, the minimum core equity capital (retained earnings and share issues) is two per cent of the risk-weighted assets of a credit institution), played an important contributory role in policy failure. See Basel Committee on Banking Supervision, BCBS, International Convergence of Capital Measurement and Capital Standards, BIS-Basel, June 2004. See also Financial Stability Board (FSB), ‘FSB Framework for Strengthening Adherence to International Standards’ (9 January 2010) 6–7, specifically ‘Core Principles for Effective Banking Supervision (BCBS)’.
3 Part of this housing boom can be attributed to the political interference of the local government in the management of savings banks (Cajas de Ahorro), a branch of the Spanish financial sector established at a regional or local level and mainly focused on retail business.
4 According to information provided by the BdE, there is no evidence that exposure to foreign ‘toxic’ assets severely damaged the Spanish banking system (BdE, ‘Annual Report 2009’, 2010). On the contrary, the initial impact of the global financial crisis (2007–09) was relatively mild. However, the effect of the crisis was that Spanish banks lost access to wholesale funding markets and the authorities took measures in order to assist bank funding rather than injecting capital. The progressive deterioration in the quality of its loan portfolios was also linked to the ‘double-dip’ recession of the Spanish economy, bolstered by a sharp increase in unemployment, during the second stage of the economic crisis (2010–11).
5 Results of the Independent Evaluation of the Spanish Banking Sector, 28 September 2012. Available at: www.thespanisheconomy.com.
6 According to the former legal framework which ruled their functioning in Spain, they were basically publicly owned banks set up by local or regional governments and they did not have shareholders. Their legal status was similar to that of a foundation and their boards of directors included members drawn from local or regional governments, business associations, trade unions and some of their own clients. By law, all annual profits of Spanish savings banks must be spent on activities of general interest, such as health, education, research, cultural etc.
7 See R Blanco and R Gimeno, ‘Determinants of Default Ratios in the Segment of Loans to Households in Spain’ (No 1210, DT-BdE, 2012) specifically figures 8, 9a, 9b and 10, pp 31–35.
8 They focused mainly on credit and market risks–capital adequacy. The Committee of European Banking Supervisors (CEBS) conducted the stress test in 2010 (‘Aggregate Outcome of the 2010 EU Wide Stress Test Exercise Coordinated by CEBS in Cooperation with the ECB’ CEBS, 2010), while in 2011 it was conducted by the European Banking Authority (EBA). See: www.eba.europa.eu.
9 According to the definition established by the Bank of International Settlements (BIS), the Tier 1 capital ratio is the ratio of a bank’s core equity capital to its total risk-weighted assets (RWAs), which are the total of all assets held by the bank weighted by credit-risk according to a formula determined by the regulator. Capital in this sense means the core measure of a credit institution’s financial strength and consists of common stock, retained earnings and non-redeemable, non-cumulative preferred stock. Banks must hold this capital in order to provide protection against unexpected losses. See ‘International Regulatory Framework for Banks (Basel III)’ (BIS, 2012).
10 Another seven Spanish banks only narrowly passed, with core Tier 1 ratios between five and six per cent. The threshold of six per cent was used as a benchmark solely for the purpose of the stress tests, while, according to Directive EC/2006/48 of 14 June 2006 relating to the taking up and pursuit of the business of credit institutions [2006] OJ L177/1 (Capital Requirements Directive), the regulatory minimum for the Tier 1 capital ratio is set to four per cent.
11 Nevertheless, it should be emphasised that, since 1999, the Spanish banking market has had the most dense network of branches in Europe. See Martínez, LM Hinojosa and González, CJ Moreiro, ‘Financial Services in the Era of the Euro and E-Commerce: Does Home Country Control Work?’ in FIDE XX Congress London (London, The British Institute of International and Comparative Law, 2002) vol I, 569 Google Scholar.
