Commission temporarily approves rescue aid for Spanish cajas – Mayer Brown

The European Commission has granted temporary approval, under EU state aid rules, to the recapitalisations of NCG Banco, Catalunya Banc and Unnim Banc by the Fondo de Reestructuración Ordenada Bancaria (“FROB”). All three banks were created this year as part of the restructuring of the Spanish savings banks system. Final approval of the recapitalisations is conditional upon the submission of a restructuring plan that ensures that the banks will be viable in the long-term, that shareholders adequately share the burden of restructuring and that distortions of competitions are limited.

“Strengthening the capital of these banks is paramount to their ability to continue lending to the real economy and to implement the restructuring that they will need to undergo as a result of the significant subsidies received from the FROB.” Commission Vice President in charge of competition policy Joaquín Almunia said.

The Commission acknowledges that the measures are necessary to increase the banks’ solvency ratios up to the 10% capital principal ratio established in the solvency regime introduced in Spain in February 2011 and maintain confidence in the Spanish financial markets.

NCG Banco brought together the banking business of the savings bank Novacaixagalicia that was its sole owner before the FROB granted a €2.465 million recapitalisation, which is the object of the current investigation. Novacaixagalicia already received €1.162 million state aid from the FROB in 2010 in the form of convertible preference shares. As a result of the second recapitalisation, the FROB will take control of NCG Banco.

Catalunya Banc was previously known as CatalunyaCaixa. As a result of the 
€1.718 million recapitalisation, which adds to €1.250 million granted in 2010, in the form of convertible preference shares, FROB also takes control of Catalunya Banc.

Unnim Banc also arose from the banking business of the savings bank Unnim that was its sole owner before the FROB granted the €568 million recapitalisation under investigation. This adds to €380 million state in the form of convertible preference shares, which – in the context of the second recapitalisation- will be converted into ordinary shares. As a result of the second recapitalisation and the conversion of the convertible preference shares, the FROB will take control. The Commission granted temporary clearance to the new recapitalisations subject to the submission of restructuring plans within six months. The final approval of the measures is conditional on these plans ensuring (i) the banks’ return to long term viability, (ii) an adequate participation in the restructuring costs by shareholders and subordinated debt holders and (iii) proper measures to limit the distortion of competition created by the state support.

Background

In March 2011, Spain approved a law to strengthen the financial sector. The law introduces a new capital requirement, known as capital principal. In particular, a 10% capital principal level over risk weighted assets is required for credit institutions that have less ability to access capital markets and meet the following criteria: a) wholesale funding for more than 20% of net loans and b) less than 20% of equity held by private investors.

For credit institutions that are unable to generate or attract from private sources the capital required to reach the new solvency requirements in Spain, the FROB will provide the capital needed.

The FROB was established in 2009 as a public instrument to reinforce and foster the consolidation of the Spanish banking sector.

Background on Temporary State aid framework for banks

In December 2010, the Commission prolonged until the end of 2011, albeit with stricter conditions, the crisis-related state aid rules for banks and for other companies with problems accessing finance (see IP/10/1636).

The rules are outlined in a Communication on the recapitalisation of financial institutions (see IP/08/1901) enabling Member States to inject emergency support into banks in order to safeguard financial stability.

Under the Communication the Commission temporarily authorises emergency support and requests a restructuring plan that ensures the bank’s viability and compensation for the distortion of competition.

The July 2009 Communication on restructuring aid to banks (see IP/09/1180) outlines the terms under which Member States can give aid to banks for periods exceeding six months provided that:

• aided banks implement a restructuring plan that ensures that they are viable in the long term without further support from taxpayers;

• aided banks and their owners must carry a fair burden of the restructuring costs and

• measures must be taken to limit distortions of competition in the Single Market.

For an overview of state aid decisions related to the crisis as well as pending investigations see Memo/11/616.

The non-confidential version of the present decision will be made available under case numbers SA.33095, SA.33096 and SA.33103 in the State Aid Register on the DG Competition website once any confidentiality issues have been resolved. New publications of state aid decisions on the internet and in the Official Journal are listed in the State Aid Weekly e-News.

Gillian Sproul is an EU & Competition Partner with Mayer Brown in London. She can be reached via gsproul@mayerbrown.com