Spain: Caja de Ahorros Castilla–La Mancha Capital Injection, 2009

On April 27, 2009, the managing board of the FGD agreed to provide a capital injection of EUR 1.3 billion in preference shares to shore up the solvency ratio of CCM, after the authorities concluded that CCM could not continue to operate on its own (CCM 2009a; EC 2010). The objective of the measure was to rescue CCM by increasing its capital buffer to fulfill the legal requirement and minimize costs for the FGD (EC 2010). The capital injections followed an ELA to enable continuity of its operations and fulfillment of its obligations and commitments (Fernández Ordóñez 2009). For more information on the ELA, refer to a separate case study by Arnold and Swaminathan (Forthcoming).

The government created the FGD to protect savings bank depositors. One of its core objectives was to maintain financial stability. The EC noted that one of the FGD’s key goals in recapitalizing CCM was to preserve the role of Spanish savings banks in their social mission (EC 2010).

The BoS provided an ELA line of up to EUR 900 million in February 2009 and a second ELA line of up to EUR 9 billion on March 31, 2009, of which the Spanish government guaranteed up to EUR 3 billion (EC 2010; El País 2009). This was done under the newly enacted Royal Decree-Law 4/2009, which enabled the government to guarantee up to EUR 9 billion of ELA provided by BoS (Carlos and Zapatero 2009). After the FGD’s capital injection, as a part of restructuring CCM, the FGD provided a five-year guarantee (with the possibility of a two-year extension) of up to EUR 2.5 billion on a EUR 7.7 billion portfolio of CCM's impaired assets, consisting mainly of loans to the real estate development sector, acquired by Banco Liberta (EC 2010). Banco Liberta was responsible for the first EUR 1.2 billion in losses on the impaired assets, after which the guarantee would cover up to EUR 2.5 billion in additional losses (IMF 2012). The FGD advanced EUR 2.5 billion to Banco Liberta in installments (IMF 2012); Banco Liberta was to repay that amount at the end of five years, less any losses ultimately realized on the impaired assets. The FGD also provided a nine-month loan of EUR 350 million for those assets not being transferred to Banco Liberta (EC 2010). See Key Design Decision No. 11, Restructuring, for more information.

The FGD was created by Royal Decree Law (RDL) 2860/1980 of December 4, 1980. RDL 2606/1996 gives the FGD a separate legal status. The FGD guarantees depositors of all savings banks (cajas); other guarantee funds cover commercial banks and cooperative banks (EC 2010; MEF 1996). Membership is mandatory for savings banks. RDL 2606/1996 also lists maintaining financial stability as one of the objectives for FGD (EC 2010; MEF 1996).

The Spanish authorities argued that the capital injection did not constitute State Aid and that they did not have to comply with EC’s State Aid rule. Specifically, they noted that (a) the FGD was a private mutual fund funded by the private sector, (b) FGD’s decisions were not attributable to the Spanish state, (c) FGD’s actions did not confer particular advantage to any one of the cajas, and (d) the FGD was allowed to provide financial support to avoid reimbursement by member banks to their depositors (EC 2010). However, the EC disagreed. The EC determined that state resources were used for financing as the contributions that savings banks made to the FGD were mandatory and partly determined by law; the capital injection was still imputable to the Spanish state, since the FGD had to rely on state directives before making its decisions; and it was selective in nature, giving CCM advantages to distort competition (EC 2010). However, the EC determined that the measures taken by Spain were ultimately compatible with the internal market.

FGD is governed and managed by a board consisting of eight members appointed by the minister of the economy. Four of the eight represent BoS, and the other four represent member institutions (MEF 1996).

The FGD guarantees the amounts deposited in credit institutions, and it can also perform the preemptive actions necessary to avoid the guarantee on deposits being triggered. Such preemptive actions are allowed only when guarantees are likely to be triggered. The FGD must factor in the financial cost of any preemptive measure relative to the cost of reimbursing depositors before any such measure is agreed to by the board. Any decision to recapitalize needs to be adopted by a qualified majority (two-thirds of the board members). The board of FGD unanimously approved a capital injection to CCM on April 27, 2009 (EC 2010).

The Spanish authorities committed to submit yearly reports to the EC on the liquidation of assets transferred to the FGD and on the social support activities of the CCM Foundation from June 2010 as part of the restructuring decision (EC 2010).

CCM announced the EUR 1.3 billion capital injection from the FGD on April 29, 2009. The savings bank noted that the FGD injection would push CCM’s solvency ratio to 11%, above the regulatory minimum (Reuters 2009).

The capital injection was described in CCM's 2009 annual report as well as in the EC State Aid document (CCM 2009b; EC 2010). CCM also released a press release to inform the public of the capital injection (CCM 2009a). The EC State Aid document stated that the Spanish authorities committed to furnishing yearly reports on the social support activities of the CCM Foundation, on the liquidation of assets transferred to the FGD, and on the accomplishment of objectives laid out in the restructuring plan (EC 2010).