12 Excluding foreign branches of the Spanish banks and taking into account the international activities of the banks.
13 According to the Basel Committee on Banking Supervision, by 2019, the ratio of capital to assets should be seven per cent. This is a ratio calculated on the basis of ‘risk-weighted’ assets, which means that some assets count less against capital requirements than others. See ‘Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems’, revised edn (BIS, 2011) especially 61–68. Nevertheless, the Committee will test a minimum Tier 1 Leverage ratio of three per cent during the parallel period, running from 1 January 2013 to 1 January 2017.
14 Bank assets are not particularly risky or illiquid. Problematic features that cause financial crises are bank liabilities (ie, debt, especially short-term debt).
15 This is not an obvious statement, as highlighted in Admati, A and Hellwig, M, The Banker’s New Clothes (Princeton, Princeton University Press, 2013)Google Scholar, because regulators tend to address the risks of banking crises by guaranteeing bank debt.
16 Some scholars stress that the inverse of growth with debt requires serious risk management. This is indeed the case for financial leverage or investment in collateralised debt obligations. See, eg, Strebel, P, ‘Governance: What Must We Learn from the Crisis?’ (IMD, 2010) 3–5Google Scholar. Available at: www.imd.org/research/challenges/TC010-10.cfm.
17 This process began with the adoption of the Council Directive 89/646/EEC of 15 December 1989 on the coordination of laws, regulations and administrative provisions relating to the taking up and pursuit of the business credit institutions and amending Directive 77/80/EEC [1989] OJ L386/1 (the Second Banking Directive), as well as the Council Directive 89/299/EEC of 17 April 1989 on the own funds of credit institutions [1989] OJ L124/16 and the Council Directive 89/647/EEC of 18 December 1989 on a solvency ratio for credit institutions [1989] OJ L386/14. Last but not least, Directive 89/647 EEC provides a common measure of the capital adequacy of credit institutions, technically defined as solvency ratios. Although the utility of ratios between assets and liabilities to monitoring solvency and liquid ity of credit institutions was promptly recognised in art 6 of Directive 77/780 EEC (the First Banking Directive), Directive 89/647 EEC defines the solvency ratio as a credit institution’s own funds as a proportion of total risk-adjusted assets and off-balance sheet items. From 1 January 1993, credit institutions were obliged to maintain a solvency ratio to be calculated at least twice a year, at a minimum of eight per cent, and to act as quickly as possible to restore this ratio should it fall below it. See González, CJ Moreiro, Banking in Europe after 1992 (Dartmouth, Aldershot, UK-Brookfield, USA, 1993) 25 Google Scholar.
18 See BCBS: Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems, BIS, December 2010 (revised June 2011) 1. The new Basel III provisions aim to improve risk management and governance as well as strengthen banks’ transparency and disclosures. To this end, the Basel Committee backs a set of measures like strengthening the global capital framework (I), introducing a global liquidity standard (II) and a leverage ratio (III). (I) Regarding the quality and consistency of the capital base, the predominant form of Tier 1 capital must be common shares and retained earnings. In addition, Tier 2 capital instruments will be harmonised. Due to the inconsistency in the definition of capital across jurisdictions, Basel III provides a new one which will consist of the sum of Tier 1 capital (going-concern capital). Common Equity Tier 1 (CET 1) must be at least 4.5 per cent of risk-weighted assets at all times. Tier 1 capital must be at least six per cent of risk-weighted assets at all times. Total capital (Tier 1 capital + Tier 2 capital) must be at least eight per cent of risk-weighted assets at all times. see BCBS, A Global Regulatory Framework 12–29. Moreover, a new framework is created in order to promote the conservation of capital and the build-up of adequate buffers above the minimum that can be drawn down in periods of stress. Capital distribution constraints will be imposed on a bank when capital levels fall within this range. On the other hand, national jurisdictions can deploy a counter-cyclical buffer, taking into account the macrofinancial environment in which