Fund for Orderly Bank Restructuring

(FROB)

April 2012

Table of Contents
1 The FROB: objectives, functions and characteristics 2 The reform of the Spanish banking system. Phase one: consolidation in the savings bank sector Phase two: solvency improvement Phase three: clean up of balance sheets 3 4

p. 3 p. 8

Restructuring processes for non-viable entities Financial structure of the FROB.

p. 16 p. 20 p. 23 p. 26 p. 29
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5 Securities issued by the FROB Annex I. FROBs procedures Annex II. Summary of processes and supports granted

1. The FROB: objectives, functions and characteristics.

1. The FROB: Main characteristics

The Fund for Orderly Bank Restructuring (FROB) is a public entity created by Royal Decree-law 9/2009, of 26 June, concerning bank restructuring and reinforcing the equity of credit entities.

Characteristics of the FROB:

Strict governance:
Strongly capitalized: 9,000Mn (recently increased up to 15,000 Mn)* Public control by:
Parliament The Ministry of Economy National Court of Auditors

Guarantee by the Kingdom of Spain, up to 27.0bn

chaired by the Banco de Espaa and with the participation of the Ministry of Economy, Ministry of Finance and the Deposit Guarantee Fund (FGD)

* The new Royal Decree-law 2/2012 , for the cleaning up of the financial system, has increased FROBs endowment in 6,000 Mn to be furnished by the State. This additional capital hasnt been disbursed yet.

1. The FROB: Main characteristics

Current endowment: 15,000Mn*, 9,000 Mn already disbursed (6,750Mn were contributed by the State Budget and 2,250Mn by the Deposit Guarantee Fund) Leverage capacity of 3 times its capital allocation: 45,000Mn. This leverage capacity can be increased up to 6 times with the approval of the Ministry of Economy and Competitiveness. Public control: report submitted to the Ministry of Economy every four months, parliamentary control every quarter and each time there is a FROB action; audited by National Court of Auditors

FROB Governance
Governing Committee made up of 9 members:
Banco de Espaa ME and MF FGD

4 members from the Banco de Espaa (BdE)

- Deputy Governor (Chairman of the Governing Committee). - Director General of Banking Supervision (Deputy Chairman of the Governing Committee) - Director General of Banking Regulation - General Secretary (Secretary of the Governing Committee)

2 members from the Ministry of Economy and the Ministry of Finance

- General Secretary of the Treasury and Financial Policy - General Director of Budgets

General Director

3 members on behalf of the Deposit Guarantee Fund A representative (without voting right) of the General Comptroller Department of the State Administration (Intervencin General de la Administracin del Estado)

* In addition, and in order to assure FROBs capital integrity, the Deposit Guarantee Fund , that is furnished with contributions made by credit entities, can compensate the FROB for the losses that it could suffer in the restructuring of the banking system .

1. The FROB. Objectives and Functions.

Final purpose of the FROB: credit institution equity reinforcement and orderly restructuring of credit entities with the aim of resuming the normal furnishing of credit to companies and households, i. Helping viable entities which could have difficulties to adapt to the new setting
To adjust productive capacity and costs To increase efficiency and productivity To improve management capacity To reinforce their resiliency and solvency

Capital Injections

ii.

And conducting the resolution processes at non-viable entities

Resolution

1. The FROB. Objectives and Functions: the three ways

(see more details in Annex I)

FROB
Viable entities that need to increase their solvency

Non viable entities

Viable entities that decide to enter in a merger process

Restructuring

Integration

Recapitalization

The FROB will take over the entity and conduct its restructuring providing financial support, if necessary.

The FROB can subscribe convertible instruments to support the integration.

The FROB can subscribe ordinary shares to reinforce the capital of the entity (capital provider of last resort).

NON-VIABLE

VIABLE
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2. The reform of the Spanish banking system.

Phase one: consolidation in the savings bank sector Phase two: solvency improvement

Phase three: clean up of balance sheets

2. Phase one: consolidation in the savings bank sector

A large-scale transformation of the banking system was necessary to gain solidity and raise efficiency. This process has been particularly intense among the savings banks that have been restructured through several integration processes. Other entities that were considered non-viable have been or are in the process of being resolved. As a consequence, 43 out of the 45 savings banks in Spain are involved in the largest overhaul of the system that the country has ever seen.
June 2010 45 savings banks March 2012 11 savings banks

