Bank Finance and Regulation Survey. SPAIN Uría Menéndez

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1 Bank Finance and Regulation Survey SPAIN Uría Menéndez CONTACT INFORMATION Emilio Díaz Ruiz / Ana García Rodríguez Uría Menéndez Calle Príncipe de Vergara, 187 Plaza de Rodrigo Uría I. BANKS AND FINANCIAL INSTITUTIONS SUPERVISION 1) Applicable laws and regulations. Provide a list of the main laws and regulations that refer to the supervision and control of banks and financial institutions. Give a brief summary of the substance of each of them. The regulation and supervision of banks is the responsibility of the Spanish State and some of the Autonomous Regions (these latter ones with respect to savings banks and some credit cooperatives)1. The Spanish Parliament has the authority to enact general regulatory and supervisory provisions applicable to all credit institutions, and therefore the Autonomous Regions with legislative powers in this regard can only use the same to develop the general regulations enacted by the Spanish Parliament. The Spanish Banking Law of 31 December 1946 (Ley de Ordenación Bancaria) is one of the main sources of banking regulation in Spain. Many of its provisions remain unchanged since it was enacted, including those concerning the powers given to the Bank of Spain and several provisions affecting credit institutions. Nonetheless, several changes have been made to the Spanish Banking Law to accommodate the increasing complexity of the Spanish banking system and Spain's membership of the European Union ( EU ). Listed below are some of the most significant revisions, which currently make up the Spanish legislation on the supervision of credit institutions: 1 Spain is a regional unified state divided into 17 Autonomous Regions (Comunidades Autónomas). Some of the Autonomous Regions maintain a high degree of political self-control, and all of them are administratively decentralized.

2 (i) Royal Legislative Decree 1298/1986 of 28 June 1986 (hereinafter, "RDL 1298/1986"), which adapted Spanish law on banking activities to EU legislation and regulates the terms and conditions for setting up a bank or opening a branch in Spain; it has been amended on several occasions, most recently by Law 6/2011 of April 11. (ii) Law 26/1988 of 29 July 1988 on the Discipline and Control of Credit Institutions (hereinafter, "Law 26/1988"), which sets forth the disciplinary regime and determines the main parameters of the activities carried out by credit institutions, which has recently been amended by Royal Legislative Decree 9/2009, of June 26, on banking restructuring and reinforcement of credit entities own funds and by Law 2/2011, of March 4, on Sustainable Economy; (iii) Law 13/1992 of 1 June 1992 on Capital and Consolidated Control of Credit Institutions (hereinafter Law 13/1992 ), which regulates capital requirements for Spanish credit institutions as further developed by Royal Decree 216/2008, of February 15, on own funds of financial entities and Circular 3/2008, of May 22, of the Bank of Spain, to credit entities on the determination and control of minimum own funds; (iv) Law 3/1994 of 15 April 1994, which adapts Spanish legislation to the Second EU Banking Directive amended, among others, by Law 16/2009, of November 13, on Payment Services, Law 41/2007, of December 7, which amends Law 2/1981, of March 25, of the Mortgage Market Regulations and other rules of the mortgage and financial system and Royal Legislative Decree 6/2010, of April 9, on measures for the boost of economic recovery and employment. (v) Law 13/1994 of June 2 on the Bank of Spain (hereinafter Law 13/1994 ) as amended by Royal Legislative Decree 9/2009. (vi) Royal Decree 1245/1995 of 14 July 1995 (hereinafter "RD 1245/1995"), which regulates the conditions for the establishment of credit institutions as amended by Royal Decree 1817/2009 of November 27. (vi) Royal Decree 692/1996 of 26 April 1996 (hereinafter "RD 692/1996"), which regulates financial credit entities ( establecimientos financieros de crédito ) as amended by Royal Decree 1817/2009 of November 27. (vii) Law 16/2009 of 13 November 2009, on Payment Services and Royal Decree 712/2010, of May 28, on the legal regime of payment services and payment entities. (viii) Law 10/2010 of April 28, on the prevention of money laundering and the financing of terrorism (although strictly speaking it is not a banking law, it deeply affects the financing industry). 2) Entities/Authorities in charge of the control and supervision. Purposes, powers and functions of each of them-their organization and structure (i.e. public or private, independency or body of the Government to which they belong, size, etc.) Two government bodies have regulatory and supervisory authority over credit institutions in Spain: the Bank of Spain and the National Securities Exchange Commission (Comisión Nacional del Mercado de Valores, hereinafter, the CNMV ), which are responsible for the Spanish credit and securities markets, respectively. Each entity may enact and enforce regulations within the legal framework approved by the Spanish Parliament and the Government. The Bank of Spain is a public entity that was created by the Spanish State in In 1994, the Spanish Parliament enacted Law 13/1994, which gave the Bank of Spain greater autonomy and reduced government control.

