Evolution

Evolution: from 2009 to today

From 2009 to 2015: origins of FROB

To explain the origins of FROB, we need to go back to the international financial crisis at the end of the first decade of the 21st Century. The Spanish banking system was not immune to this crisis as it led, right from the start, to a drastic tightening of access to market financing and liquidity, together with the impairment of assets, particularly those relating to exposure to the real estate development sector. All of this threatened the stability of the Spanish banking sector, making a significant public intervention necessary in an attempt to restore confidence in the Spanish banking system, which led to exceptional measures being taken in the context of the coordinated response of the European Union.

As a result, FROB was created by Royal Decree Law 9/2009, of 26 June, on bank restructuring and the strengthening of own funds of credit institutions. Its aim was to increase the strength and solvency of the Spanish banking system by means of two essential functions at that time: managing the restructuring processes of credit institutions and helping to strengthen their own funds. This involved the introduction of the new Spanish model for public management of banking crises.

Royal Decree Law 24/2012, on credit institution restructuring and resolution was then approved and entered into force. It would later be transformed by Parliament into Law 9/2012, of 14 November, on credit institution restructuring and resolution. FROB was thus provided with extraordinary instruments and powers to strengthen its existing intervention powers, turning it into a genuine resolution authority. The Law established a series of objectives to be followed in the orderly restructuring and resolution processes of credit institutions. These included (i) ensuring the continuity of the institutions’ critical functions; ii) preventing harmful effects on the stability of the financial system, and (iii) ensuring the most efficient use of public resources, minimising the financial support which, on an extraordinary basis, it may be necessary to grant. The new resolution regime that was implemented through Law 9/2012 involved the existence of three levels of management (early intervention, restructuring and resolution), which were associated with measures of varying levels of intensity that the public authorities might apply according to the gravity of the difficulties faced by the credit institutions.

In order to perform its functions, FROB was granted a broad catalogue of powers, differentiating between “commercial” and “general administrative” powers. On the one hand, FROB could exercise the powers that commercial legislation generally conferred on the management body and the general meeting or assembly of a commercial company. On the other hand, it also had the necessary administrative powers to implement the restructuring and resolution instruments.

From then on, FROB was configured as a full resolution authority, a new player in the institutional framework with its own specific mandate and full capacity to discharge its duties.

FROB since 2015

Law 11/2015 on the recovery and resolution of credit institutions and investment firms was approved in 2015. Law 11/2015 set up a new institutional framework in order to comply with the principles set out in Resolution Directive 2014/59/EU to separate supervisory and resolution functions. Accordingly, the Spanish model distinguishes between two types of national resolution authorities: (i) the preventive resolution authorities, responsible for the preventive stage of the resolution, and (ii) the executive resolution authority, responsible for the execution stage. As a major substantive new development, unlike the previous legislation and in line with the Resolution Directive, Law 11/2015 applies not only to credit institutions but also to investment firms. However, those whose legally required minimum share capital is lower than 730,000 euros or whose activity meets another series of characteristics are exempt.

Therefore, at the present time and under the regime of Law 11/2015, there are three national resolution authorities: two preventive resolution authorities that must exercise their tasks through bodies that are operationally independent from their supervisory functions - the Bank of Spain, with regard to credit institutions and the CNMV (Spanish Securities Market Regulator) for investment firms. And an executive resolution authority which is also the contact authority at an international level, whose functions are entrusted to FROB.

It also made substantial progress in some key aspects, such as the mechanism for loss absorption. In short, the pillars supporting the current resolution framework are as follows:

(i) establishment of a special administrative procedure to manage the failure of institutions that could not be wound up through insolvency proceedings for reasons of public interest and financial stability

(ii) separation between supervisory and resolution functions (CNMV, Bank of Spain, FROB)

(iii) the resolution costs of an institution must mainly affect its shareholders and creditors. Public resources must be protected during the institution’s resolution process with shareholders and creditors or, as the case may be, the industry, absorbing the losses

(iv) the resolution preventive stage is strengthened so that all institutions must have recovery and resolution plans, as well as sufficient loss absorption capacity

(v) the resolution controls established by Law 9/2012 are enhanced, eliminating the instrument of public financial support