On November 3, 2009, the Bank of Spain and the National Securities Market Commission (Comisión Nacional del Mercado de Valores, CNMV) announced in press releases that the BoS had selected CajAstur as the buyer of CCM’s banking assets (BoS 2009b; CNMV 2009). The BoS announcement noted that the FGD role ensured that no taxpayer funds were involved.

In its June 2010 State Aid report, the EC pointed out that CCM called two previously issued preference shares after the capital injection. CCM had repurchased EUR 120 million in preference shares issued in 2001 on August 31, 2009, and EUR 85 million in preference shares issued in 2005 between July 15 and August 31, 2009. The EC emphasized that despite the absence of distributable profits, both calls were offered at par value. Additionally, CCM made discretionary coupon payments on hybrid capital in 2009, although it was incurring losses in 2008. The EC noted that this was not consistent with its policies on hybrid instruments and its principles on burden-sharing, since the creditors were not made to bear any of the losses (EC 2010). Santos (2017) also points out that CCM had no legal obligation to do this and that the BoS had rights to bail in the debt before any recapitalization of the entity.

The EUR 1.3 billion capital injection took the form of preference shares without voting rights (CCM 2010; EC 2010). The preference shares were perpetual, but CCM could redeem them from the fifth year after the date of issuance with prior authorization from the BoS (CCM 2010). These shares were treated as Tier 1 capital by the BoS (EC 2010).

The preference shares paid no interest during the first five years. After that, the interest rate increased to 3% until the 10th year of issuance. After the 10th year, the interest rate was the average rate of preference shares issued in the Spanish market by companies with a credit rating identical to CCM’s within the three-month period before the end of the 10th year. If this rate could not be determined, then the rate would be equal to that of the state’s 10-year bond rate as of the 10th year plus 300 basis points (EC 2010). The payment of the interest was limited to the existence of sufficient distributable profits (CCM 2010). The EC noted that the objective of the very low level of remuneration CCM paid on the preference shares was to help the bank increase its capital buffer to meet legal requirements. The EC noted that the low interest rates and long term on the preference shares did not provide a sufficient incentive for the bank to repay the government for the capital injection. However, it also noted that “it is possible to accept that a distressed bank pays a lower remuneration than is normally necessary, provided that this is required to ensure financial stability and is accompanied by the presentation of a thorough and far-reaching plan” (EC 2010). The EC also noted that CCM later partly reimbursed the FGD for the capital injection through the transfer of its nonbanking assets (EC 2010).

The FGD elected to inject preference shares worth EUR 1.3 billion into CCM in April 2009 (EC 2010). The issue of these shares took place on May 4, 2009 and was authorized by the BoS. The term of this authorization depended on the restructuring plan and the fulfillment of objectives highlighted in that plan, pursuant to the approval of the BoS before December 31, 2009 (CCM 2009b). RDL 2606/1996 empowers the FGD to act in full capacity in the management of the savings banks (cajas) (EC 2010).

The FGD’s financing was based on the periodic contributions of member credit institutions to the FGD, which was legally determined and based on potential needs of the FGD to fulfill its statutory goals. Until 1994, the BoS also contributed to the FGD (EC 2010).

By June 2010, the parties decided that the EUR 1.3 billion capital injection would be partially reimbursed by way of a transfer of nonbanking assets of CCM to the FGD and part of CCM’s stake in Banco Liberta was pledged to FGD as collateral (EC 2010; IMF 2012). Columbia Business School’s Tanos Santos notes in a presentation that this intervention wiped out 90% of the funds at FGD (Santos 2012). The total cost to the FGD (including the capital injection and the asset protection scheme for CCM) amounted to EUR 4.2 billion, of which it recovered just EUR 174 million (Baudino, Herrera, and Restoy 2023).

In 2008 and the first quarter of 2009, the BoS monitored CCM on site and concluded that the optimal solution to solve CCM’s underlying problems was to consolidate it with another sound credit institution. Because CCM was unable to raise capital in the wholesale markets after Fitch lowered its bond rating to below investment grade in February 2009, the BoS elected to grant an ELA line. On March 31, 2009, after this temporary ELA was reimbursed, the BoS provided a new ELA line of up to EUR 9 billion. The state guaranteed up to EUR 3 billion of this ELA. On March 28, 2009, the BoS had placed CCM under administration and concluded that restructuring was necessary (EC 2010).

On April 27, 2009, the FGD chose to inject EUR 1.3 billion in preference shares to raise CCM’s solvency ratio to 11%. No specific law had to be passed, since RDL 2606/1996 had empowered the FGD to administer capital injections (EC 2010). Issued on May 4, 2009, these shares were fully subscribed to by the FGD (CCM 2009b).

The capital injection preceded the creation of a restructuring plan intended to integrate CCM’s banking activities with another solvent institution. The plan focused on seeking out the best bidder through a competitive auction process, with a special emphasis on the buyer being a caja (owing to better likelihood of success and because of their legal form) (EC 2010). The restructuring plan was finalized in June 2010, after the CCM general assembly approved the acquisition of the banking business of CCM by Banco Liberta, a subsidiary of CajAstur (IMF 2012).