3 The Bank of Spain exercises general supervisory powers over domestic credit institutions. Those powers cover a broad range of banking concerns, including professional conduct and practices and solvency. Inspections and detailed reporting requirements allow the Bank of Spain to ensure compliance with regulations. These measures also enable the Bank of Spain to issue warnings or take any other disciplinary measures that are appropriate under the circumstances, which may range from the appointment of a special supervisory body to control the management of a given credit institution to the revocation of the license of the relevant credit institution. The CNMV is an independent public agency which supervises the activities of corporations, including banks, in the securities market, and advises the government on matters within its areas of competence. Its responsibilities include admitting securities to the primary and secondary markets, ensuring compliance with conduct of business rules and promoting investor protection. 3) Describe briefly the activities under supervision and give a list of the different types of licenses available. The chart below summarizes the types of banking activities that are supervised in Spain (the first column) and the different types of licenses that can be obtained to perform each of these activities. No reference has been made to the regulations applicable to savings banks and credit cooperatives owing to their specific nature and the interests other than those of a purely banking nature involved. Supervised banking activities Licenses RDL 1298/1986 and RD 692/ Taking funds from the public, either in the form of a deposit, loan, temporary assignment of financial assets, or any other form that entails the obligation to return those funds; applying those funds to the granting of credits or similar transactions - Banking license 2. Lending, including, inter alia, consumer credit, - Banking license mortgage credit and factoring (with or without - Financial credit entity license recourse) 2 3. Financial leasing (see footnote 2) - Banking license - Financial credit entity license 4. Money transfer services - Banking license - Payment service license pursuant to Law 16/2009 of 13 November 2009, on Payment Services and Royal Decree 712/2010 of May 28 on the legal regime of payment 2 Please note that these activities may be carried out without a license, however in case they are carried out by a licensed entity, specific requirements must be met when performing such activities.

4 Supervised banking activities RDL 1298/1986 and RD 692/1996 Copyright Lex Mundi Ltd Licenses services and payment entities - Money transfer license pursuant to Royal Decree 2660/1998 of 14 December 1998 until April 30, Issuing and administering means of payment - Banking license - Financial credit entity license - Payment entity - E-money entity Payment services - Banking license - Payment entity - E-money entity 5. Issuance of guarantees 4 - Banking license - Financial credit entity license 6. Issuance of e-money - Banking license - E-money entity license pursuant to Royal Decree 322/2008 of February 20, on the legal regime of electronic money entities In addition to all of the above, Spanish credit institutions are also entitled to carry out activities in the securities market. 4) Describe briefly non-regulated financial and banking activities. All the activities mentioned in section 3) above are activities regulated by Spanish law, and, therefore, the performance thereof on a regular or professional basis requires the appropriate license, except where otherwise indicated. There is no other activity that qualifies as a financial or banking activity that would fall outside the scope of the regulated activities, with the possible exception of the so-called operative leasing or renting activities (i.e. a short-term or medium-term leasehold, where the leasing period is shorter than the life cycle of the leased asset and the purchase of the leased asset is not 3 Please note that the exchange establishments (establecimientos de cambio de moneda) authorized to manage external money transfers prior to December 25, 2007 require to be previously authorized before April 30, 2011 as either a credit entity, an e-money entity or a payment entity in order to provide payment services save if they do not request an extension of the corporate purpose (i.e. thy only render external money transfer services) and provided they comply with the requirements set forth in the payment services law (in which case they will transform into payment entities but such transformation will not require prior authorization). In addition, any entity carrying out payment services before December 25, 2007 may continue to render them until April 30, 2011, after which moment they must be authorized as either a credit entity, an e-money entity or a payment entity in order to provide such services. 4 Please note this activity may be carried out without a license, however in case they are carried out by a licensed entity, specific requirements must be met when performing such activities (i.e. bank guarantees must meet certain requirements).

