Spanish draft law would undermine financial reform, ECB says

A draft Spanish law could undermine the independence of the country’s central bank and weaken one of Spain’s key financial reforms, the European Central Bank (ECB) said in an official opinion.

Under the Treaty of the Functioning of the European Union, the ECB has the duty to give official rulings on any legislation affecting member states’ central banks. The draft law would create a government commission to monitor and control how Spanish banks were complying with an out-of-court settlement procedure created by an earlier law. The settlement procedure deals with housing loans extended by Spanish banks in the run-up to the country’s banking crisis.

A number of these loans were judged by Spain’s supreme court to have contained “floor clauses” that lacked transparency. The earlier law, passed in January, allows consumers to claim for the reimbursement of funds judged as having been unfairly paid to banks.

According to the new draft law, the government will create a commission chaired by the vice-governor of the Bank of Spain. The other seven members will come from different government bodies, and the commission itself will come under the auspices of Spain’s ministry of economy.

The commission will monitor whether banks are properly informing their clients of the out-of-court procedure, and the number of settlements achieved by each bank.

Under the draft law, the central bank would also provide the commission with its secretary and any necessary technical experts. The Bank of Spain will be “generally responsible for preparing the documents and steering the operation of the commission”, the ECB noted. The draft law also makes each government body responsible for meeting the costs of its share of staffing and administration from its own “ordinary budget”, the ECB noted.

The Spanish government should revise the law to make sure the central bank was “adequately remunerated” for all expenses it occurred in establishing the commission, the ECB said. Laws obliging a eurozone country’s central bank to finance bodies “that operate as an extension of the government” were “incompatible with the prohibition of monetary financing”, the ECB said.

“Due consideration should be given to safeguarding the personal independence” of the Bank of Spain’s senior staff, the ECB said. The involvement of the vice-governor in the commission made this “a significant issue”, it added.

Reduced provisions

The ECB made even sharper criticisms of other provisions of the draft law, which relate to the “savings and banking foundations”, which hold major stakes in many Spanish savings banks. Spain’s savings banks played a particularly prominent role in the country’s financial crisis.

Under a Spanish law passed in December 2013, those foundations that hold “a highly significant stake, amounting to at least 30%, in a credit institution are subject to significant obligations”, the ECB noted. Foundations with a controlling stake of 50% or more are subject to even more stringent requirements, it said.

Banking foundations must currently build up the reserve funds of credit institutions they own within five years. They must also pay a mandatory minimum of 50% of all cash dividends from credit institutions to the institutions’ reserve funds.

The draft law would weaken these measures, the ECB said, by extending the time period for boosting reserve funds to eight years and by cutting the proportion of dividends to be paid into reserves to 30%.

These proposals were “contrary to the spirit of the original savings bank reform”, the ECB said. The rationale behind the reforms had been to “set incentives to reduce controlling stakes of banking foundations in banks”. The draft law “significantly reduces” those incentives, the ECB said.

Reform of the savings bank sector was “one of the key pillars of the financial assistance programme in Spain”, the ECB said, and the draft law’s proposals “appear to unduly weaken its importance”. The law could also unfairly affect banking foundations that had already chosen to reduce their holdings in credit institutions, the ECB argued.

The ECB also complained that the “economic rationale of the measure is not sufficiently explained” by the Spanish government. The draft law “merely mentions the ‘current situation of the financial markets’ without providing further explanation as to the substantive reasons for the amendment or how the measure will help banking foundations”.

“Spain is enjoying very strong and broad-based economic growth, from which the financial sector is benefiting,” the ECB said. “Therefore, it is not obvious what is meant” by the justification offered by the Spanish government in the draft law, it said.