But also commercial banks (i.e. non-savings banks) have been involved in several mergers: B. Popular-B. Pastor, B. Sabadell-B. Guipuzcoano.
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2. Phase one: the consolidation in the savings bank sector: Integration processes roadmap Assets in Mn as of Dec. 2010
LIBERBANK C.A. Asturias +CCM C.A. Extremadura C.A. Cantabria Total 54.523 NOVACAIXAGALICIA C.A. Galicia Caixanova Total 73.319 BANKIA Caja Madrid Bancaja C.A. Insular C.A. Laietana C.A. vila C.A. Segovia C.A. Rioja Total 327.930 KUTXA BANK BBK+ CajaSur C.A. Vital Kutxa S. Sebastin Total 74.081 UNIIM (sold to BBVA) C.A. Sabadell C.A. Terrassa C.A. Manlleu Total 28.310 CAIXABANK + BANCA CVICA La Caixa+ C.A. Girona Cajasol+Guadalajara C.A. Navarra C.A. Burgos C.A. Canarias Total 346.911

CATALUNYA CAIXA C.A. Catalunya C.A. Tarragona C.A. Manresa Total 76.014

IBERCAJA + CAJA 3 CAI + C.A. Circulo + C.A. Badajoz Ibercaja Total 65.133

UNICAJA-CEISS Unicaja + C.A. Jaen Cala Espaa+CajaDuero Total 79.919

BANCO MARE NOSTRUM C.A. Murcia C.A. Penedes Sa Nostra C.A. Granada Total 69.760
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2. Phase one: consolidation in the savings bank sector

The FROB granted financial support to these merger processes when requested to do so by the entities concerned. Not all of the mergers agreed requested aid from the FROB.
Entities involved Approved by Bank of Spain, with FROB aid FROB aid (million) FROBs approval Stage

Seven integration processes received FROB support amounting to 9,7 bn (the so called FROB I). The form of support was through the subscription of CONVERTIBLE PREFERENCE SHARES that yield 7,75% and have to be repurchased within a period of 5 to 7 years.

Catalunya Caixa (CX) Catalunya-Tarragona-Manresa UNNIM 2 Manlleu-Sabadell-Terrassa CEISS 3 Espaa-Duero 1 4 NOVACAIXA GALICIA Galicia-Caixanova

1,250 380 525 1,162

25/03/2010 25/03/2010 25/03/2010 29/06/2010

Completed Completed(*) Completed Completed

BANCO FINANCIERO-BANKIA 5 Madrid-Bancaja-Laietana-Insular Canarias-vila-Segovia-La Rioja BANCO MARE NOSTRUM (BMN) 6 Murcia-Peneds-Sa NostraGranada BANCA CVICA Navarra-Cajasol+Guadalajara7 General Canarias-Municipal de Burgos Total committed

4,465

29/06/2010

Completed

915

29/06/2010

Completed

977

22/12/2010

Completed

9,674
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(*) These preference sahres were converted into common equity in september 2011.

2. Phase two: Improving solvency

In 2011 the Spanish Government adopted new measures to foster the transformation of the sector and to help regain market confidence. On a general basis entities were required to reach a capital principal ratio equal to or above 8% of their risk-weighted assets (RWAs). For credit entities which are highly dependant on wholesale markets and havent placed at least a 20% of its capital either in the stock or among private investors, the capital principal ratio is increased to 10%. The FROB was entrusted to subscribe, if necessary, ORDINARY SHARES in market conditions and on a temporary basis (up to 3 years) in order to allow entities to comply with the new capital requirements.

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2. Phase two: Improving solvency

The Banco de Espaa released, on a case by case basis, the capital shortfalls that had arisen because of the new solvency requirements:
Entitiy Additional capital to reach the new level (Mn) 333 8 552 182 1,075 5,775 2,800 847 637 1,718 2,622 463 519 568 15,949 17,024 FROB's final support Comments

Bankinter Bankpyme Barclays Deutsche Bank Commercial banks Bankia CAM Cvica Mare Nostrum Catalunya Caixa NovacaixaGalicia Caja Espaa-Duero Liberbank Unnim Savings banks Total
Source: Banco de Espaa and FROB

0 Issue of bonds mandatory convertible completed 0 Taken over by Caixa 0 Capital increase completed 0 Capital increase completed 0 0 IPO process completed 0 Sold to B. Sabadell with DGF support 0 IPO process completed 0 Convertible bonds. RWAs reduction 1,718 2,465 RWAs reduction 0 Merger with Unicaja 0 Divestments and realized gains 568 Sold to BBVA with DGF support 4,751 4,751
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2. Phase two: Improving solvency

Finally, FROBs capital injections were much lower than initially estimated. Only 3 groups required FROBs capital amounting to 4.7 bn (FROB II). Catalunya Caixa: 1,718 Mn. FROBs stake: 90% FROBs stake: 93% FROBs stake: 100%

Nova Caixa Galicia: 2,465 Mn Unnim: 568 Mn

And the disposal of some of those stakes has already started: Unnim1 Catalunya Caixa Sold to BBVA Tender just started
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1 This entity was considered not viable and was taken over by the FROB. Its restructuring process has just finished and it has been sold to BBVA.