banks operate (ie, when excess aggregate credit growth is judged to be associated with a build-up of system-wide risk). Therefore, the Calibration of the Capital Framework could vary from a minimum of 10.5 per cent (minimum plus conservation buffer) to 13 per cent (including the top of the counter-cyclical buffer range); see Moreiro González (n 17) 5–7, 54–61 and 64. (II) To complement the liquidity framework adopted in 2008 (the Principles for Sound Liquidity Risk Management and Supervision: www.bis.org/publ/bcbs144.htm), standards have been developed to achieve two complementary objectives: first, to assure short-term resilience of a bank’s liquidity risk profile within the context of an acute stress scenario lasting for one month, the Liquidity Coverage Ratio (LCR). Second, establishing additional incentives for a bank to fund its activities with more stable sources of funding in order to promote resilience over a one-year horizon, the Net Stable Funding Ratio (NSFR); see Moreiro González (n 17) 8–10. Nonetheless, regarding the LCR, banks will be permitted to dip into their liquidity buffers during a period of stress, thereby temporarily falling below the minimum requirement (see the Decision adopted by the Group of Governors and Heads of Supervision (GHOS), which met in Basel on 8 January 2012: www.bis.org/press/p120108.htm). Moreover, the BCBS meeting in Basel on 6 January 2013 accepted that a wider pool of assets can count toward the buffer (the numerator of the LCR). The timescale was also pushed back from 60 per cent by 2015 to 100 per cent by 2019. (III) The Committee introduces a more transparent, non-risk based leverage ratio (LR). The capital measure for the LR should be based on the new definition of Tier 1 capital and the Committee will test a minimum Tier 1 LR of three per cent during the parallel run period from 1 January 2013 to 1 January 2017; see Moreiro González (n 17) 61–63.
19 As pointed out in Haldane, A, The Dog and the Frisbee (London, Bank of England, 2012)Google Scholar, dogs don’t need to understand the physics behind a frisbee’s trajectory in order to catch it. Similarly, capital standards are better when they are higher and blunter than when they are lower and more sophisticated. See AG Haldane and V Madouros, ‘The Changing Policy Landscape’ (speech at the Federal Reserve Bank of Kansas City’s 366th Economic Policy Symposium, Jackson Hole, Wyoming, 31 August 2012); see also M Hoening, ‘Back to Basics: A Better Alternative to Basel Capital Rules’ (speech to the American Banker Regulatory Symposium, Washington DC, 14 September 2012), which suggests scrapping Basel III and focusing solely on a tougher leverage ratio that measures equity against total assets.
20 See European Commission, ‘Proposal for a Directive of the European Parliament and of the Council on the access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms and amending Directive 2002/87/EC of the European Parliament and of the Council on the supplementary supervision of credit institutions, insurance undertakings and investment firms in a financial conglomerate’ COM(2011) 453/3, which enshrines two proposals set out to amend and replace existing capital requirement directives (Directives 2006/48/EC and 2006/49/EC) by two new legislative instruments: first, a regulation establishing prudential requirements that institutions need to respect; and, second, a directive governing access to deposit-taking activities. According to the results of the 3227th Council Meeting on Economic and Financial Affairs (ECOFIN), Brussels, 5 March 2013, Member States could impose, for up to two years (extendable), stricter macroprudential requirements for domestically authorised financial institutions in order to address increased risks to financial stability, as well as introducing a systemic risk buffer of additional CET 1 capital for the financial sector, or buffers for systemically important institutions. See press releases 7088/13 and 6962/13. The European Parliament adopted the proposals on first reading at the Plenary Session celebrated on 16 April 2013, see Docs P7-TA-PROV (2013) 0114 and P7-TA-PROV (2013) 0115.
21 See the Statement by the Euro Group meeting in Brussels (21–22 October 2011) and press release 15893/11 of the Extraordinary ECOFIN Meeting in Brussels on 22 October 2011. See also EBA, ‘Capital Buffers for Addressing Market Concerns over Sovereign Exposures. Methodological Note’, 26 October 2011.