5 agreed in the contract in advance but rather the lessee is obliged to return the leased asset upon the termination of the contract). 5) Describe briefly non-permitted financial and banking activities and/or government monopolies. There are no non-permitted financial and banking activities and/or government monopolies in this area in Spain. It should be noted, however, that intermediation in the credit is a monopoly of the different types of banks. II. BANKING ACTIVITIES 6) Different types of banking licenses. Activities permitted under each of them. Activities prohibited. As indicated in the chart included in the response to question 3) above (the Chart ), there are four main types of what could generally be called credit institution licenses or licenses for rendering banking services that entitle the holder thereof to carry out all or some of the financial and banking activities also described in that response (as stated above, no reference will be made to saving banks and credit cooperatives, which can basically carry out the same activities that a bank): - Banking license: this grants the holder thereof the right to carry out any type of financial and banking activities, as described in the Chart. - Financial credit entity license, under which all the financial and banking activities indicated in the Chart, except for those mentioned in lines 1 and 4, can be performed. - E-money license. - Payment service license, which only grants the holder thereof the right to render payment services. 7) Procedures to be followed and requirements to be met to obtain each of the different licenses. Formalities to be fulfilled, documentation to be submitted, guaranties requested, time estimation, etc. The procedure to obtain each of the licenses mentioned in the response to question 6 above and the requirements to be met for the purposes thereof are briefly described below for each of the cited licenses: A. BANKING LICENSE As indicated, any person or entity seeking to conduct banking business in Spain through a permanent establishment must obtain a banking license. Under Article 1 of RD 1245/1995, the incorporation of a bank must be authorized by the Spanish Ministry of Economy and Finance (based on, among other things, a previous report from the Bank of Spain and the antimoney laundering commission or SEPBLAC ). This authorization

6 may be denied if: (i) the administrative organization of the bank is considered insufficient, (ii) the shareholders or directors are not reliable or trustworthy, or (iii) the bank fails to meet any of the basic requirements for incorporation mentioned below. Basic requirements for incorporating a bank in Spain include the following: Banks must have a minimum fully paid up share capital of 18,030, that is represented by shares. Shares representing this capital must be registered. The bank must be incorporated as a public limited company ( sociedad anónima ). The corporate purpose of the new bank must be limited to banking activities. No special rights or preferences may be granted to the founders of a new bank. All new banks must be governed by a board of directors of at least five members, all of whom must be reliable and trustworthy. Any person who has been convicted of a criminal offense or is under indictment for crimes involving dishonesty or a breach of a fiduciary duty, such as money laundering, misuse of public funds, unfaithfulness in the custody of documents or disclosure of secrets, is ineligible to serve as a bank director. Furthermore, the majority of the members of the board of directors must have practical and theoretical knowledge and expertise in the running of a bank. All of the foregoing requirements also apply to the bank's general managers. Bank s registered address and headquarters must be located in Spain. The bank must approve the appropriate policies for the prevention of money laundering, according to the relevant legislation, which include the drafting of an antimoney laundering handbook and the appointment of a representative before the SEPBLAC. Applications for banking licenses are submitted to the General Directorate of the Treasury and Monetary Policy (Dirección General del Tesoro y Política Financiera), and must include a copy of the bank's proposed business plan, a copy of the proposed bylaws, a certificate issued by the Central Commercial Registry showing that the proposed bank's name is not used by another corporation, a list of the initial shareholders with their percentage holdings in the bank, a list of the initial members of the board of directors, and proof that 20 percent of the initial capital of the proposed bank has been deposited with the Bank of Spain. Applications are typically cleared within six months of their submission to the General Directorate of the Treasury and Monetary Policy; applications not cleared within twelve months of submission are deemed to have been denied. In addition, foreign banks may conduct business in Spain by maintaining a permanent presence in Spain or by providing cross-border services: (i) (ii) Providing cross-border services is relatively simple: banks from EU countries need only notify the Bank of Spain. Banks from non-eu countries must also notify the Bank of Spain of their activities although it may impose additional requirements on the provision of crossborder services by the foreign institution. Foreign banks seeking to have a permanent presence in Spain may do so by acquiring an existing bank, incorporating a new bank, opening a branch, or incorporating a representative office. RD 1245/1995 contains specific provisions applicable to foreign branches and representative offices, while the provisions of the Spanish banking

