Law on banking foundations: refounding savings banks

The approval of Law 26/2013 on savings banks and banking foundations was the last condition to comply with the Memorandum of Understanding agreed with European authorities to recapitalise Spain's banking system. This new law forces almost all savings banks (those with more than 10 million euros in consolidated assets) to become foundations by 2015 and thereby lose their banking licence. Only two of the smallest savings banks (Pollença and Ontinyent) can keep their current legal form, albeit subject to restrictions in terms of geography and size.

This change in the legal form of savings banks has also been happening in other European countries. The main reason is that, from supervisors' point of view, the ownership structure of these organisations, lacking shareholders per se, involves three large drawbacks. Firstly, given the impossibility of resorting to shareholders to increase capital, retaining earnings becomes almost the only way for savings banks to improve their solvency. Secondly, as they do not have ownership rights that are traded on a market, the managers of savings banks cannot be disciplined via the threat of acquisitions. For the same reason, it is also difficult to achieve economies of scale through mergers. Lastly, given the frequent presence of public representatives on their governance bodies, decision-making can be influenced by political interests and affected by electoral cycles.

Some of these drawbacks were tackled in the previous reform of savings banks in 2010, aimed at helping them access the capital market and consolidating the sector. This allowed savings banks to transfer their financial operations to instrumental banks, of which they would be shareholders, and limited the representation of political powers on their governance bodies. As new banks have increased their capital to reinforce their solvency, the proportion owned by savings banks has shrunk and, at present, a large number of savings banks share ownership of their banks with other shareholders.

This latest reform aims to tackle this situation, where bank ownership is shared between common investors (who are mainly interested in maximising the value of their shares) and savings banks, which also pursue social aims. In this way, the mandatory transformation into banking foundations aims to clearly separate both objectives and reinforce corporate governance. Achieving social aims will be the responsibility of the foundation and the policies implemented to achieve these aims, which it plans to follow when exercising its ownership rights over the bank, will have to be included
in the corporate governance report. With regard to their governance bodies, foundations will be governed by a board of trustees with no more than 15 members, on which public representation must be less than 25%. To minimise possible conflicts of interest between the foundation and the bank, trustees will be subject to a strict regime of incompatibility which, in particular, will prevent them from holding equivalent positions in the bank or its subsidiaries.

This new law also aims to bolster the solvency of instrumental banks, establishing additional requirements for those foundations that still hold a significant share of the bank's capital. Specifically, a highly significant stake (at least 30%) in a credit institution will require a contingency plan to be drawn up to tackle any possible capital needs on the part of the subsidiary. Likewise, holding a controlling stake (at least 50% or effective control) means that the contingency plan must include a reserve fund to be kept at the credit institution's disposal. In addition to the fund, an investment diversification and risk management plan must also be drawn up with limits imposed on the foundation's investments.

These limits on investment concentration and on the volume and composition of the reserve fund will be set by the Bank of Spain. To determine these, the supervisor will take into account both the characteristics of the subsidiary (volume of risk-weighted assets, foreseen capital needs and whether its shares are listed) as well as those of the foundation (percentage stake and concentration of investments in the financial sector). In this respect, it is important to stress just how exceptional these last types of requirements are, which are not required from the rest of the majority shareholders in banks (either individuals or companies) and which, set at excessively high levels, could result in these new foundations giving up control of their subsidiaries.

In implementing this new law, it would be advisable to bear in mind that banking foundations, as investors focusing on the long term, could play an important role in preserving financial stability. The longer timescale of their investment tends to make them more prudent when taking risks throughout the cycle. In fact, it is precisely this characteristic that has allowed those savings banks now subject to stricter requirements to keep control of their banks. This prudence, and the pursuit of social aims, add heterogeneity to the behaviour of financial institutions as a whole and reduce the system's procyclicality. Diversity being a source of resilience in any ecosystem, this should also be preserved in the financial system.