22 The EBA was established on 1 January 2011 with the chief objective of ensuring common regulatory and supervisory standards across the EU. Its main tasks are focusing on protecting the stability of the financial system through the establishment of high-quality common regulatory and supervisory standards and practices in the EU, as well as consumer protection. It is one of the new European Supervisory Authorities (ESAs) created by the EU to address the serious deficiencies in cooperation between national supervisors exposed by the crisis. The other ESAs are the European Insurance and Occupational Pensions Authority (EIOPA) and the European Securities and Markets Authority (ESMA). See Regulation (EU) No 1093/2010 of 24 November 2010 establishing a European Supervisory Authority (European Banking Authority) [2010] OJ L331/12; Regulation (EU) No 1094/2010 of 24 November 2010 establishing a European Supervisory Authority (European Insurance and Occupational Pensions Authority) [2010] OJ L331/48; and Regulation (EU) No 1095/2010 of 24 November 2010 establishing a European Supervisory Authority (European Securities and Markets Authority) [2010] OJ L331/84. See also European Commission, ‘Restoring the Health and Stability of the EU Financial Sector’, available at: http://ec.europa.eu/internal_market/publications/index_en.htm. An analysis of the implementation of the most relevant instruments adopted by these authorities can be found in European Commission, ‘European Financial Stability and Integration (2012)’ (2013).
23 See EBA: ‘Interim Results of the EBA Review of the Consistency of Risk-weighted Assets. Top-down Assessment of the Banking Book’, 23 February 2013. Moreover, banks use other risky tools for raising capital, such as writing partial guarantees for the assets appearing on their balance sheets through bespoke securitisations or the so-called collateral or liquidity swaps.
24 See the BdE press release of 17 April 2012. Capital increases could be made through the market, either alone or by participating in a merger operation with another institution, or with the financial support of the public owner Fund for the Orderly Restructuring of the Banking Sector (FROB) by presenting a restructuring plan, according to the Royal Decree Law 9/2009. Banks submitted plans to comply with the new requirements by means of earnings asset sales, conversion of preferred shares and bonds into common equity, and paying dividends in the form of new shares.
25 According to IMF, ‘Spain: Financial Stability Assessment’ (Country Report No 12/137, IMF, 2012), this consolidation process involves up to 88 per cent of total domestic assets.
26 See BdE press release, 28 September 2012. See also Promontory Financial Group, ‘Independent Analysis of the Results and Methodology of the June 2012 Stress Test of the Spanish Banking System’ (Washington DC, 2012) especially 22–23.
27 See Spanish Ministry of Economy and Competitiveness, ‘Methodology Used in the Independent Evaluation of the Spanish Financial System’ (2012).
28 €26.2 billion for specific provisioning, €32.1 billion for generic provisioning and €9.1 billion of extra capital add-on. See Appendix, Table 18 of the IMF Report (n 25).
29 The contribution from industry must be raised by another €13 billion or, even more steeply, to €34 billion (3.2 per cent of GDP), taking into account its provision to the Deposit Guarantee Fund (DGF), to the funding of the FROB, the resolution of three institutions and the implementation of granted asset protection schemes.
30 G1 includes two banks (Banco Santander (BS) and Banco Bilbao Vizcaya (BBV)) that are sufficiently capitalised and well-enough diversified in terms of their geographical foot-prints and business models; they account for about 33 per cent of domestic banking assets. G2 includes seven banks, focusing most of their lending on the residential housing market; they account for approximately 17 per cent of domestic banking assets. G3 includes seven banks with a high share of mortgage lending relative to their average balance sheet size; they account for about 22 per cent of domestic banking assets. G4 includes several banks whose main lending activities are concentrated in the corporate sector, with exposures to the real estate sector being second only to G3; they account for approximately 11 per cent of domestic banking assets.
31 Nevertheless, they fall below the NSFR benchmark of 100 per cent so they would struggle to withstand adverse scenarios if there were no access to central bank liquidity.