7 regulations apply equally to Spanish banks owned by Spanish entities and to Spanish banks owned by foreign entities. Incorporation of subsidiaries: Foreign banks may establish subsidiaries in Spain. While the rules for incorporating a subsidiary of a foreign bank are substantially the same as the rules applicable to the incorporation of a domestic bank, two major differences exist for non-eu banks. First, a foreign bank may be denied permission to incorporate a Spanish subsidiary if the country of residence of the parent foreign bank does not guarantee reciprocal treatment for Spanish banks under an international agreement. Second, the Ministry of Economy and Finance may require the parent bank to guarantee the obligations of the Spanish subsidiary. Establishment of branches: Banks from non-eu countries must obtain permission from the Spanish Ministry of Economy and Finance (based, among others, on a previous report of the Bank of Spain) in order to open branches in Spain. Any application submitted must satisfy the following conditions: (i) (ii) (iii) (iv) (v) (vi) The name of the branch must be the same as that of the parent bank. The branch must have a reserve of 18,030, available at all times to cover potential losses. The branch must have at least two managers, who must be reliable and trustworthy. The corporate purpose of the branch must comply with Spanish banking law and the law of the country where the parent company was incorporated. For example, if the parent company of the foreign branch is incorporated in a country that prohibits banks from engaging in securities activities, the branch will also be unable to engage in securities activities, even though Spanish law otherwise allows banks and branches to carry out a securities business. The registered address and the headquarters of the branch must be located in Spain. The proposed establishment of the branch must be approved by the supervisory authorities of the country of incorporation or if such approval is not required, the filing must state that the approval is not needed. In addition, a description of the bank's activities must be submitted to the Bank of Spain together with a description of the management structure of the bank and an organization chart. (vii) Have in place appropriate proceedings and internal control and communication bodies to prevent and hinder the carrying out of transactions related with money laundering. EU banks seeking to establish branches in Spain must have their domestic supervisory authorities inform the Bank of Spain as to: a) the branch activities to be carried out in Spain, b) the address of the branch in Spain, c) the name and curriculum vitae of the managers of the branch, d) the bank s and its group s resources and credit rating, and e) information about Depositary Trust Funds (as defined below) available in the country of incorporation of the bank. Two months following such notice, an EU bank may open branches in accordance with the notice given. Additional branches may be opened without further notice.

8 Establishment of representative offices: A prior authorization from the Bank of Spain is required to open a representative office. In order to obtain the necessary permission, the following information must be submitted to the Bank of Spain: a) details of the activities to be carried out by the representative office, and b) the name and personal details of the manager of the office. Representative offices may only gather information for the parent bank and are prohibited from conducting any other business. B. FINANCIAL CREDIT ENTITY LICENSE Pursuant to Article 3 of RD 692/1996, the incorporation of financial credit entities must be authorized by the Spanish Ministry of Economy and Finance, whose decision is based on the report that must be issued by the Bank of Spain. Authorization may be denied if: (i) the shareholders holding a significant stake (i.e. at least 5% of its share capital or, if lower, a stake which permits the holder thereof to notably influence the entity) in the financial credit entity are not reliable or trustworthy, or (ii) the financial credit entity fails to meet any of the basic requirements for incorporation mentioned below. Basic requirements for incorporating a financial credit entity in Spain include the following: New financial credit entities must have a minimum fully paid-up share capital of 5,108, The shares representing this capital must be registered. The financial credit entity must be incorporated as a public limited company ( sociedad anónima ). The corporate purpose of the new financial credit entity must be limited to the activities of a financial credit entity, as described in the Chart. All financial credit entities must be governed by a board of directors of at least three members, all of whom must be reliable and trustworthy. Any person who has been convicted of a criminal offense or is under indictment for offences involving dishonesty or the breach of a fiduciary duty, such as money laundering, misuse of public funds, unfaithfulness in the custody of documents or the disclosure of secrets, is ineligible to serve as a director of a financial credit entity. Furthermore, at least three of the members of the board of directors must have adequate practical and theoretical knowledge and expertise. All of the foregoing requirements also apply to the general managers of the financial credit entity. The management and accounting organization of financial credit entities must be adequate, and they must have, as well, appropriate internal control proceedings which ensure the prudent management of the entity. Both the financial credit entity s registered address and its headquarters must be located in Spain Have in place appropriate proceedings and internal control and communication bodies to prevent and hinder the carrying out of transactions related with money laundering.

