The Spanish government has bowed to demands from the banking sector and has given the country's savings banks more time to meet the new capital adequacy requirements it is imposing.
The government set a deadline of the end of September for the country's lenders to increase their core capital to 8 percent from 6 percent at present. In the case of unlisted savings banks with wholesale funding needs of over 20 percent of their loan portfolios and with less than 20 percent of their capitals in the hands of third parties the new minimum has been set at 10 percent, conditions that apply to the majority of the savings banks.
Economy Minister Elena Salgado said Friday that savings banks, or cajas planning to transform themselves into commercial banks as a prior step to seeking a stock-market will be given until the first quarter of next year to do so.
But she insisted they would have to take decisions that are "practically irreversible" beforehand. Among these, she listed the approval of a calendar for issuing shares, or the provision of a mandate to coordinating banks for initial public share offers. The new regulations were included in a royal decree approved Friday by the Cabinet.
Salgado said the Bank of Spain under exceptional circumstances will allow banks that in "essence" are complying with the recapitalization program but have still to complete red tape accompanying it another three months to do so.
Banks failing to raise the necessary funds from the private sector can tap the state's Orderly Bank Restructuring Fund (FROB). In such cases, they will be given three months to transfer their banking business to a commercial bank and another month to present their recapitalization program. They will also be obliged to present plans detailing structural cost-cutting, means to enhance corporate governance as well as a commitment to increasing loans to small- and medium-sized companies.
If the results of stress tests to be carried out on European banks, which are due to be released in the summer, show any lenders to be still short of capital, they will be required to boost their solvency ratios even further.
The Bank of Spain on March 10 will make public the current capital adequacy ratio of the banks based on their balance sheets at the end of 2010. Those failing to meet the new requirements will be required to present a detailed calendar on how they plan to obtain the additional funding they need.
Cajas failing to meet the new ratio will be obliged to convert themselves into commercial banks to allow the FROB to inject capital into them in what amounts to a partial nationalization. The Bank of Spain is also being authorized to set salary caps for directors of banks that have failed to meet the new requirements. Salgado said that in the future if banks' capital ratios fall by 20 percent below the stipulated level, restrictions will be imposed on dividend payments and share buybacks.
Salgado said the funds given to the FROB, of which 12 billion euros have already been used, will be more than sufficient to meet expected demand, which the government has calculated at some 20 billion euros.
She said banks receiving funding from the FROB will be required to return it within five years or convert debt into shares. They will subsequently be allowed to buy back their shares under market conditions.
The minister said the definition used for basic capital will be the same as set down in the Basel III global regulatory standards. Funds received from the FROB will be included in the calculation of capital adequacy ratios as will convertible bonds exchangeable for shares before 2014.
Salagdo said the new rules are aimed at "strengthening the solvency of the banks and boosting "confidence" in the Spanish financial system as a whole.
One of the main reasons why Spain's savings banks have been the focus of concern by investors is their exposure to the ailing real estate sector and rising loan defaults. According to figures released Friday by the Bank of Spain, the non-performing loan ratio of the financial sector rose from 5.68 percent in November to 5.81 percent in December of last year, the highest level since November 1995. Doubtful credits amounted to 107.173 billion euros, an increase of 14 billion over a year earlier.
The central bank also said savings banks increased their total provisions for potential bad loans by 34.7 percent in December to 37.26 billion euros.