Spain – Fondo de Reestructuración Ordenada Bancaria (FROB) Capital Injections

The financial safety net infrastructure that existed in Spain in 2009 included FROB as well as three sector-focused deposit guarantee funds and the Bank of Spain (IMF 2012b; Official State Bulletin 2009). Though these organizations worked in tandem, they were not a package, as the government created the deposit guarantee funds in 1977 under the administration of the Bank of Spain (Official State Bulletin 1977). In November 2011, the government merged the three deposit guarantee funds into the Fondo de Garantía de Depósitos (FGD) or Deposit Guarantee Fund in English (BdE 2017a). Law 9/2012 expanded the FROB’s powers and established Sareb, Spain’s government-owned asset management company (Official State Bulletin 2012). Sareb was responsible for managing assets transferred to it by Spanish institutions recapitalized by the FROB. Law 9/2012 also established the FROB as a resolution authority.

The FROB was created in June 2009 by Royal Decree-law 9/2009 to manage the restructuring of credit institutions and contribute to the strengthening of their resources (Official State Bulletin 2009). Royal Decree-law 2/2011 allowed FROB to help entities achieve capital targets of 8% or 10% of risk-weighted assets (Official State Bulletin 2011).

Law 9/2012 established the possibility of the resolution, not just the restructuring, of a credit institution that was not viable and established FROB’s role in such processes, as well as early action to prevent the failure of a financial institution. FROB could value institutions and restructure institutions that required public financial support to maintain viability while minimizing the use of public resources (Official State Bulletin 2012). According to a commenter close to the program, this law also included the possibility to impose losses to subordinated creditors in these processes.

After FROB III, Law 11/2015 established a more formal and comprehensive regime of systemic risk policy. It clarified the FROB’s resolution powers and transposed the BRRD into Spanish regulation, including bail-in power for both subordinated and senior debt. This allowed a troubled entity to remain in business while separating its unviable parts, the latter of which was already possible under Law 9/2012. It also gave the FROB early action and preventative powers to reduce the risk of insolvency and to facilitate the resolution of the entity or specific assets if needed. The 2015 law also provided tools that the FROB used to shift the financial burden of resolution to an entity’s shareholders and creditors rather than public resources (a “bail in”). The law allowed the preventative resolution authority (the Bank of Spain) to create resolution plans for less significant entities like those not under European Central Bank supervision, which it required to include a scenario in which no public support was available. This law also empowered the FROB to perform capital increase or reduction operations, amortize capital instruments, or perform internal recapitalization actions (Official State Bulletin 2015).

In 2012, the FROB gained authority to resolve unviable institutions and create an early action program to improve their health prior to their requiring government intervention. This occurred under Law 9/2012 in response to the MOU signed with the European Commission to receive European Stability Mechanism funds. It gave the FROB powers to value institutions, as well as restructure those that required public financial support to maintain viability, but it was mandated to minimize the amount of public resources used to maintain financial stability (Official State Bulletin 2012). It also established an asset management company for bank restructuring, Sareb (see Tam 2021).

Under the law, the FROB used four tools individually or jointly to facilitate resolution of a credit entity: the sale of the entity’s business, the transfer of assets and liabilities to a bridge bank, the transfer of assets and liabilities to an asset management company, or financial support to the purchasers to the business (including the bridge bank^FNA bridge bank for the purposes of this case study was a credit institution, including the entity itself in resolution in which the FROB participated (Official State Bulletin 2012). The bridge bank had to comply with regulations and supervision applicable to credit institutions. The total value of liabilities transmitted to the bridge bank was not to exceed the value of assets transmitted from the entity or from any other source, including the financial support it received. The FROB was able to exercise this clause more than once in favor of more than one bridge bank, as well as transfer assets and liabilities to third parties. The FROB managed the bridge bank with the objective of selling it or its assets and liabilities within five years when conditions were appropriate. This sale was to be done under competitive market conditions. The bridge bank ceased to exist after one year from FROB’s exit, or after all assets and liabilities were sold. This therefore occurred within six years of its founding, or the FROB liquidated it. or asset management company mentioned in the previous tools) (Official State Bulletin 2012).

The 2015 law transposing the European Commission’s bank recovery and resolution directive to Spain built upon the 2012 law formalizing the processes of resolution. The FROB was now able to work toward an entity’s survival while resolving the unviable parts of it. In accordance with the European Single Resolution Mechanism, the 2015 law also established the National Resolution Fund, which was responsible for financing the resolution processes of financial entities. The National Resolution Fund was administered by the FROB and was required to constitute at least 1% of guaranteed deposits of all entities (Official State Bulletin 2015). To fund it, the FROB collected annual ordinary contribution from entities and branches in Spain of EU entities proportional to their liabilities, relative to the total liabilities of all entities, and their specific risk profiles.