9 Applications for banking licenses are submitted to the General Directorate of the Treasury and Monetary Policy (Dirección General del Tesoro y Política Financiera) and must include a copy of the financial credit entity's proposed business plan, a copy of the proposed bylaws, a certificate issued by the Central Commercial Registry showing that the proposed financial credit entity's name is not used by another corporation, a list of the initial shareholders with their percentage holdings in the financial credit entity, a list of the members of the initial board of directors, and proof that 20 percent of the aforementioned minimum share capital has been deposited with the Bank of Spain. Applications are typically cleared within three months of their submission to the General Directorate of the Treasury and Monetary Policy; applications not cleared within six months of submission are deemed to have been denied. Foreign entities may conduct business in Spain by maintaining a permanent presence in Spain by acquiring an existing financial credit entity or incorporating a new one. EU financial credit entities may also open a branch in Spain in accordance with the procedure established by Directive 2000/12/EC of 20 March There is no similar provision regarding the opening of Spanish branches by non-eu financial credit entities. Foreign financial credit entities may establish subsidiaries in Spain. While the rules for incorporating a subsidiary of a foreign financial credit entity are substantially the same as the rules applicable to the incorporation of a domestic financial credit entity, two major differences exist for non-eu financial credit entities. First, a foreign financial credit entity may be denied permission to incorporate a Spanish subsidiary if the country where the parent foreign financial credit entity is incorporated does not guarantee reciprocal treatment for Spanish financial credit entities under an international agreement. Second, the Ministry of Economy and Finance may require the owners to guarantee the obligations of the Spanish subsidiary. C. PAYMENT ENTITY LICENSE Pursuant to Article 1 of RD 712/2010, the incorporation of payment entities must be authorized by the Spanish Ministry of Economy and Finance, whose decision is based on the report that must be issued by the Bank of Spain and the report that must be issued by the SEPBLAC. This authorization may be denied if the entity either: (i) lacks a good administrative and accounting organization and internal control procedures, (ii) the shareholders which are going to have a significant stake are not considered suitable (i.e. those which hold a stake exceeding 10% or such stake which enables its holder to exercise significant control over the entity), (iii) when its directors or managing directors do not hold the commercial and professional honorability required or (iv) when it fails to comply with the minimum share capital requirements. Basic requirements for incorporating a payment entity in Spain include the following: (i) (i) (ii) They must be incorporated as a commercial entity, whether on account of the nature of its object or they type of entity in which it incorporated. The shares or participations (or other titles in which the share capital is divided) must be registered. The payment entity s registered address and headquarters must be located in Spain. Have the following minimum share capital: a euros, in case the payment entity only renders the service of delivery of money.

10 (iii) (iv) (v) (vi) Copyright Lex Mundi Ltd b euros, in case the entity executes payment transactions in which the consent of the payer is transmitted by way of telecommunication, digital or electronic devices and the payment is carried out by the operator of the network or the telecommunication/electronic system,, which only acts as an intermediary between the user of the payment service and the provider of the payment service. c euros, in case the entity renders any of the other payment services contained in article 1.2 of Law 16/2009. The shareholders or holders of significant participations must be considered suitable in accordance with article 6 of the Law. The directors must be persons reliable and trustworthy and most of them must have the necessary knowledge for the rendering of payment service All of the foregoing requirements also apply to the general managers. To have solid corporate governance procedures in place, including a clear organizational structure, with well defined responsibility lines, transparent and coherent, as well as effective procedures for the identification, management, control and communication of the risks to which the entity may be exposed together with adequate internal control mechanisms, including adequate administrative and accountancy procedures. Such procedures and mechanisms shall be exhaustive and proportional to the nature, scale and complexity of the payment services provided by the entity. Have in place appropriate proceedings and internal control and communication bodies to prevent and hinder the carrying out of transactions related with money laundering. Applications for payment services licenses are submitted to the General Directorate of the Treasury and Monetary Policy (Dirección General del Tesoro y Política Financiera) and must include a copy of the financial credit entity's proposed business plan, a copy of the proposed bylaws, a program of activities, a certificate issued by the Central Commercial Registry showing that the proposed financial credit entity's name is not used by another corporation, a list of the initial shareholders which hold a significant holding in the payment entity, a list of the members of the board of directors and managing directors, the identity of the auditors, a list of the measures taken to protect the clients funds, a description of the internal control mechanisms, a description of the proceedings and internal control and communication bodies to prevent and hinder the carrying out of transactions related with money laundering, a description of the organizational structure, a description of the services, instruments and other means to attend and solve claims and complaints of its clients, including the regulation for the client s defense, the address of the central administration, if the entity already exists, audited annual accounts of the last exercise and an explicative report on the characteristics and situation of the company and proof that 20 percent of the aforementioned minimum share capital has been deposited with the Bank of Spain. Applications are typically cleared within three months of their submission to the General Directorate of the Treasury and Monetary Policy; applications not cleared within three months of submission are deemed to have been denied. E. E-MONEY ENTITIES Pursuant to Article 4 of RD 322/2008, the incorporation of e-money entities must be authorized by the Spanish Ministry of Economy and Finance, whose decision is based on the report that must