32 See RC Koo, ‘Central Banks in Balance Sheet Recessions: A Search for Correct Response’, Nomura Research Institute, 2013, 22–24. Available at: http://snbchf.com/wp-content/uploads/2013/04/Koo-Ineffectiveness-Monetary-Expansion.pdf. According to Koo, recovering from the financial crisis is the easy part, while the hard work involves the repair to millions of impaired private sector balance sheets. The latter is a borrower’s phenomenon, and this is a problem which can only be addressed by increasing fiscal stimulus as a tool for recovering the economy.
33 See the Euro Area Summit Statement of 29 June 2012.
34 This solution was adopted by the Irish government in 2011 to tackle the problems of the Anglo Irish Bank and the Irish Nationwide Building Society. Both entities merged on 1 July 2011 and formed the Irish Bank Resolution Corporation (IBRC). An analysis of the fiscal cost of the IBRC bailout can be found in K Whelan, ‘ELA, Promissory Notes and All That: The Fiscal Costs of Anglo Irish Bank’ (2012) University College Dublin Working Paper 12/06, 18–25.
35 See Points IV and V of the MoU, 20 July 2012. In the case of point (a), the adoption of the Royal Decree Law No 24/2012 on 31 August established a comprehensive framework to deal with financial institutions in stressed situations. Consequently, on the one hand, this RDL incorporates, in advance, some of the provisions foreseen in the ‘CRD IV’ package and, on the other hand, modifies the capital requirements that the entities and groups of credit institutions must comply with as from January 2013. See also the Law 9/2012, which repealed the RDL 24/2012 and established a more comprehensive approach to this issue.
36 The RDL No 24/2012 also incorporates some of the provisions foreseen in the EC proposal for a directive to establish a framework for crisis management and resolution (CMD). See European Commission, ‘Proposal for a Directive of the European Parliament and of the Council establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directives 77/91/EEC and 82/891/EC, Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC and 2011/35/EC and Regulation (EU) No 1093/2010’ COM(2012) 280 final, which details the nature and content of recovery and resolution plans (RRPs). It must be also underlined that the EBA adopted a formal Recommendation to ensure that major EU cross-border banks develop group recovery plans by the end of 2013 (EBA/REC/2013/02, 23 January 2013), which intends to fill the interim period before the implementation of the CMD’s Directive.
37 The Spanish authorities will submit an orderly resolution plan for these banks. The orderly resolution of an institution might take the form of partial business sales or an asset and liability sale to a bridge-bank or to an asset management company. Moreover, orderly resolutions plans should be compatible with the goals of maintaining financial stability (ie, by protecting customer deposits).
38 See the critics of P de Grauwe to the alteration of this approach of governments belong ing to the Eurozone on the ‘resolution’ of the Cypriot crisis in P de Grauwe, ‘The New Bail-in Doctrine: A Recipe for Banking Crises and Depression in the Eurozone’ (CEPS Commentary, Centre for European Policy Studies, 4 April 2013).
39 See Directive 94/19/EC of 30 May on deposit-guarantee schemes [1994] OJ L135/5 and the amendments to it introduced by Directive 2009/14/EC of 11 March 2009 amending Directive 94/19/EC on deposit-guarantee schemes as regards the coverage level and the payout delay [2009] OJ L68/3.
40 See paras 31–32 of the ECJ’s judgment of 12 October 2004 in Case C-222/02 Paul and others (2004) ECR I-9425, remarking upon the scope of recitals 23 and 24 in the preamble to Directive 94/19/EC, which establish inter alia that ‘the cost of financing (schemes guaranteeing deposits) must be borne, in principle, by credit institutions themselves … [and that] this Directive may not result in the Member States’ or their competent authorities, being made liable in respect of depositors’. The EFTA Court ruled on a similar way in its Judgment in Case E-16/11 EFTA Surveillance Authority Supported by the European Commission v Iceland (ECJ, 28 January 2013) [171]–[178].
