Bank resolution and legal challenges. The Spanish Experience

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1 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.

2 ENRIQUE SANJUÁN. SPAIN

3 On one hand, we have the act named Law 22/2003. This is the law what we should applicate when one or more companies, one or more natural person or whoever, must go into insolvency Ley 22/2003, de 9 de julio, Concursal. - ( ADDITIONAL DISPOSITION) : Disposición adicional segunda. Régimen especial aplicable a entidades de crédito, empresas de servicios de inversión y entidades aseguradoras. ENRIQUE SANJUÁN. SPAIN

4 FINANCIAL COMPANIES CREDIT COMPANIES special cases of insolvency matters. ADDITIONAL DISPOSITION INSURANCE COMPANIES ENRIQUE SANJUÁN. SPAIN

5 ENRIQUE SANJUÁN. SPAIN

6 Therefore, we have two different system in our insolvency law: º. Firstly the normative for the companies, natural person or other which have juridical personality. 2º. 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. ENRIQUE SANJUÁN. SPAIN

7 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 ENRIQUE SANJUÁN. SPAIN

8 EU SYSTEM. But we are inside de European Union. And therefore we need to adapt our normative if the issue is regulated by it or we must harmonize 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 ENRIQUE SANJUÁN. SPAIN

9 EU NORMATIVE SPANISH LAW GENERAL NORMATIVE F. OUTSIDE CASES SPANISH F. INSIDE CASES EU F. INSIDE CASES ENRIQUE SANJUÁN. SPAIN

10 ENRIQUE SANJUÁN. SPAIN

11 Remember the first one from which we have the others: - Ley 22/2003, de 9 de julio, Concursal. And so: MAIN LAW Disposición adicional segunda. Régimen especial aplicable a entidades de crédito, empresas de servicios de inversión y entidades aseguradoras. ENRIQUE SANJUÁN. SPAIN

12 And from this: Ley 11/2015, de 18 de junio, de recuperación y resolución de entidades de crédito y empresas de servicios de inversión. Real Decreto 1012/2015, de 6 de noviembre, por el que se desarrolla la Ley 11/2015, de 18 de junio, 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 garantía de 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 determinados productos 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 del derecho español a la normativa de la Unión Europea en materia de supervisión y solvencia de entidades financieras. Ley 10/2014 de 26 de junio de ordenación, supervisión y solvencia de entidades de crédito ENRIQUE SANJUÁN. SPAIN

13 FROB: MAIN FEATURES. SIMILARY TO SRB ( SINGLE RESOLUTION BOARD IN EU). TOOLS: THE SAME TO RESOLUTION 806/2014. ENRIQUE SANJUÁN. SPAIN

14 FROB. PUBLIC AGENCY OF SPAIN FOR FINANCIAL COMPANIES RESTRUCTURATION. ENRIQUE SANJUÁN. SPAIN

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

16 The General State Administration may grant guarantees to guarantee the economic obligations required of the FROB. GUARANTEES AND GAINS. 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. ENRIQUE SANJUÁN. SPAIN

17 TOOLS. In our Law 9/2012, we have the next structure: EARLY ACTION REESTRUCTURATION 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 ENRIQUE SANJUÁN. SPAIN

In this case, the Commission and the Minister of Spain decided that other Bank would buy the whole stocks of the Banco

18 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. ENRIQUE SANJUÁN. SPAIN

19 BUT SEVERAL MORE BANCO POPULAR CAJA RURAL MOTA ENRIQUE SANJUÁN. SPAIN

20 2013 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 2014 BANCO DE VALENCIA ENRIQUE SANJUÁN. SPAIN

21 ENRIQUE SANJUÁN. SPAIN

22 EVOLUTION OF THE STRUCTURE OF THE BANKING SYSTEM ( source RTVE) ENRIQUE SANJUÁN. SPAIN

23 At the present We have reduced the number of the bank from 55 to 16 units: 2015 ENRIQUE SANJUÁN. SPAIN

24 PUBLIC AID. ENRIQUE SANJUÁN. SPAIN

25 ENRIQUE SANJUÁN. SPAIN

26 ENRIQUE SANJUÁN. SPAIN

27 - 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. TIMELINE - 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 ENRIQUE SANJUÁN. SPAIN