11 be issued by the Bank of Spain and the report that must be issued by the SEPBLAC, The authorization process is the same as the one provided for financial credit entities. Authorizations will be denied in case the below requirements are not met, and when the shareholders with a significant shareholding are not suitable. Basic requirements for incorporating an e-money entity include the following: (i) (ii) (iii) (iv) (v) (vi) Have a minimum fully paid-up share capital of The shares representing this capital must be registered. Must be incorporated as a public limited company ( sociedad anónima ). The corporate purpose of the new entity must be limited to the activities of an e-money entity. Must be governed by a board of directors of at least three members, all of whom must be reliable and trustworthy. Furthermore, at least three of the members of the board of directors must have adequate practical and theoretical knowledge and expertise. All of the foregoing requirements also apply to the general managers. The management and accounting organization of the entities must be adequate, and they must have, as well, appropriate internal control proceedings which ensure the prudent management of the entity. Both the registered address and its headquarters must be located in Spain (vii) Have in place appropriate proceedings and internal control and communication bodies to prevent and hinder the carrying out of transactions related with money laundering. (viii) Shareholders with significant holdings must be considered suitable. Applications for e-money licenses are submitted to the General Directorate of the Treasury and Monetary Policy (Dirección General del Tesoro y Política Financiera) and must include a copy of proposed business plan, a copy of the proposed bylaws, a certificate issued by the Central Commercial Registry showing that the proposed financial credit entity's name is not used by another corporation, a internal regulations for the board of directors, regulation for the client s defense department, a list of the shareholders with their percentage holdings in entity, a list of the members of the initial board of directors, and proof that 20 percent of the aforementioned minimum share capital has been deposited with the Bank of Spain. Applications are typically cleared within three months of their submission to the General Directorate of the Treasury and Monetary Policy; applications not cleared within six months of submission are deemed to have been denied. 8) Legal structure admitted/requested for each of the different licenses. a) Different types of legal structures that may be used, i.e. corporations, limited liability partnership, branches, subsidiaries, etc. Please see the response to question 7 above.

12 b) Capital requirements and own fund rules. Law 13/1992, Circular 4/2004, Law 5/2005, Law 6/2005, Law 36/2007, Royal Decree 216/2008 (to adapt the Spanish legal frame work to Directives 2006/48/EC and 2006/49/EC)and Circular 3/2008 of the Bank of Spain set out the general regulations that govern capital requirements applicable to credit institutions in Spain. Spanish regulations on the prudential supervision of credit and financial institutions are, to a large extent, harmonized with EU rules. It is worth mentioning the recent approval of Royal Decree-law 2/2011 of 18 February (the Royal Decree-law ), on the strengthening of the banking system. The purpose of the Royal Decree-law is twofold: (i) to strengthen the solvency of Spanish banking entities, and (ii) to speed up the restructuring process initiated by saving banks. The following paragraphs are a brief summary of the most important requirements in this regard, which will apply to all credit institutions (including, thus, both banks and financial credit entities): (i) Credit risk: The solvency requirements of banking consolidated groups, and banks, savings banks and credit cooperatives that do not form part of a consolidated group, have been made more stringent. On a general basis the Royal Decreelaw requires a so-called capital principal (that would be referred for the purposes of this document as core capital) equal to or above 8% of their riskweighted assets. For credit entities which are highly dependent on wholesale markets, the core capital ratio is increased to 10%. As an exception, the 8% ratio is maintained when the relevant entity has 20% or more of its capital or voting rights placed among third parties, either in the stock market or among private investors. The ratio may also be increased for entities that do not pass the stress tests carried out by the Bank of Spain. The concept of core capital ratio is new, not only in connection with the levels required, but also as regards quality. Core capital is formed by (i) common shares, (ii) retained earnings (including share premiums of capital instruments), (iii) other comprehensive income, (iv) minority interests and (v) instruments subscribed by the Fondo de Reestructuración Ordenada Bancaria ( FROB ); all of which minus treasury stock, cumulative losses, unrealized losses recognized in other comprehensive income and intangible assets (including goodwill). For a transitional period, subordinated debt instruments mandatory convertible into common shares will be included in the core capital, provided that conversion takes place before 31 December This includes instruments issued before the entry into force of the Royal Decree-law and those issued subsequently (in the latter case, the conversion ratio must be pre-