Law 11/2015 also provided for an early action mechanism that monitored banks in order to help internally recover institutions that were likely to fail capital requirements. The supervisors of this process were the Bank of Spain, European Central Bank, or National Securities Market Commission (Official State Bulletin 2015). This preventative action was intended to streamline the operations of an entity to reduce risk of insolvency and facilitate its resolution, if needed, while shifting the burden of financing from the government to the financial industry itself.

To ensure that bank failures wouldn’t cause systemic issues, the 2015 law also required contingent resolution plans for entities that were not under the FROB in a scenario where no public support was available. This law also empowered the FROB to perform capital increase or reduction operations, amortize capital instruments, or perform internal recapitalization (Official State Bulletin 2015).

The resolution of a credit institution was pursued when two criteria existed: the credit institution was unviable or soon would be unviable, and it was in the public interest and convenience to resolve the institution to maintain financial stability, protect creditors, and limit external damage. A credit institution was unviable in the following circumstances: when it breached solvency requirements, its required liabilities exceeded its assets, or it was unable to fulfill its enforceable obligations in a timely manner—and it could not remedy these circumstances by use of its own means, private markets, or restructuring aid (Official State Bulletin 2012).

Resolution proceeded when the entity did not present a restructuring plan or demonstrated its own unviability, presented an inadequate plan, or did not execute aspects of the plan within the timeframe established by the Bank of Spain and the FROB. The Bank of Spain began resolution processes by reporting its decision to the FROB, Ministry of Economy and Competitiveness, and where appropriate, the European Union and European Banking Authority. The Bank of Spain then designated FROB as administrator of the entity. Within two months (the Bank of Spain could extend this deadline to six months), the FROB prepared a resolution scheme for the entity to be approved by the Bank of Spain; the scheme had to include the reason for resolution, the resolution instruments to be implemented, the commitments adopted to minimize the use of public resources and distortion of competition, the financial support measures to be implemented by the deposit guarantee fund for credit institutions, the economic valuation of the entity and its balance sheet, the management actions of the capital and subordinated debt instruments to be carried out, and the maximum execution period (Official State Bulletin 2012). The Bank of Spain had authority to impose additional requirements on entities under resolution processes.

The criteria for the resolution of an entity under Law 11/2015 were similar to those in Law 9/2012 with the addition that an entity that was unviable might also be defined as an entity that needed extraordinary public financial assistance (Official State Bulletin 2015).

Post-FROB III Resolution

After FROB III, the FROB also resolved Caja Rural Mota del Cuervo, Sociedad Cooperativa de Crédito de Castilla-La Mancha, a small rural credit cooperative that held less than one ten thousandth of the assets in the Spanish banking system (about €82.55 million). This was done in 2014 by selling it to Globalcaja in an emergency procedure, without any public funds, to maintain confidence in the sector. In 2015, due to concerns about money laundering in an Andorran institution, BPA, the FROB considered intervening in its subsidiary, Banco Madrid, which had a balance sheet of €1.3 billion. The FROB concluded that a resolution through restructuring was inappropriate, and this resulted in the only exercise of the Deposit Guarantee Fund in Spain during the recent financial crisis, and most payments were executed without any problems. However, the court that was intended to advise voluntary insolvency procedures for Banco Madrid still has not handed down a ruling (Ponce Huerta 2019).

Royal Decree-law 9/2009 paints the Spanish banking sector in 2009 as resilient and relatively strong (Official State Bulletin 2009). However, it states that smaller struggling institutions could, en masse, constitute a systemic risk.

The Congress of Deputies (lower house of the legislature) in Spain approved Royal Decree-law 2/2011, allowing the recapitalization of Spanish entities by a vote of 177 to eight, with 157 abstentions from the Popular Party and Basque nationalist party (Europa Press 2011). Elena Salgado, the Spanish deputy prime minister and former minister of economy and finance, described the law as being extremely urgent and necessary to give the green light to the most recent package of financial reforms articulated in this decree and to minimize the impact of the global financial crisis on the Spanish financial system. She said it would help to complete the reorganization of the financial sector, clear doubts in the markets, and guarantee a sufficient flow of credit to encourage maximum recovery and job creation.