2. Phase three: cleaning up balance sheets

In February 2012 additional measures have been adopted aimed at speeding up the clean up of the banks balance sheets. These new measures will prompt the entities to focus on the core of their business easing the disposal of noncore assets and improving market confidence Provisioning requirements for current exposures to foreclosed assets and loans to developers have been increased significantly.
An additional capital add on for some types of exposures (land and unfinished houses) has also been set up, increasing the effective coverage for these assets up to 80% for land and 65% for unfinished houses. The impact of the new requirements has been estimated to be 50 bn. The FROB will grant support if necessary through the subscription of common equity or CoCos (for the entities that decide to merge) (FROB III)

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3. Restructuring processes for non-viable entities.

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3. Restructuring processes for non-viable entities

Non-viable entities are taken over by the FROB to prevent a disorderly resolution process entailing losses for creditors and depositors that could raise concerns on the overall stability of the banking sector. The FROB draws up a restructuring plan to be approved by BdE which will result in a merger or in the transfer of the assets and liabilities of the ailing bank to a sounder financial institution chosen through a competitive tender. The winner of the competitive process is the entity that, subject to being considered fit and proper by the BdE, has requested the least support.
All types of entities (domestic and non domestic, banks or funds) are invited to participate in the bidding process.
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3. Restructuring processes for non-viable entities

The plan usually includes financial support to the buyer (asset protection schemes, capital injection, etc.) initially granted by the FROB and then taken on by the Deposit Guarantee Fund.

Through DGF participation, the system itself bears the losses of the restructuring preserving tax payers money.
The combined firepower of FROB and DGF provides also much more room for maneuver to deal with ailing entities:
FROBs funding capacity 42 bn (27 bn still available) 2 bn per year

DGFs annual levies

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3. Restructuring processes for non viable entities

Four entities have been considered non-viable and taken over by the FROB. Tender offers have been/are being carried out to sell these entities to sounder entities. The FROB or the DGF grant financial support to ensure the success of the processes.
CajaSur

Sold to BBK. Support granted by FROB

CAM
Unnim B. Valencia

Sold to B. Sabadell. Support granted by DGF and FROB

Sold to BBVA. Support granted by DGF Tender in progress.

DGF participation improves firepower to address problems at non-viable entities

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4. Financial structure of the FROB.

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4. Financial structure of the FROB

Capital allocation of 15,000Mn: 9.000 Mn already disbursed (75% of which furnished by State Budget and 25% by the FGD). Debt capacity of 45 bn (3 times its allocation)and can be increased up to 6 times, 90 bn, with the approval of the Ministry of Economy.

with the explicit, unconditional and irrevocable guarantee of the Kingdom of Spain: guarantee up to 27 bn, already granted
Strong position in liquid assets (current account or Public Debt) In addition, and in order to assure FROBs capital integrity, the Deposit Guarantee Fund , that is furnished with contributions made by credit entities, can compensate the FROB for the losses that it could suffer in the restructuring of the banking system .
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4. Financial structure of the FROB

Commitments vs. funds available (current)
Capital not disbursed

Main conclusions:
Remaining funding capacity

Remaining State Guarantee

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27.3 bn

Funds available are sufficient to support the restructuring and recapitalization processes
Only 14.8 bn have been committed vs. a total funding capacity of 42 bn

Credit facility

3 5.3
Liquidity Ordinary shares (recapitalization processes) Restructuring of CajaSur Preference shares (integration processes)

Marketable bonds

11 4.7
0.4

Strong liquidity position: 5.3 bn in cash + 9bn immediately available. Financial incomes in 2011 amounted to 750 Mn

Capital

9.7

Funding Capacity 42 bn

Total committements 14.8 bn

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5. Securities issued by the FROB: the guarantee of the Kingdom of Spain

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5. Securities issued by the FROB

Simple bonds... with the explicit, unconditional and irrevocable guarantee of the Kingdom of Spain (Current rating: A3 (Moodys); BBB+ (S&P); BBB (Fitch))
Equity Requirements for credit risk: 0% RWA (confirmed by the Banco de Espaa)

Eligible as guarantee assets in ECB monetary policy operations (confirmed by the Banco de Espaa)
Up to 5 years: Between 5 and 7 years: Haircut: 4.5% Haircut: 5.5%

Trading on the Public Debt Entry Book Market

The Banco de Espaa will act as a payment agent in FROB issues. Equivalent treatment for tax purposes to that of the Government bonds
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5. Guarantee of the Kingdom of Spain