13 (ii) (iii) (iv) (v) Copyright Lex Mundi Ltd determinated). In any event, these instruments must not represent more than 25% of the core capital. Although the new capital requirements are in line with Basel III standards, they are specific to the Spanish banking system. From a quality point of view, the core capital ratio is less stringent than Basel III s core capital. Certain deductions, such as deferred tax assets and investments in the capital of financial and insurance entities are not included, and certain convertible instruments are. From a quantitative point of view, however, the level required is higher than Basel III (8% or 10% as opposed to 7% - including the capital conservation buffer - of Basel III). Foreign currencies and gold risk: credit institutions are also required to maintain a ratio of at least 8% between their own funds and their global net position in foreign currencies and gold. Portfolio risk: There are very detailed regulations on the covering of the market, credit, counterparty, settlement and delivery risks associated with the holding of securities and other financial instruments which form part of the credit institutions portfolio. Commodities risk: There are also very detailed regulations on the covering of the risks involved in the holding of commodities and the execution of derivatives over commodities. Significant exposures: Spanish credit institutions are obliged to report significant exposures (the exposure of a credit institution to a particular client or group where its value is equal to or exceeds 10% of its own funds) to the Bank of Spain. In addition, except for certain cases, Spanish credit institutions cannot incur have an exposure to a single client or group that exceeds 25% of its own funds (20% if it refers to the exposure of the credit institution to non-consolidated entities within its own group) and, in general, cannot incur significant exposures which, in total, exceed 800% of its own funds. Tangible assets: a Spanish credit institution cannot hold tangible assets (real estate properties, equipment, etc.) exceeding 70% of its own funds. In addition, there are certain rules on the composition of Spanish credit institutions own funds (core capital, Tier II capital, etc.) and certain limitations on the holding of qualified holdings (a holding in a company that represents 10% or more of the capital or the voting rights of such company or which makes it possible for the credit institution to exercise significant control over the company) in non-financial companies. c) Transfer of control and ownership regime. Is it regulated? Yes, it is. Spanish law imposes certain information obligations on the shareholders of credit institutions and also provides for the possible revocation by the Ministry of Economy and Finance of a credit entity s license in the event that the individuals who have a significant stake in the credit entity have a negative influence on the prudent management thereof such that its financial situation is seriously prejudiced.

14 In this regard, according to Article 19 of RD 1245/1995, credit institutions must comply with the following information obligations: (i) (ii) During the month following each quarter, credit institutions must communicate to the Bank of Spain the composition of their share capital, including all its shareholders that at the end of the said period are considered financial entities and those who are the owners of 0.25% or more (in the case of banks) and 2.50% (in the case of financial credit entities) of the share capital. As soon as they are known by the relevant credit entity, any transfer of shares which entails the acquisition by a person (either natural or legal), or a group of companies, of a stake in the share capital of the credit entity equal to or higher than 1% must be communicated to the Bank of Spain. The Bank of Spain, as soon as it is informed thereof, will notify the Ministry of Economy and Finance of any transfer of shares of a credit entity that entails a change of control (as this term is defined by Spanish law) thereof. In addition, any person (either natural or legal) intending to acquire a significant stake in a Spanish credit entity (i.e. at least 5% of its share capital or, if lower, a stake which permits the holder thereof to notably influence the entity) must communicate his intention to the Bank of Spain. The same notification obligation will correspond to any person who intends to increase, directly or indirectly, its significant stake so that it reaches or exceeds any of the following percentages: 20%, 30%, 50%, or a percentage that gives him control of the credit entity. The Bank of Spain will have a maximum term of 60 business days to oppose the intended acquisition. Finally, as indicated above, the Ministry of Economy and Finance could also revoke the authorization of a credit entity in the event that the persons who have a significant stake in the credit entity have a negative influence on the prudent management thereof, such that its financial situation is seriously prejudiced. d) Personal requirement and restrictions that may apply in each case for officers, directors, shareholders, etc. Please see the response to question 7 above. e) Special requirements/restrictions for foreigners either individual or legal entities (including short description of WTO/GATS commitments and exemptions). Please see the response to question 7 above. With respect to WTO/GATS commitments and exemptions, it must be noted that Spain is a member of the WTO through the EU and, therefore, it shares any commitments and exemptions adopted thereby.