An eight-member Governing Commission appointed by the Ministry of Economy and Finance operated the FROB beginning in 2009 (Official State Bulletin 2009). The Bank of Spain proposed five of the eight members. The three deposit guarantee funds—for savings banks, banks, and credit cooperatives—were represented by one member each. The minister of economy and finance also appointed a member from the General Intervention Board of the State Administration, proposed by the general auditor, as an additional representative on the Governing Commission with a voice but not a vote. The chair of FROB was the deputy governor of the Bank of Spain at the time.

The Governing Commission was empowered to make its own rules and delegate power as it saw fit (Official State Bulletin 2009). It had the power to approve external financing operations, like bond issuance, to finance FROB’s activities. At least half the voting members of the Governing Commission had to be present to hold a session and adopt agreements, which had to be supported by a majority of members. The secretary of state for the economy appeared quarterly before the Congress of Deputies Finance and Economy Committee to report the activities of FROB and the situation of the Spanish banking sector. The Governing Commission subsequently had to approve this report. The president of the Governing Commission also reported to this congressional committee within 30 days after each injection by the fund. The Governing Commission was also obligated to keep the activities of the fund secret.

In 2011, the legislature changed the composition of the Governing Commission to have nine members, of which one each represented the Ministry of Finance and Budgets and the Ministry of Economy (Official State Bulletin 2011). Four members were proposed by the Bank of Spain, and three members were proposed by the deposit guarantee funds.

In 2012, the legislature changed the composition of the Governing Commission to include four members nominated by the Bank of Spain, of which one was the president of the Governing Commission; the secretary general of the Treasury, who was also the vice president; the undersecretary of economy and competitiveness; the president of the Accounting and Audit Institute; the director general of economic policy; and the general director of budget. A director general of the FROB was appointed by royal decree of the Council of Ministers, and he supervised and managed the FROB (Official State Bulletin 2012). According to a commenter close to the program, as the deposit guarantee funds had stepped out of FROB’s equity, they no longer had representatives on the Governing Commission as of this law.

In 2015, the legislature again changed the composition of the Governing Commission to have 11 members: the president of the FROB (chair); four members nominated by the Bank of Spain, one of whom was the deputy governor (vice-chair); three members nominated by the Ministry of Economy and Competitiveness; the vice president of the National Securities Market Commission (Comisión Nacional del Mercado de Valores, or CNMV); and two representatives from the Ministry of Finance and Public Administration (Official State Bulletin 2015). This law indicated that the chair of FROB was independent form the Bank of Spain; he or she was proposed by the government and confirmed by the legislature.

Figure 4 below shows the summary of member changes for the Governing Commission of FROB.

Source: Ponce Huerta 2019.

Of the FROB’s initial €9 billion, €3 billion was to be disbursed when its constitution was formalized, defined by the time the members of the Governing Commission were all appointed (Official State Bulletin 2009). The General State Budget allocated €6.75 billion to the initial financing of the FROB. The deposit guarantee funds contributed €2.25 billion, and FROB had authority to obtain additional financing by issuing fixed-income securities, taking loans, or participating in any other debt operations, provided that those borrowings did not exceed three times the permanent financing at any time. After January 1, 2010, with the authorization of the Ministry of Economy and Finance, the FROB could obtain additional funding of up to 10 times its permanent financing.

The law required the FROB to hold uncommitted funds in public debt or other highly liquid, low-risk assets (Official State Bulletin 2009). Any returns from these assets were added to the FROB’s permanent financing, which paid any fees incurred in the management of these assets.

The law empowered the General State Administration to guarantee the FROB’s debt, subject to the approval of the Ministry of Economy and Finance (Official State Bulletin 2009). Until December 31, 2009, the guarantee was limited to €27 billion; the legislature set the limit in subsequent years in the annual budget. If the FROB defaulted on an obligation, the state paid compensation to the owners of guaranteed securities within five days of the expiration of the obligation. The Ministry of Economy and Finance established the terms of guaranteed compensations, and the General Directorate of the Treasury and Financial Policy would make payments if the guarantee were exercised, though it never was.

In 2012, the Spanish government requested financial assistance from the European Union (EU) and International Monetary Fund (IMF). This aid was approved subject to stress tests conducted by external consultants in order to identify the capital needs of various institutions (EC 2012). The stress tests carried out by consultant Oliver Wyman concluded that 10 banks required €55.9 billion of additional capital (BdE 2017a). Two banks found private solutions. The European Stability Mechanism ultimately provided €39 billion to recapitalize the other eight banks; the FROB covered the remaining needs by enforcing losses on shareholders and subordinated debt holders and facilitating asset transfers to Sareb (IMF 2017).

