Draft decree to include salary caps for executives at failed banks

A draft decree drawn up by the government on bank restructuring and liquidation addresses the thorny issue of remuneration for managers of banks that require intervention.

The proposed legislation, to which EL PAÍS has had access, cuts the maximum annual fixed salary for managers with executive functions from 600,000 euros to 500,000 euros in banks over which the Bank of Spain’s Orderly Bank Restructuring Fund (FROB) does not have majority control. If FROB is the leading shareholder, the cap is set at 300,000 euros.

The salary restrictions do not apply to executives hired after a bank has been intervened or those of a healthy bank that has not required public assistance that takes over one that has.

The proposed changes to the law also allow “early intervention” by the Bank of Spain to prevent the spate of forced nationalizations of a number of lenders that led to the country having to seek a bailout of up to 100 billion euros to recapitalize the banking system.

FROB can liquidate a failed bank without prior permission of its shareholders

The draft decree will allow the central bank to take over the reins at lenders that are in compliance with solvency requirements if there are “objective elements” that make it “reasonably predictable” that they will fail to do so in the future. Such intervention will also be allowed even if public funds are not required to restore lenders back to financial health.

The decree, which the Cabinet is expected to approve on Friday, arms the central bank with a whole gamut of measures to ensure the stability of the system, such as requiring lenders to present plans that guarantee their stability within a period of 10 days, agreements on debt restructuring and the removal of management.

Despite eight banks being taken over by the Bank of Spain — mostly notably Bankia, which has been nationalized and requires a further injection of 19 billion euros to help it get back on its feet — and four reforms of the sector, Spanish banks require an estimated further 62 billion euros to guarantee their solvency.

The proposed legislation also enshrines the idea that shareholders and bondholders in a bank that has been taken over will have to bear the brunt of any losses deriving from its restructuring.

The health of the banking system has been undermined by lenders’ over-exposure to the real estate sector, which has been in a dire slump since around the start of 2008 after a massive property bubble burst.

The non-performing loan ratio has also built up to levels last seen in 1994 as a result of the Spanish economy slipping back into recession for the second time in three years, accompanied by a massive jump in unemployment to levels of around 25 percent.

The decree follows the directives of a memorandum of understanding Spain signed with the European Union in July on the bailout for the banking system.

The new rules emphasize the need for the Bank of Spain to anticipate problems before they come to a head. The central bank came in for heavy flak because of its perceived supervisory failings in the financial crisis.

In a speech delivered in July, just after he took over as governor of the Bank of Spain, Luis Linde acknowledged the central bank’s shortcomings. “We failed to tackle, with the resolve we now understand would have been necessary, the considerable increase in our debt, and later, the heavy deterioration in bank balance sheets, the outcome of the bursting of the [property] bubble and the recession. The fact that we are not the only European supervisor that can be reproached on this is of no consolation to anyone.”

The draft decree also allows the central bank’s Orderly Bank Restructuring Fund (FROB) to wind down lenders that are unable to return public funds they have received within a “reasonable period of time.”

The FROB will determine the economic value of the lender to be liquidated and transfer its assets and liabilities to a so-called “bridge bank,” which can then be sold. Toxic assets will be transferred to a bad bank, which the government is in the process of setting up.

The FROB can liquidate a failed lender without prior permission of its shareholders and without having to comply with procedural issues enshrined in mercantile law.

Banks that receive public funds will be given five years to return them, a period that can be extended to seven years. Fund injections can be in the form of cash or debt issued by the Treasury or the FROB itself.

The decree also calls for changes to the composition of FROB’s board, which is currently made up of two representatives named by the Economy Ministry, four by the Bank of Spain and three by the Deposit Guarantee Fund. In future the Economy Ministry will have five representatives and the central bank four.