41 According to the Key RDL 11/2010, new options were provided for capitalisation through new corporate formulas (particularly, indirect exercise of financial activity through a bank), as well as events of transformation from savings banks into foundations of special character. On the other hand, a Preliminary Draft of Law (January 2013), establishes new rules for the delimitation of their activity and the transformation into banking foundations. Only a few savings banks will be able to operate as credit institutions.
42 RDL 2/2012 established a clean-up plan that included capital requirements and additional provisions to cover the deterioration in bank balance sheets caused by the assets at risk related to the property development business. Law 8/2012 allows the removal of the foreclosed real estate assets from their balance sheets through their mandatory transfer to an asset management company.
43 According to this legislation, the households which may benefit from it are subject to very restrictive eligibility criteria and, conversely, banks do not give up their rights to the foreclosed asset, but rather are forced to delay evictions. Moreover, the delinquency ratio for residential mortgages remained stable at a level of around 3.2 per cent of total loans.
44 Case C-415/11 Mohamed Aziz v Caixa d’Estalvis de Catalunya, Tarragona i Manresa (Catalunyacaixa) [2013] ECR I-000.
45 The capital structure of the SAREB is organised on this basis: majority holding by private investors and non-majority holding of the FROB and those banks which transfer their assets may not be shareholders or represented on its board of directors; (in exchange for the assets contributed, they will receive bonds issued by the SAREB and guaranteed by the state; these bonds will be structured in such a manner that they will meet the conditions set out by the ECB to qualify as eligible collateral in Eurosystem operations). In addition, the governing bodies will be those established by the Law for public limited companies, with special features. Therefore, the AMC-SAREB is excluding from being classified as part of the general govern ment according to Eurostat criteria.
46 The SAREB will purchase the assets at the REV and will have the potential to hold them to maturity. The REV will be established on the basis of a thorough quality review process of the assets, drawing on the individual valuations used in the bottom-up stress test in 2012. The transfer values divided into categories of assets have been released and, on average, these prices represent a reduction of approximately 63 per cent on the gross carrying amount of foreclosed assets and 45.6 per cent on loans.
47 BFA-Bankia, CantalunyaBanc, Novagalicia, España-Duero, BMN, Liberbank and Caja 3.
49 See BdE Circular 6/2012.
50 See BdE Circular 7/2012.
51 See ‘Criterios para la aplicación de la Circular 4/2004 en materia de refinanciación y reestructuración de créditos’ (BdE, 2013).
52 See D Schoenmaker, ‘The Trilemma of Financial Stability’ (2009) Working Paper, SSRN No 1340395.
53 See ‘Towards a Genuine Economic and Monetary Union’, Bruselas, 26.6.2012, EUCO120/12, Point II.1.
54 See European Commission, ‘Proposal for a Council Regulation conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions’ COM(2012) 511 final. See also European Commission, ‘Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) No 1093/2010 establishing a European Supervisory Authority (European Banking Authority) as regards its interaction with Council Regulation (EU) No…/… conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions’ COM(2012) 512 final.
55 According to arts 4 and 8–15 of the Proposal from the Commission COM(2012) 511 final (n 54), the ECB will be empowered to authorise credit institutions, assess qualifying holdings, ensure compliance with the minimum capital requirements, ensure compliance with the minimum capital requirements, ensure the adequacy of internal capital in relation to the risk profile of a credit institution, conduct supervision on a consolidated basis and supervise tasks in relation to financial conglomerates, ensure compliance with provisions on leverage and liquidity, apply capital buffers and carry out early intervention measures when a bank is in breach of, or is about to breach, regulatory capital requirements.
56 In July 2010, the Commission proposed the creation of a similar system on the matter; see EP Directorate General for Internal Policies: ‘Deposit Guarantee Schemes’, July 2013, IP/A/ECON/NT/2013-02, p 1 n 6.
57 See European Commission, ‘Proposal for a Directive of the European Parliament and of the Council establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directives 77/91/EEC and 82/891/EC, Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC and 2011/35/EC and Regulation (EU) No 1093/2010’ COM(2012) 280/3.