In 2017, the Ministry of Economy capitalized €3 billion more of its loans to the FROB to strengthen its balance sheet. This capitalization was done to return FROB’s equity to positive numbers, but no new money was involved, just an effect of accounting. To keep FROB afloat, the Treasury converted some of its debt holdings in FROB to equity, allowing FROB to maintain positive equity and potentially attract creditors, though FROB has not funded itself through debt issuance since 2011 (Segovia 2017).

The government created FROB I primarily to recapitalize and merge savings banks and FROB II primarily to recapitalize commercial banks. Most of the savings banks that received FROB I injections were transformed into banks due to changes in regulation. All recipients of FROB II funds were previously savings banks prior to FROB I.

After the stress tests, Law 11/2015 permitted the FROB to be a resolution authority for a broader set of companies, including investment services companies and financial entities (other than insurance and reinsurance entities) established in Spain that were subsidiaries of credit institutions or investment services companies (Official State Bulletin 2015). It also included financial holding companies based in Spain or other European Union member states, provided they were supervised by a competent supervisor.^FNA competent supervisor was the Bank of Spain, European Central Bank, within the Single Supervisory Mechanism, responsible for the supervision of credit institutions, and the National Securities Market Commission as the authority responsible for the supervision of investment services companies (Official State Bulletin 2015). Spanish branches of European Union entities were also eligible. Investment services companies whose legally required minimum share capital was less than €730,000 or that conducted specific activities enumerated in the law were not eligible.

FROB I and II

The Bank of Spain expected struggling credit institutions to inform the central bank within one month and provide an action plan for strengthening their equity (Official State Bulletin 2009). The plan could involve a merger or acquisition with a solvent entity, which had to be actualized within three months. The Bank of Spain evaluated the organization and management of the credit institution to determine whether it was viable as a stand-alone entity going forward.

If the Bank of Spain determined that a credit institution that had not submitted a plan had financial weaknesses, it required such an institution to submit a plan within one month. The Bank of Spain needed to approve these plans and could modify or add necessary measures to ensure that the plan was sufficient to overcome any financial weaknesses. If a month passed after the submission of a plan without explicit approval, the plan was approved automatically.

The FROB intervened to restructure any credit institution that did not present a required plan, presented an infeasible plan, rejected Bank of Spain additions to a proposed plan, declared to the Bank of Spain that there was no viable solution, deviated greatly from the plan, or had a plan that its Deposit Guarantee Fund objected to. In these cases, the Bank of Spain replaced the management of the credit institution and appointed the FROB as the administrator of the institution. The FROB had one month to create a detailed report on the institution’s viability and to submit a restructuring plan to the Bank of Spain. The FROB also submitted an economic impact report of the restructuring to the Ministry of Economy and Finance. The ministry could oppose the restructuring within 10 days of submission. As long as a restructuring plan was prepared, the FROB could provide financial support to the credit institution on a temporary basis by way of measures such as favorable loans or asset acquisition, or facilitations of mergers and acquisitions. Investments made by the FROB were not subject to legal limitations applied to the deposit guarantee fund in credit institutions (Official State Bulletin 2009). In addition, the boards of entities requesting aid under FROB II had between five and 15 members, of which at least one-third were independent directors (Official State Bulletin 2011).

For FROB II, in March 2011, the Bank of Spain identified 13 institutions that did not meet their capital requirements and required them to present their recapitalization strategies (BdE 2017a). Four of those banks were able to raise funds through share sales or injections by their parent companies. The FROB agreed to provide €15.9 billion to recapitalize nine banks (Appendix E), but several of these banks were again able to raise private funds. Ultimately, the FROB purchased €5.7 billion of common shares to recapitalize four banking groups—Novacaixagalicia, Catalunya Caixa, Unnim, and Banco de Valencia. A fifth, Caja de Ahorros del Mediterráneo, requested FROB II support but received aid instead from the Deposit Guarantee Fund (Appendix F). The FROB’s equity stakes in the four banks ranged from 90% to 100% (FROB 2019). The four banks included three of the seven banking groups merged via FROB I (Ponce Huerta 2019). The Deposit Guarantee Fund compensated the FROB €953 million for its investment and losses in Unnim: €380 million for preferred share subscriptions in FROB I, €5 million for capitalization of accrued interest, and €568 for capital increase in FROB II.

FROB III

The law provided three possible actions for credit institutions: early intervention, restructuring, and resolution.