Under the restructuring plan, Spanish authorities and the Spanish government–appointed directors of CCM restructured the bank in the form of a structured acquisition by another caja of CCM’s banking activities (the “good bank”) and by the FGD’s assumption of CCM’s nonbanking activities (the “bad bank”).

Good Bank

The Acquisition Measure. CajAstur, through its banking subsidiary Banco Liberta, would acquire a net EUR 23.2 billion of assets from CCM. To reach its required 8% Tier 1 capital ratio, CajAstur would inject EUR 410 million into Banco Liberta, while CCM would transfer EUR 442 billion of assets and liabilities to Banco Liberta. The parties would fully reimburse the outstanding EUR 1.2 billion of ELA to the BoS (EC 2010).

Asset Guarantee Measure. As part of the restructuring, the FGD provided a five-year guarantee (which could be rolled over for an additional two years) on a EUR 7.7 billion portfolio of impaired assets (loans and credit facilities) acquired by Banco Liberta, for losses of up to EUR 2.5 billion in excess of the first EUR 1.2 billion in losses (to be borne by Banco Liberta) (EC 2010).

Liquidity-in-Resolution Measure. The FGD also provided liquidity to support CCM’s restructuring. This EUR 350 million loan was meant to help settle some CCM subordinated liabilities that could not contractually be transferred to its acquirer (CajAstur through its banking subsidiary Banco Liberta). The loan allowed EUR 442 million of CCM banking assets to be transferred to Banco Liberta so the latter could reach its 8% Tier I capital ratio requirement. The duration of the loan was nine months. The FDG charged the fixed portion of a nine-month mid-swap rate plus 20 basis points, which the EC said did not appear to be risk-appropriate pricing but deemed that such pricing was driven by the need to “satisfy legal constraints” regarding the subordinate liabilities’ ineligibility for transfer to Banco Liberta (EC 2010).

Bad Bank

The FGD assumed CCM’s nonbanking assets and liabilities (those that were neither its core banking activities nor its charity work), which it set off against its EUR 1.3 billion capital injection and EUR 350 million liquidity provision (both of which came from the FGD). The FGD would sell the assets over seven years, subject to a loss-sharing agreement with CCM, whereby CCM would be required under adverse loss scenarios to transfer a share of its equity in Banco Liberta to the FGD (EC 2010).

Continuity of CCM’s Charitable Work

The remaining CCM organization surrendered its banking license and reorganized into a charitable foundation, the CCM Foundation, which would continue CCM’s legacy charity work in Castilla–La Mancha. The CCM Foundation would retain a 25% stake in Banco Liberta (60% of which guaranteed FGD losses on the bad bank—see Bad Bank measure), the dividends from which (subject to an annual cap of EUR 11 million) would support the CCM Foundation’s regional charity work (EC 2010).

Before the capital injection took place, the BoS put CCM under administration, dismissed the entire board of directors and appointed three interim directors from the BoS on March 28, 2009 (Barrón 2009; EC 2010). This replacement decision was taken as a part of the intervention to restructure and recapitalize CCM (Barrón 2009). In February 2016, the National Court of Spain sentenced ex-president of CCM Juan Pedro Hernández Moltó and ex-general director Ildefonso Ortega to two years in prison for falsifying figures in the book of accounts (Barrón 2016).

The capital injection did not involve any restrictions. However, the FGD committed to not lend any additional financial support to any of the entities involved in the restructuring of CCM (EC 2010).

The capital injection into CCM did not entail any regulatory relief.

The restructuring plan, which was approved on June 30, 2010, 14 months after the capital injection, was to merge CCM with a solvent institution (IMF 2012). The sale process (which commenced in March 2009) ended in October 2009 after an auction determined Spanish savings bank CajAstur’s bid to be the best one (EC 2010; IMF 2012; Sanz de Miguel 2010). One of CajAstur’s subsidiaries, Banco Liberta, acquired CCM’s banking business after it entered restructuring. The legacy CCM entity was transformed into a charitable organization, CCM Foundation. It received 25% of shares in Banco Liberta, which was renamed Banco CCM (IMF 2012). The restructuring provided for the CCM Foundation to use any dividends from the Banco Liberta shares to finance activities consistent with the savings bank’s traditional social mission, with an annual cap of EUR 11 million to fund existing commitments.

After the takeover, CCM’s remaining nonbanking assets were transferred to the FGD to partially repay the EUR 1.3 billion capital injection and EUR 350 million loan (EC 2010). These assets consisted mainly of holdings in real estate, unlisted companies, and venture capital funds (CCM 2010). The FGD planned to sell these assets over a seven-year period, and losses incurred after the completion of the sale process were to be shared between the FGD and CCM. This loss-sharing mechanism may result in CCM being obliged to transfer to the FGD up to 60% of its 25% stake in Banco Liberta, in other words, a 15% stake. A company within the CajAstur group was appointed to manage the sale process (EC 2010).

A recent analysis concludes that the FGD ultimately recovered just EUR 174 million on the EUR 4.2 billion that it committed in total to CCM for the recapitalization, asset guarantee, and liquidity contribution (Baudino, Herrera, and Restoy 2023).