58 According to the statement of the Euro Area Summit on 29 June 2012, ‘when an effective SSM is established, involving the ECB, for banks in the euro area the ESM could, following a regular decision, have the possibility to recapitalize banks directly’. See www.consilium. europa.eu/uedocs/cms_data/docs/pressdata/en/ec/131359.pdf.
59 See J Pisani-Ferry, A Sapir, N Véron and GB Wolff, ‘What Kind of European Banking Union?’, Bruegel Policy Contribution 2012/12.
60 See European Commission, ‘President Barroso Proposes Banking Union’, http://ec.europa.eu/europe2020/banking-union/index_en.htm. See also European Commission, ‘A Roadmap Towards a Banking Union (Communication)’ COM(2012) 510 final, 9.
61 See D Gross and D Shoenmaker, ‘A European Deposit Insurance and Resolution Fund’ (2012) CEPS Working Paper No 364, Centre for European Policy Studies, 11 September.
62 See OJ Elliott, ‘Key Issues of European Banking Union; Trade Offs and Some Recommendations’ (2012) Brookings Global Economy and Development Working Paper No 52, 39–40.
63 See the Point 1.3.3 of ‘Informe Annual 2012’ (BdE, 2013).
64 Including improvements in the formalisation of supervisory actions as well as in the off-site monitoring of credit institutions and in the on-site inspections. See BdE, ‘Análisis de los procedimientos supervisores del BdE y recomendaciones de reforma’ (2012) MOU/FSPCInforme de la Comisión Interna.
65 See IMF, ‘Spain: Financial Sector Reform—Second Progress Report’ (Country Report No 13/54, IMF, 2013) 7–11. See also BdE Circular 1/2013 of 24 May 2013, ‘Normas de información financiera pública y reservada, y modelos de estados financieros’.
66 See European Commission, ‘Results of in-depth reviews under Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic imbalances’ COM(2013) 199 final, 6–7.
67 See European Commission, ‘Financial Assistance Programme for the Recapitalization of Financial Institutions in Spain: Update on Spain’s Compliance with the Programme—Winter 2013’ (European Economy Occasional Papers 126, European Commission, 2013) 8–10. See also, BdE: Boletín Económico, 07-08/2013, p. 3.
68 Global financial assets have fallen by 43 percentage points relative to GDP since 2007; see ‘Debt and Deleveraging: Uneven Progress on the Path to Growth’, McKinsey Global Institute, January 2012. Available at: www.mckinsey.com/insights/global_capital_markets/uneven_progress_on_the_path_to_growth.
69 According to a research commentary by the McKinsey Global Institute, while cross-border capital flows rose from $0.5 trillion in 1980 to a peak of $11.8 trillion in 2007, they collapsed during the crisis, and as of 2012, they remain more than 60 per cent below their former peak. See ‘Financial Globalization: Retreat or Reset? Global Capital Markets, 2013’ McKinsey Global Institute, March 2013, 2–6. Available at: www.mckinsey.com/insights/global_capital_markets/financial_globalization.
70 Ibid 3.
71 Asset managers and insurance companies are being engaged in direct lending to companies. But this form of non-bank credit intermediation raises concerns in relation to its maturity transformation, increasing volatility in credit supply or the poor assessment of credit risk, among other factors.
72 Lagarde, C, ‘The Global Financial Sector: Transforming the Landscape’ (Frankfurt Finance Summit, Frankfurt, 19 March 2013)Google Scholar.
73 European Commission (n 60) 3.
74 According to the statistical data delivered by the BdE on 13 April 2013, this borrow ing dropped to €259,998 billion in March 2013, from approximately €400,000 billion which was borrowed in August 2012. This data confirms the dropping trend seen over the last seven months; for example, the Spanish banking system borrowed €271,840 billion in February 2013 and €298,664 billion in January 2013. It must be emphasised that these banks refunded €61,100 billion in February 2013 to the ECB, while they refunded €44,000 billion in January 2013. Nonetheless, according to Moody’s, the Spanish banking system is still strongly dependent upon the ECB’s Long-Term Refinancing Operations (LTRO); see the report delivered by MJ Mori, ‘Bancos españoles: http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_149954.