Institutions that did not, but could potentially, maintain viability and meet capital requirements through their own means were eligible for early action (Official State Bulletin 2012). This entailed submitting an action plan to the Bank of Spain, which, with FROB’s input, modified and approved it, as appropriate. This process helped capitalize entities without public support, to prevent them from becoming insolvent.

Institutions that required public support to maintain their viability, and whose resolution would likely cause detrimental effects to Spanish financial stability, were considered for restructuring. These institutions had to inform the FROB and the Bank of Spain of their status and, within 15 days, submit a plan of restructuring, with a planned execution date of no more than three months after its approval by the FROB (Official State Bulletin 2012). The FROB could modify the plan before it was sent to the Bank of Spain for approval, which had to approve it within one month of receiving it.

The Memorandum of Understanding between Spain and the European Commission signed in 2012 established a framework that categorized banks into different levels of eligibility for aid (EC 2012). Based on the results of a stress test conducted by an external consultant and the restructuring plans of banks, banks were grouped into four categories.

Group 0 will constitute those banks for which no capital shortfall is identified and no further action is required. Group 1 has been pre-defined as banks already owned by the Fund for Orderly Bank Restructuring (FROB) (BFA/Bankia, Catalunya Caixa, NCG Banco and Banco de Valencia). Group 2 will constitute banks with capital shortfalls identified by the Stress Test and unable to meet those capital shortfalls privately without having recourse to State aid. Finally, Group 3 will constitute banks with capital shortfall identified by the stress test with credible recapitalisation plans and able to meet those capital shortfalls privately without recourse to State aid (EC 2012).^FNSee Oliver Wyman 2012.

The Bank of Spain and the European Central Bank closely monitored the liquidity situation of banks that had capital shortfalls in the stress test (EC 2012). The Bank of Spain regularly reported this information to the European Commission, European Central Bank, and International Monetary Fund.

The stress test assessed 14 banking groups, which represented 90% of the assets of the Spanish banking system over a three-year period (BdE 2017a).

The stress test identified 10 banks that needed €55.9 billion of additional capital (BdE 2017a). Two banks found private solutions. The FROB invested €39 billion to recapitalize the other eight banks, using funds provided by the European Stability Mechanism. The banks raised their capital ratios through loss absorption by investors holding subordinated debt and other hybrid instruments, asset transfers to Sareb, burden sharing, and asset sales (IMF 2012a).

The stress test concluded that 90% of capital needs were in the four entities in Group 1, in which FROB already held a majority equity stake, and that the core of the Spanish banking system was relatively healthy (BdE 2017a).

FROB I

The FROB was allowed to make capital injections to certain institutions that did not satisfy set conditions (See “Key Design Decision No. 6”) but still needed capital with which to integrate themselves with each other. As a condition of the capital injection, these participating institutions had to improve their efficiency, administration, and management, as well as resize their productive capacity, preparing a merger or acquisition plan detailing these processes that were approved by the Bank of Spain. These FROB capital injections were performed through acquisitions of preferred convertible shares in participatory quotas or portions of share capital (Official State Bulletin 2009).

The first round was in March 2010, when the FROB issued €9.7 billion of convertible preference shares in the integration processes of Unnim, Catalunya Caixa, CEISS, Novacaixagalicia, Banco Financiero y de Ahorros, Banco Mare Nostrum, Banca Base, and Banca Cívica, and the restructuring of Cajasur. The restructuring of Cajasur consisted of purchasing €800 million of equity units and providing a €1.5 billion line of credit. This set of interventions was not sufficient to address the problems in the saving bank sector, likely due to an incomplete write-off of capital, the limited efficacy of convertible preference shares, and a general downturn in the economy (Ponce Huerta 2019). In 2010 and 2011, the restructuring of the banking sector, and especially the savings bank sector, resulted in the merging of 42 of 45 banks into 15 institutions, although three of the mergers occurred without FROB or Deposit Guarantee Fund aid (Caixa-Girona, Unicaja-Jaén, and Caja 3) (BdE 2017a).

FROB II

Royal Decree-law 2/2011 authorized FROB II, raised capital requirements, and allowed FROB to recapitalize banks using ordinary shares. This law allowed FROB to subscribe ordinary shares under distressed market conditions to help entities that could not capture capital through traditional markets (Official State Bulletin 2011). FROB II injected €5.7 billion in 2011 and 2012 to Catalunya Caixa, Novacaixagalicia, Unnim, and Banco de Valencia (Appendix E; IMF 2017; Ponce Huerta 2019).