28 - 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. ENRIQUE SANJUÁN. SPAIN

29 - 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. ENRIQUE SANJUÁN. SPAIN

30 What was done? Intervention by the FROB. Application for declaration of insolvency. Declaration of Insolvency by the Court Suspension of the procedure pending resolution of assistance to the Bank Refusal of redemption. Bankruptcy liquidation Transfer of funds and portfolios managed to other operators ENRIQUE SANJUÁN. SPAIN

31 ENRIQUE SANJUÁN. SPAIN

32 - 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. TIMELINE - 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. ENRIQUE SANJUÁN. SPAIN

33 - 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 [State Aid SA (2012 / N) Spain Restructuring and Recapitalization of the BFA Group]. ENRIQUE SANJUÁN. SPAIN

34 ENRIQUE SANJUÁN. SPAIN

35 Measures A and B: Guarantees on liabilities Since 2009, the BFA Group has received State guarantees worth EUR 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 million out of which EUR million remain outstanding, as of 30 October 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. ENRIQUE SANJUÁN. SPAIN

36 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 subscribing EUR million in newly issued convertible preference shares under the FROB recapitalisation scheme. The aid represented [0-5]% of the BFA Group's RWA as of March The securities subscribed for by the FROB have an annual yield of 7.75% the first year, with annual step-ups for the following years until redemption. The first coupon paid on the preference shares held by the FROB was paid in December 2011, but the securities were converted into ordinary shares before the second coupon was paid. ENRIQUE SANJUÁN. SPAIN

37 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 million to BdV into subordinated debt of BdV. ENRIQUE SANJUÁN. SPAIN

38 Measure E: the conversion of the preference shares held by the FROB in BFA On 27 June BFA converted the preference shares held by the FROB. As a result of the conversion the FROB became the sole shareholder of BFA. ENRIQUE SANJUÁN. SPAIN

39 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. ENRIQUE SANJUÁN. SPAIN

40 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 Restructuring Plan (including a series of subordinated liabilities exercises and the transfer of some impaired assets and real estate loans to the AMC), a capital injection by the FROB of EUR million is still needed for the BFA Group to meet the new regulatory solvency levels in Spain taking into consideration the results of the MoU Stress Test. ENRIQUE SANJUÁN. SPAIN

41 Measure H: segregation of impaired assets to the Asset Management Company The BFA Group will benefit from an impaired asset measure whereby it transfers assets to the AMC. The aim of that measure is to remove uncertainty about the future value of its most problematic asset portfolio and allow the BFA Group to concentrate on the implementation of the Restructuring Plan. ENRIQUE SANJUÁN. SPAIN

42 PAYMENT RETURNED Till the present Bankia has returned1.628 million of the total. ENRIQUE SANJUÁN. SPAIN

43 What was done? PUBLIC AID INTERVENTION PUBLIC AID EU RESOLUTION FROB CONTROL AN EXECUTION REESTRUCTURATION ENRIQUE SANJUÁN. SPAIN

44 ENRIQUE SANJUÁN. SPAIN

45 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 : 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. ENRIQUE SANJUÁN. SPAIN