75 There has been a reduction in loans to non-financial entities of 17 per cent since 2008; see BdE, ‘Indicadores económicos’, 3 May 2013, especially Figures in 8.5–8.7. See also IMF (n 65) 9.
76 See A Martín Oliver, S Ruano and V Salas Fumás, ‘Effects of Equity Capital on the Interest Rate and the Demand for Credit. Empirical Evidence from Spanish Banks’ (2012) Working Paper No 1218, BdE, 9–10.
77 Lending to SMEs dropped by around 45 per cent from the €100,000 billion lent in 2007 to €40,000 billion in 2012. Nevertheless, according to the information delivered by the BdE, up to €20,000 billion of this credit reduction registered for 2012 came from the transfer of assets of banks receiving state aid to SAREB in exchange for government-guaranteed SAREB bonds. See BdE press release of 18 February 2013, ‘Efectos de la transferencia de activos a la Sareb y de la recapitalización de las entidades del “Grupo 1” sobre los balances agregados de las entidades de crédito según los estados de supervision’. It is striking that the most recent sta tistical data delivered by the BdE warns of the increasing credit constraints which are leaving Spanish SMEs starved of credit and investment; see BdE ‘Indicadores económicos-Financiación (crédito) a familias y empresas (Febrero de 2013)’, Madrid, 2 April 2013.
78 See Koo (n 32) 14–15.
79 See the Concluding Statement of the IMF Staff Mission to Spain (Article IV Consultation), Madrid, 18 June 2013, Point 15.
80 Asset-backed securities back by SME loans are accepted by the ECB as collateral when providing liquidity to Eurozone banks and what the ECB is currently considering is whether to accept such loans as collateral in return for bank funding. See Comments by M Draghi, ECB President, after the ECB’s Governing Council in Bratislava, 2 May 2013. See also the information provided in the interview with P Praet (‘Redrawing the Map: New Risk, New Reward’, Pioneer Investments Colloquia Series, Beijing, 17 April 2013).
81 Therefore, banks would have to pay the ECB to deposit money, which would encourage the strongest banks to lend excess funds to other financial entities; see comments by Draghi (n 80).
82 Verfahren mit den Az. 2 BvR1390/12, 2 BvR 1421/12, 2 BvR 1439/12, 2 BvR 1824/12, 2 be 6/12. The plaintiffs, 37,000 German citizens, including some members of the Bundestag, oppose the OMT on the ground that, by adopting this programme, the ECB overstepped its mandate and thus imposed undue risk on German taxpayers. The legal issues for the Court is whether Germany’s Parliament still has control over the country’s exposure to financial risks created by Eurozone rescue operations. Although the Court has no jurisdiction over the ECB and could not force it to cancel the OMT, a negative ruling could foster uncertainty in financial markets about whether the ECB could stop a renewed run on the Spanish bonds market.
83 The spin-off of the vast majority of savings banks’ transferred activity to newly formed commercial banks raises the question of their financial strength to provide capital to the latter; see Points 23–24 of the IMF, ‘Spain: the Reform of Spanish Savings Banks Technical Notes’ (Country Report No 12/141, IMF, June 2012).
84 According to an independent calculation from El Economista delivered on 4 May 2013, these costs could reach more than €120 billion, including both public and private capital injections.
85 See IMF (n 65) Points 14–15.
86 See European Commission (n 57). For an analysis, see King, P, Buessemaker, A and Mayer, S, ‘EU Published Proposed Directive on Bank Resolution and Recovery’ (2012) 129(8) Banking Law Journal 689 Google Scholar.
87 See ICB Financial Report Recommendations, September 2011, 8. Available at: http://bankingcommission.independent.gov.uk.