The Spanish banking sector has experienced significant challenges in the past, and understanding the legal framework surrounding bank failures is crucial for international bank creditors with exposure to Spanish banks. Banking law in Spain is primarily governed by the Law of Credit Institutions (Ley de Entidades de Crédito), which covers the establishment, operation, and supervision of banks and other credit institutions. Additionally, the Bank of Spain (Banco de España) is the primary authority responsible for supervising and regulating the financial system. In the event of a bank failure, the Spanish legal framework includes the Law on Recovery and Resolution of Credit Institutions and Investment Firms (Ley de Recuperación y Resolución de Entidades de Crédito y Empresas de Servicios de Inversión), which aligns with the European Union’s Bank Recovery and Resolution Directive (BRRD).

Several Spanish banks have faced hefty fines due to misconduct, including Banco Santander, BBVA, and CaixaBank. The penalties were imposed for various reasons such as mis-selling of complex financial products, anti-money laundering violations, and rigging interest rates. Despite the severity of these wrongdoings, these banks were not shut down because their closure would have posed a risk to Spain’s financial stability. Instead, these banks were subjected to enhanced supervision and were required to implement stringent measures to prevent future misconduct.

Bank Failure in Spain

Bank failure in Spain is defined as the inability of a bank to meet its financial obligations, comply with regulatory requirements, or the likelihood of such an occurrence. In essence, it refers to the bank’s insolvency or impending insolvency, which can jeopardize the stability of the financial system and the interests of its depositors and creditors.

The Bank of Spain, in coordination with the European Central Bank (ECB) and the Single Resolution Board (SRB), is responsible for determining bank failure. This process involves a thorough assessment of the bank’s financial health, including capital adequacy, liquidity, asset quality, and governance structure. Additionally, stress tests are conducted to evaluate the bank’s resilience to adverse economic scenarios.

The Bank of Spain, as the national competent authority, is legally mandated to supervise and regulate credit institutions. In the event of a bank failure, the Bank of Spain works closely with the ECB and SRB to determine the appropriate resolution strategy, ensuring the continuity of critical banking functions and minimizing the impact on financial stability.

Once a bank failure is concluded, the resolution process commences. The SRB, in consultation with the Bank of Spain and ECB, determines the most suitable resolution strategy, which may include a bail-in, the sale of the bank, the creation of a bridge bank, or the separation of assets. Common reasons for bank failure in Spain include inadequate capitalization, poor asset quality, weak corporate governance, and the mismanagement of risks.

Supervision, Resolution Planning, and Preservation

Bank supervision and resolution planning in Spain aim to preserve the critical functions of banks and ensure their continuity during financial distress. The Bank of Spain, in coordination with the ECB, closely monitors the financial health of banks and enforces regulatory compliance. In addition, banks are required to develop recovery and resolution plans, detailing their strategies for addressing potential financial distress and restoring viability.

When a bank within their jurisdiction fails, Spain’s resolution authority, the Single Resolution Board (SRB), takes the following steps:

  • Assess the bank’s failure and determine the public interest in its resolution.
  • Evaluate the available resolution tools and select the most appropriate strategy.
  • Coordinate with national and European authorities to implement the chosen resolution strategy.
  • Ensure that shareholders and creditors bear the losses.
  • Minimize the impact on financial stability and maintain the continuity of critical functions.

Spain offers various resolution tools to reorganize, recapitalize, restructure, or dissolve a failed bank. These include the sale of the business (transferring the assets and liabilities to a third-party acquirer), bridge bank (creating a temporary bank to maintain critical functions while a buyer is sought or the failed bank is restructured), and asset separation (transferring non-performing or non-core assets to a separate entity, allowing the bank to focus on core operations), and bail-in (recapitalizing the bank by writing down or converting its liabilities, including debt and equity instruments).

Protection of Deposits and Creditor Interests

Spain’s deposit guarantee scheme, the Deposit Guarantee Fund of Credit Institutions (Fondo de Garantía de Depósitos de Entidades de Crédito), protects deposits up to €100,000 per depositor and per institution. Furthermore, the legal framework prioritizes the protection of secured creditors, while unsecured creditors bear losses according to the hierarchy of claims in the event of a bank failure.

Spain ensures the orderly exit of non-viable firms by implementing resolution strategies that minimize disruption to the financial system and protect depositors and creditors. The Bank of Spain, ECB, and SRB work collaboratively to develop and execute the most suitable resolution plan, considering the specific circumstances of the failed bank.

Bank Liquidation in Spain

In cases where resolution is not deemed necessary, bank liquidation is initiated. The bank is placed under statutory administration, and its assets are liquidated to repay creditors according to the hierarchy of claims. This process is overseen by a court-appointed insolvency administrator.

Spain’s legal framework for bank failures seeks to protect the financial system, depositors, and creditors. International bank creditors can better protect their interests by understanding the regulations, resolution strategies, and deposit protection measures in place. By staying informed and proactively managing exposure to Spanish banks, international creditors can minimize the potential impact of bank failures on their financial positions.