FROB II required entities to hold core capital equal to 8% risk-weighted assets (Official State Bulletin 2011). The standard was 10% for those entities that had more than 20% of their capital from wholesale financing and had less 20% of their capital in the possession of third parties. This allowed the FROB to participate directly in recapitalized institutions’ boards of directors in proportion to its percentage of capital (BdE 2017a). Entities recapitalized under FROB II that were noncompliant by more than 20% of the core capital requirement had to present recapitalization and business plans that committed to reducing structural costs, improving corporate governance and limiting bonuses, and modifying credit activity.

The FROB’s acquisition of ordinary shares was conditional on the beneficiary’s preparation of a recapitalization plan that included a business plan and commitments to reduce structural costs, improve corporate governance, and have better credit activity. The FROB reported to the Ministry of Economy and Finance, detailing the financial impact of its acquisition of common stock. The FROB could become part of the boards of directors of recapitalized entities in proportion to its share percentage. It could also still convert convertible preferred shares, as allowed in Royal Decree-law 9/2009. FROB contributions were made through cash injections or the delivery of securities representing public debt (i.e., treasuries) or securities issued by FROB itself (Official State Bulletin 2011).

Conditions for recapitalization under FROB II included submitting a business plan and committing to reduce structural costs, improving corporate governance, and increasing financing to small and medium-sized companies. If a FROB II applicant had issued convertible preferred shares to FROB I, it could request an immediate conversion of those shares into ordinary shares or contributions to the share capital. Preferred shares subscribed before Royal Decree-law 2/2011 were to be governed by the law in effect when they were purchased. Independent directors were not allowed to remain in their positions for more than 12 continuous years. The board had to create an internal commission or two separate committees of appointments and remuneration. The former assessed the competencies and experiences of the board and its members and evaluated candidates to fill vacancies, while the latter ensured compliance with the remuneration policy established by the company for directors, executives, and other managers. When a company acquired an entity with the help of FROB or deposit guarantee funds, it did not need to make a public tender offer, as was normally required according to Spanish law (Official State Bulletin 2011).

FROB III

FROB III occurred after the passage of Law 9/2012, which established FROB’s powers as a resolution authority and allowed it to perform capital injections not only through ordinary shares but also through contingent convertible securities. About €41.3 billion was injected, of which €39 billion was used to recapitalize eight credit institutions for restructuring or resolution and €2.2 billion was used to purchase FROB’s stake and subordinated debt in Sareb, the asset management company for bank restructuring. FROB III was financed through European Stability Mechanism funding (IMF 2017). Sareb acquired troubled real estate assets, which reduced financial sector recapitalization requirements by €1.3 billion and restored confidence in financial institutions (Ponce Huerta 2019). Shareholders and subordinated creditors incurred losses of about €14 billion, 70% of whom were retail investors who had acquired preference shares in somewhat opaque transactions.^FNAccording to a commenter close to the program, most of the retail investors eventually recouped their investments through a specifically created deposit guarantee fund liquidity facility, arbitration procedures, and court rulings related to the sale of hybrid instruments.

The Memorandum of Understanding between the European Commission and Spain signed in 2012 formed a strategy to strengthen the Spanish banking sector. The MoU specified that a stress test conducted by independent consultants would determine capital shortfalls of individual banks and the system overall. This stress test categorized banks accordingly: Group 0 banks had no capital shortfall and required no intervention, Group 1 banks were already owned by the FROB (these were BFA/Bankia, Catalunya Caixa, NCG Banco, and Banco de Valencia), Group 2 banks had capital shortfalls that required public support, and Group 3 banks had capital shortfalls that could be met privately (EC 2012).