46 2017: On June 7, following the resolution of the bank by the single European mechanism of resolution of banking institutions as unfeasible, Banco Santander bought the bank at auction for the price of one euro, becoming part of the Santander Group. It was the first bank intervened by the European authorities. The purchase came after the bank, whose accounts were heavily burdened by real estate assets, lost more than 50% of its value on the stock market in recent days and "suffered a significant deterioration in its liquidity position." As part of the execution of the resolution, Popular shareholders lost 100% of their investment in the shares after amortization and zeroing of all securities. Holders of additional tier 1 capital and tier 2 capital instruments (hybrid and subordinated debt) also lost their investment.his operation gave rise to numerous claims by former Banco Popular investors, both retailers and wholesalers. On the same day, Banco Santander appoints President of Banco Popular to José Carcía Cantera to replace Emilio Saracho. 2017: On July 13, Banco Santander announced that it had decided to compensate Banco Popular's small investors by offering 99% of Popular customers and employees who attended the capital increase in 2016 and who invested less than 100,000 euros possibility of fully recovering its investment in seven years. To this end, up to 980 million euros will be issued in "loyalty bonds" and those affected will have to resign to take legal action against the bank.these are perpetual debt bonds for the amount of the invested that could not be executed in a term of less than seven years, leaving from Santander unilaterally the decision of when they would be paid personlly to each client. Such bonds are considered a product of high bank risk that would need the authorization of 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 than 5,000 million euros. Following the close of this sale, scheduled for the first quarter of 2018, Blackstone will assume the management of the assets integrated in the new joint venture, of which Popular will control 49%. ENRIQUE SANJUÁN. SPAIN

47 FEATURES OF THE BANCO POPULAR SELLING. ENRIQUE SANJUÁN. SPAIN

48 ENRIQUE SANJUÁN. SPAIN

SRB Established 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

49 SRB Established 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 "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". ENRIQUE SANJUÁN. SPAIN

50 TOOLS & SCOPE ENRIQUE SANJUÁN. SPAIN

51 ON 7 June 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. ENRIQUE SANJUÁN. SPAIN

52 EXECUTION BY FROB ENRIQUE SANJUÁN. SPAIN

53 Execution and actions: a) Reduction of share capital to zero euros ( 0) by writing down the shares currently outstanding to establish a non-distributable voluntary reserve. b) Simultaneous execution of the capital increase to convert all the Additional Tier 1 capital instruments into share capital totalling one billion, three hundred and forty-six million, five hundred and 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 the conversion of the Additional Tier 1 capital instruments stipulated in the previous point, and to establish a non-distributable voluntary reserve. d) Simultaneous capital increase to convert all the Tier 2 capital instruments into newly issued shares totalling six hundred and eight-four million, twenty-four thousand euros ( 684,024,000), of 1 euro par value each. Amendment of the bylaws. e) Bank Sale: ENRIQUE SANJUÁN. SPAIN

54 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 be distributed in the following order and manner: To settle all reasonable expenses incurred by the SRB and the FROB to prepare the resolution scheme and share transfer, as per Article 20.6 of Regulation (EU) No 806/2014 and Article 25.4 of Law 11/2015. To the holders of Tier 2 capital instruments on the date the agreements set forth in the previous principle of law were executed, in accordance with Article 25.5 of Law 11/2015. ENRIQUE SANJUÁN. SPAIN

55 ENRIQUE SANJUÁN. SPAIN

SHOULD WE MAINTAIN WITHIN OUR LAW A DIFFERENT REGULATION ON FINANCIAL AND OTHER COMPANIES? CHALLENGES IN OUR LAW. SHOULD WE GIVE MORE TRANSPARENCY TO THESE PROCEDURES?

56 SHOULD WE MAINTAIN WITHIN OUR LAW A DIFFERENT REGULATION ON FINANCIAL AND OTHER COMPANIES? CHALLENGES IN OUR LAW. 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? ENRIQUE SANJUÁN. SPAIN

57 ENRIQUE SANJUÁN. SPAIN

REPORT PREPARED BY THE EXECUTIVE COMMITTEE OF BANCO SANTANDER, S.A

REPORT PREPARED BY THE EXECUTIVE COMMITTEE OF BANCO SANTANDER, S.A. ON THE ISSUE OF CONTINGENTLY CONVERTIBLE PREFERRED SECURITIES TO BE APPROVED BY THE EXECUTIVE COMMITTEE PURSUANT TO THE AUTHORISATION