Memorandum of understanding will reform Spain’s banking sector, says Fitch

The Memorandum of understanding (MOU) on bank recapitalisation for Spanish banks, which also introduces resolution legislation, represents a far-reaching reform of the Spanish banking sector, said today rating agency Fitch.

“While the MOU is clearly intended to be the final reform of the Spanish banking sector, Fitch is cautious about whether this will actually be the case, given the very tough economic and market conditions in Spain,” said Maria Jose Lockerbie, managing director in Fitch’s Financial Institutions group.

Spain was granted financial assistance of up to €100bn under the terms of the European Financial Stability Mechanism. A bank-by-bank stress test is being conducted on the assets for 14 banking groups accounting for 90% of the banking system and this will determine whether a bank will be restructured, recapitalised or resolved.

Key conditions of the MOU include burden sharing and segregation of impaired assets. Burden-sharing will be imposed on subordinated debt and preference shareholders for viable Spanish banks that require restructuring/recapitalisation.

“While this has been a feature of other bail outs in Europe, it has more commonly arisen through coupon deferral/omission than enforced write-down. Another difference in Spain is that a large proportion of these instruments have been distributed through banks’ branches, while in other countries they had mainly been taken up by institutional investors,” Fitch said.

According to the agency, this could lead to reputational and legal issues relating to mis-selling. With segregation of assets, banks requiring public support will need to segregate impaired assets, which will be mainly real estate-related, to an Asset Management Company. Transfers will take place at the real (long-term) value of the assets.

“While the MOU does not explicitly impose burden-sharing on senior debt holders of banks undergoing recapitalisation/restructuring, in explicitly emphasising the intention to protect customer deposits and minimise the burden on the taxpayer, it could be interpreted as implicitly suggesting that senior debt holders could face potential losses in the case of ultimately non-viable banks,” the firm said.

Additional conditions of the MOU will be higher capital requirements; re-assessment of loan-loss provisions; changes in corporate governance structure of savings banks; strengthening of the supervisory framework; consumer protection; and, governance arrangements of the financial safety net agencies.


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