15 9) Is there a Deposits Insurance? Is it mandatory or based on self-regulations? Provide a brief explanation of how it operates. In response to the banking crisis of the mid-1970s, the Spanish government established the socalled Fondos de Garantía de Depósitos ( Deposit Guarantee Trusts ) to protect deposits made in credit institutions and improve the general financial health of credit institutions. Deposit Guarantee Trusts are private bodies with legal personality and of which banks must become members. Deposit Guarantee Trusts guarantee customer deposits up to 100,000 per depositor. All deposits in Spain are protected by the Deposit Guarantee Trusts, regardless of the currency in which they are denominated or the nationality of the depositor. Branches of EU banks located in Spain may join the Spanish Deposit Guarantee Trusts, but are not required to do so. Branches of non-eu banks are required to join the Spanish Deposit Guarantee Trusts if their home countries do not offer similar protection to depositaries in Spain. Deposit Guarantee trusts are funded by annual contributions from member banks. 10) Interest rate. Is it regulated? Should the answer be affirmative, explain briefly its regulatory framework. Under Spanish law, in principle, interest rates can be freely determined by the parties to the relevant contract. However, pursuant to the Spanish Law on the constraint of usurious loans dated July 23, 1908, loan agreements shall be null and void when the interest rate applied is significantly higher than the market interest rate and clearly disproportionate given the particular circumstances, such as the fact that it has been accepted by the borrower due to his distressing situation of financial hardship, his lack of experience or his limited mental faculties. Likewise, overdrafts cannot accrue more than 2.5 times the legal interest rate. 11) Sanctions (civil, administrative, or criminal) for violations of the legal and regulatory dispositions. Spanish law establishes a variety of rules regarding administrative liabilities of those persons who infringe banking laws. Criminal liability, which is established in the Criminal Code (applies to all types of companies, not only credit institutions; in particular, Articles 290 to 297) is much more restrictive than administrative liability (which is contained in Law 26/1988). Finally, civil liability arises from the general provisions of civil law on contractual relationships and on those persons who cause harm to a third party. In the case of administrative liability, Law 26/1988 contains a list of very serious, serious and minor infringements, together with a list of the corresponding penalties. The most serious penalty for very serious infringements by credit institutions operating in Spain is the revocation of their license or, if they are branches of foreign entities, prohibiting them from operating in Spain, or a fine of up to the highest of the following amounts: 1% of the own resources of the offender or 1,000,000.

16 III. BANK SECRECY LAWS Copyright Lex Mundi Ltd ) Is clients information protected? Are there any restrictions for its use? According to the First Additional Provision of Law 26/1988, entities and any other persons subject to the supervision of credit institutions (i.e. managers and directors of credit institutions and significant shareholders and their managers and directors) are obliged to safeguard and keep strictly confidential (without disclosure to third parties) all information relating to balances, operations and any other client transactions. As general exceptions to this duty of confidentiality, Law 26/1988 refers to all information (i) which the client or applicable law has allowed to be communication to third parties, or (ii) when an obligation to communicate to the supervisory authorities exists or a request has been made in connection therewith by the supervisory authorities. In these exceptional cases, the delivery of confidential information must comply with the instructions of the client or with those provided by applicable law. An additional exception to the duty to keep client information confidential is that the passing of confidential information between credit institutions pertaining to the same consolidated group is not subject to the aforementioned restrictions. In addition, please take into account data protection rules applying to the processing of the clients personal data. 13) Should answer to number 12) be affirmative, please describe the legal framework, i.e. scope, limitation, exceptions. Please see the response to question 12 above. 14) Sanctions (civil, administrative, or criminal) for violations. Due to the existence of a variety of rights and principles serving as the legal basis to the principle of bank secrecy under Spanish law, there is also a significant number of remedies available, or that arguably could be used, in the event of a breach by a credit entity of its obligation to keep information gathered from its clients confidential. This notwithstanding, the clearest remedy available to the client is to bring an administrative action before the Bank of Spain based on Law 26/1988. In this regard, the breach of the obligation to safeguard confidential information will be deemed as a serious offence under Law 26/1988. Pursuant to this Law, a serious offence may lead to the imposition of the following sanctions: On the credit entity: a) a public admonition, to be published in the Spanish Official Gazette; and/or b) a fine of up to 0.5% of its own resources or up to 500,000, whichever is higher. On the responsible managers or members of the board: a) a private admonition;

17 b) a public admonition; Copyright Lex Mundi Ltd c) a fine of up to 250,000 on each of the responsible managers or directors; or d) a prohibition on acting as managers or directors of a credit or financial entity, including, as the case may be, their temporary suspension from their respective offices for a period not exceeding one year (this sanction can be imposed together with the aforementioned fine). Law 26/1988 sets forth several criteria to determine the actual sanction to be imposed from those among those available. Additionally, this law states that members of the board of a credit entity will be liable for serious offences except in the event that they (i) have not attended the relevant meeting with a justified cause or have acted against the relevant resolution that has given rise to the offence, or (ii) the relevant offence is exclusively attributable to delegated bodies, general managers or other individuals in the credit entity. Finally, it is worth mentioning that, Organic Law 5/2010, of 22 June, which amends Organic Law 10/1995, dated 23 November, on the Criminal Code establishes for the first time in the Spanish Criminal Code (Código Penal) an express regulation on the criminal liability of legal entities for crimes committed on their behalf by their representatives, de facto and de jure administrators, employees and/or workers.