Spanish authorities prepared restructuring plans for Group 1 banks in conjunction with the European Commission. These included BFA/Bankia, NCG Bank, Catalunya Bank, and Banco de Valencia, which were recapitalized on December 26, 2012, for a total of €36.9 billion. They also presented plans for Group 2 by October 2012 to the European Commission. Both involved moving impaired assets to an external asset management company (Sareb). Group 2 banks included Banco Mare Nostrum, Caja 3, España-Duero, and Liberbank, and they were injected with €1.865 billion on March 12, 2013. Caja 3 (which received €407 million), España-Duero (which received €604 million), and Liberbank (which received €124 million) were recapitalized using contingent convertible securities, while Banco Mare Nostrum was recapitalized with €730 million worth of shares. Banco CEISS was also a Group 2 bank but was resolved after an injection of €407 million of CoCos. Group 3 banks that were planning a significant equity raise (of more than 2% risk-weighted assets) could issue contingent convertible securities to FROB to meet their capital needs by December 2012, though this was not used; Group 3 banks performed either private capital increases or asset reductions. They were redeemable until June 2013, if the bank succeeded in finding the necessary capital from private sources; if not, the FROB would convert them into equity and recapitalize the struggling bank. Group 3 banks planning a smaller equity raise were able to do so until June 2013. If they failed, they were recapitalized. Group 3 banks that benefited from FROB support were required to transfer bad assets to Sareb (EC 2012). Banco Popular and Ibercaja were Group 3 banks (BdE 2017a). According to a commenter close to the program, the choice between ordinary shares and CoCos depended on the viability of the entity after a capital injection. Banco CEISS was under resolution and would normally have received an injection of ordinary shares; however, as it had already agreed to integrate in Unicaja, the FROB subscribed CoCos instead of shares.

Restructuring was done through financial support, the transfer of assets or liabilities to an asset management company (Sareb), or a combination of both strategies. Convertible share instruments were issued with conditions that included repurchase of the shares within five years and the exercise of conversion upon FROB’s discretion of the entity’s solvency. This acquisition was priced relative to the economic value of the entity minus a discount in accordance with EU State Aid regulation. FROB purchased them with bonds issued by the European Stability Mechanism. The FROB’s voting rights and board participation were determined by the proportion of shares it acquired in an entity. The FROB also imposed losses on private shareholders of hybrid capital and subordinated debt to support the recapitalization plans of credit institutions, including offers to exchange it for capital instruments, offers to repurchase issued securities, reduction of the nominal value of debt, and early amortization of debt at a value other than the nominal value. FROB III also created and asset management company to which to transfer bad assets (Sareb) (Official State Bulletin 2012).^FNSee Tam 2021.

The FROB could sell shares, as well as assets and liabilities, to third parties through a transparent, speedy, and impartial process that avoided conflicts of interest while maximizing sale price and minimizing the use of public resources (Official State Bulletin 2012). However, commenters from the program said that while FROB could have sold its CoCos, it held them until the issuers repurchased them.

After FROB III

Law 11/2015 added to FROB’s recapitalization arsenal the ability to orchestrate internal recapitalization of an insolvent entity (Official State Bulletin 2015). In response to the European Single Resolution Mechanism (SRM) of 2014, the law also created the Single Resolution Board and National Resolution Fund, which helped synchronize Spanish resolution policies with those of Europe as a whole. This allowed FROB to require that losses be borne internally through the write-down or conversion of capital instruments, or via bail-in by other eligible liability (BdE 2015). To make sure the first was sufficient to absorb losses, resolution authorities set a minimum requirement for own funds and eligible liabilities for each institution.

Research did not reveal any limits on individual participation.

When the FROB acquired participatory quotas of a bank, it had the right to representation at shareholders’ meetings equivalent to the percentage of equity they owned (Official State Bulletin 2009). This right was maintained throughout the FROB’s possession of these securities and was not transferred to any subsequent acquirers. Similarly, the FROB’s voting rights in the assembly of a credit union to which it had contributed were proportional to its contributions with respect to the total capital stock of the credit union.

The cancellation of voting rights for existing shareholders happened at the time of the adoption of the capital increase or quota issuance agreement (Official State Bulletin 2009). The status of different parties and how they bore losses was established in Law 9/2012, Chapter I, Article 4. They were as follows:

1. The shareholders or partners of the entities were the first to bear losses.
2. The providers of subordinated debt bore losses arising from restructuring or resolution after shareholders, according to the order of priority established in bankruptcy legislation, though the exceptions established in this law took precedence.
3. Creditors of the same rank were treated the same unless this act indicated an exception.
4. A creditor did not bear a loss greater than the loss s/he would have borne if the entity were liquidated in a bankruptcy proceeding.
5. If an entity was resolved, its administrators were replaced.
6. The administrators of the credit institutions were liable for damages caused, in proportion to their participation and the severity of the damages.

FROB was not included as a shareholder in allocations of losses or protections for shareholders or partners.

If a credit institution was resolved, FROB was permitted to transfer shares or capital instruments to a third party without obtaining the consent of the shareholders (Official State Bulletin 2012). The sale price deducted the administrative and other expenses incurred by FROB including the costs of financial support instruments that were previously reimbursed to FROB.

Law 11/2015 later modified this loss structure as follows (Article 4).