Limit of guarantee granted1: 27 bn of principal plus the pertinent ordinary interests ( 13 bn still available).
Characteristics: Explicit, unconditional, irrevocable and waiving the right of excussion Guaranteed operations: Marketable securities, loans or credits in euros or other currency with a term no longer than 7 years, formalised prior to 15.12.2016. Payments agent: Banco de Espaa Clearing in the event of execution: At the EONIA rate for the days elapsed between the maturity date of the guaranteed obligation and the date of payment by the guarantor, provided the execution of the guarantee is requested within the 5 days following the maturity date Execution procedure: The Banco de Espaa, as the payment agent, and on behalf of the legitimate creditors, will claim, at the General Directorate of the Treasury and Financial Policy, the payment through it of the amount not paid to the holders of the affected securities or loans Payment by the Government: The General Directorate of the Treasury and Financial Policy is authorised by Royal Decree 9/2009 to carry out the payments arising from the execution of the guarantee, immediately and with no need for further budget-related steps.

1 From 01.01.2010 onwards can be increased up to 90,000 Mn, with the approval of the Ministry of Economy.

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Annex I. Description of FROBs procedures

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Annex I. The FROB. Objectives and Functions: the three ways

Restructuring Integration Recapitalization Viable entities that need to increase their solvency
To allow entities to comply with the new capital requirements with the aim of regaining market confidence. Subscribing ordinary shares issued by banks or credit cooperatives . The support will be on a temporary basis (the FROB must divest within 3 years) A recapitalization plan must be submitted to the BdE. The subscription of these instruments will cause the immediate inclusion of the FROB in the entitys board of directors. In the event that the requesting entity is a savings bank or an Institutional Protection Scheme (IPS), the entity or entities must transfer the financial activity to a commercial bank.
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Elegible entities

Non viable entities

To avoid a disorderly resolution process entailing losses for creditors and depositors that could raise concerns on the overall stability of the banking sector

Viable entities that decide to enter in a merger process

To foster financial stability and adapt the capacity of the sector to the level of demand and the current economic environment Subscription of convertible instruments. Entities must repurchase these financial instruments within a period of 5 years (can be extended for 2 further years) The entities involved are required to tackle an integration process aimed at diminishing the global capacity of the sector . The integration plan has to be approved by BdE and must include goals in terms of reorganization, efficiency gains and productivity improvement.

Objectives

FROBs role / Form of support

Loans; guarantees; assets protection schemes; purchase of assets and/or capital provision The FROB will be appointed to interim administrator of the entity and will draw up a restructuring plan to be approved by BdE which may include financial support and meanwhile could provide rescue aid for keeping the institution afloat The plan will result in a merger or in the transfer of the assets and liabilities of the ailing bank to a financial institution to be chosen through a competitive process

Way to proceed

Annex I. The FROB: Objectives and Functions: the three ways

Restructuring Integration*
The EC approved a scheme that has been in force till 2010 Dec. 31st . New processes will need specific approval.
7 integration processes involving 26 savings banks: -Catalunya Caixa -UNNIM -Caja Espaa-Duero - NovaCaixaGalicia - SIP MareNostrum - SIP Banca Cvica - SIP Bankia Catalunya Caixa NovaCaixaGalicia

Recapitalization

State aid treatment

EU approval required on a case by case basis

EU approval required on a case by case basis

CajaSur CAM

Cases

B. de Valencia UNNIM

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Annex II. Summary of processes and supports granted

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Annex II. Summary of processes

Support granted (Mn)
1,250 1,718 1,162 2,465 525 4,465 915 977 392 5,249

Entitiy

Process

Form of support

Supporter

Comments

Catalunya Caixa NovacaixaGalicia Caja Espaa-Duero Bankia Mare Nostrum Cvica CajaSur B. CAM

Integration/ Recapitalization Integration/ Recapitalization Integration Integration Integration Integration Restructuring Restructuring

Pref. shares Ord. shares Pref. shares Ord. shares Pref. shares Pref. shares Pref. shares Pref. shares Asset Protec. Scheme Ord. shares Asset Protec. Scheme Contingent liquidity support

FROB

FROB's stake 90% FROB's initial stake was 93%. A 3% has been sold to private investors, so the current stake is 90% and the equity investment has reduced to 2,395 Mn

FROB FROB FROB FROB FROB

Estimated loss under the APS. Sold to BBK DGF DGF FROB DGF DGF Sold to BBVA. To be formalized in the coming weeks. Temporary support granted by FROB, amounting to 953 Mn, assumed by DGF. Temporary support granted by FROB Sold to B. Sabadell. To be formalized in the coming weeks.

Unnim

Restructuring -

953 Ord. shares

Asset Protec. Scheme T.B.C.

Restructuring B. Valencia Total support granted by FROB Total support granted by DGF
Source: FROB

13,869 6,202

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Further and detailed information can be consulted on the website of the Fund for Orderly Bank Restructuring (FROB):

www.frob.es

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