1. The shareholders or partners, as appropriate, of the entities were the first to bear losses.
2. The creditors of the entities bore, where appropriate, losses arising from the resolution after the shareholders or partners and in accordance with the order of priority established in the bankruptcy legislation, with the exceptions established in this law.
3. Creditors of the same rank were treated in an equivalent manner unless otherwise provided in this act.
4. No shareholder or creditor bore losses greater than what they would have borne if the entity were liquidated in the context of a bankruptcy proceeding.
5. The directors and general or similar directors of the entity were replaced, unless, on an exceptional basis, its maintenance was considered strictly necessary to achieve the objectives of the resolution.
6. The directors and general or similar directors of the entity had to provide all necessary assistance to achieve the objectives of the resolution.
7. In accordance with the provisions of bankruptcy, commercial, and criminal legislation, the administrators of the entities and any other natural or legal person were liable for the damages caused in proportion to their participation and the seriousness of those.
8. Guaranteed deposits were fully protected.
9. The resolution measures adopted were accompanied by the corresponding guarantees and safeguards provided for in this law and its development regulations.

Since Law 11/2015 also formalized the write-down of capital and bail-in mechanisms, it delineates the treatment of shareholders in the case of internal recapitalization. The FROB could amortize existing or transfer to creditors capital instruments and eligible liabilities of the entity at a reduced nominal value. The sequence to which capital or liabilities were amortized was as follows (Official State Bulletin 2015):

1. The elements of Level 1 ordinary capital proportional to the losses and as far as possible,
2. The principal amount of the Level 1 additional capital instruments to the extent necessary and to the extent possible,
3. The principal amount of Level 2 capital instruments to the extent necessary and to the extent possible,
4. The principal amount of the subordinated debt that was not additional capital of Level 1 or 2, then
5. The principal amount or the outstanding amount of the admissible liabilities, in accordance with the priority of the credit rights provided in the applicable bankruptcy regulations.

Capital or eligible liabilities of the same rank had losses equitably distributed amongst them. The FROB was also was able to reorganize the activity of the entity. Only after these methods had been exercised could the National Resolution Fund contribute to the entity to cover any loss that remains or acquire shares or other capital instruments in order to recapitalize it (Official State Bulletin 2015).

Institutions that were recapitalized had to go through a hybrid instrument loss-sharing exercise for shareholders and preferred shareholders. Most of these arrangements were compulsory and generally required a recapitalized institution to repurchase preferred shares and subordinated debt at a haircut of 26%, on average. Shareholders received shares or mandatorily convertible bonds, while subordinated debt holders received senior debt instruments with a haircut. To limit the burden on retail investors and give them liquidity, the Deposit Guarantee Fund was empowered to acquire the shares those investors received and did so to the tune of €1.8 billion. A committee was created to determine the compensation that banks owned by FROB could dispense in response to disputes from customers suing for damages (BdE 2017a).

Under FROB I, in the cases where the Bank of Spain allowed the FROB to replace the management of the credit institution, FROB was responsible for declaring bankruptcy (Official State Bulletin 2009).

The FROB divested from these participations by either repurchase of shares by the issuing entity or transference of shares to third parties. This divestiture was designed in a way to minimize competition and had be completed within five years of the date of compliance of the integration plan). The recapitalized entity had to issue quarterly reports on the merger or acquisition to the Bank of Spain; if it was unable fulfill said plan, the FROB modified its terms and extended its repurchase terms by up to two years. Credit institutions that fulfilled the requirements of eligible institutions above but failed to perform their merger plans were still eligible for FROB aid (Official State Bulletin 2009).

For ordinary shares associated with FROB II, divestment occurred within a maximum term of five years. The FROB was allowed to resell securities to the issuing entity or third parties proposed by the beneficiary entity within one year of the acquisition. The maximum term was two years, in which case it could require the beneficiary to adhere to additional terms. The conditions of resale had to ensure efficient use of public funds and be carried out under market conditions, while complying with Spanish and EU regulations, especially that concerning State Aid. However, the divestment of contributions to capital stock was not subject to any legal or statutory limitations (Official State Bulletin 2011).

These participating institutions had to commit to repurchasing the preferred shares held by the FROB as soon as they were able. If five years passed without a repurchase, the FROB could request conversion into common shares, participatory fees, or dividends within six months after the five-year mark. The FROB could also convert shares earlier if repurchase seemed unlikely, and the credit institution had to follow all other conditions in the merger or acquisition plan.

As of 2021, FROB still owns 16.12% of CaixaBank shares (previously approximately 61% of Bankia shares) (Ponce Huerta 2019).