SAVINGS BANKS

The reform of the Spanish cajas: From savings banks to banks and foundations

The crisis hit ’s cajas (savings banks) particularly hard and, in part, led to the introduction of regulation that significantly reformed the savings banks segment. As a result, this segment has become more concentrated and undergone a legal transformation from savings banks to banks and foundations, with significant implications for these entities’ ownership and corporate governance structure.

Ángel Berges and Fernando Rojas

Abstract: Coupled with an extraordinary represented half of the Spanish banking system contraction in the number of entities, the most prior to the crisis. However, the financial profound change in the Spanish financial crisis hit the savings banks particularly hard, system during the last decade has taken place thereby resulting in the adoption of a series in the savings banks segment. This segment of new regulations that led to the sector’s was characterised by a large number of entities, reorganisation and reform. Specifically, this had no shareholders, entrenched local roots, involved a contraction in the absolute number a commitment to giving back to society and of entities and a change in their legal form

25 −from savings banks or cajas to banks and the decade as their counterparts foundations− with clear implications for embarked on a significant expansion (Exhibit 1). their ownership and management structures (corporate governance). One reason for this disparate performance relates to the strategies adopted by the large The savings banks during the banks in the second half of the 1990s. Immersed pre-crisis growth years in their respective mergers, they prioritised It is impossible to understand the transformation their international expansion strategies. At of the savings banks as a result of the crisis the same time, based on their belief that the without a brief look back at their performance banking market in Spain was saturated, they during the boom years in Spain, the decade deployed ‘retreat’ tactics in their home market, before the crisis. closing branches in areas where there was geographic overlap between the merged banks. During that period, the banks and cajas took divergent paths with the former closing The gaps left by those branch closures were branches and reducing headcount for much of rapidly filled by the savings banks which, in

Exhibit 1 Employees and branches at banks versus savings banks

(Employees)

160,000

140,000 131,933

120,000

100,000 117,559

80,000

60,000

40,000

20,000

0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Banks Saving Banks

(Branches)

30,000 24,591 25,000

20,000 15,542 15,000

10,000

5,000

0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Banks Saving Banks

Source: , Afi and authors’ own elaboration.

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The opening of new branches held the key to savings banks gaining “ market share in Spain, where the retail banking business sustained one of the highest growth rates in the world between 1997 and 2007. ” contrast to the banks, presented two unique savings banks was unquestionably the fact traits: (i) their smaller size prevented them from that it primarily took place outside of the pursuing aggressive international expansion savings banks’ traditional areas of influence. strategies; and, (ii) their strategic commitment Of the 5,000 branches which the savings to the Spanish market, particularly the businesses banks added to their networks from the mid- related to the real estate and mortgage markets, 90s on −whether new branches or branches was far more resolute than that of the banks. acquired from banks− 75% were located outside the region of origin of the respective As a result, they focused their growth strategies savings banks. around targeting new urban settlements, with new branch openings as their main strategic weapon. Judging by Exhibit 2, which In addition to the perception of bank correlates branch openings with business saturation in Spain, it is worth highlighting growth, it can be said that the opening of new the fact that the Spanish economy entered the branches held the key to gaining market share financial crisis in a highly vulnerable in a country whose retail banking business position on account of its overexposure sustained one of the highest rates of growth in to the real estate sector and its high the world between 1997 and 2007. dependence on external borrowings. These two factors were closely related insofar as However, the most noteworthy aspect of this a growth model based on the construction period of intense branch openings by the sector consumed large sums of credit,

Exhibit 2 Relationship between growth in branches and business volumes (1997-2007)

(Percentage)

45 40 35

30 25

20 15 Business growth 10 5 0 0 2 4 6 8 10 12 14 16 Branch growth

Note: The size of the bubbles represent the relative size of the savings banks shown in the exhibit. Source: CECA, Afi and authors’ own elaboration.

27 leading to borrowing rates above internal business environment during that decade was savings capacity. marked by sharp growth in business volumes, which presumably permitted them to run The Spanish economy’s dependence on the their businesses free from the consolidation construction industry was even more obvious in pressures the crisis would later bring on. the Spanish banking sector and, specifically, That entity map (Exhibit 3) was marked by in the retail banking segment. By the end of significant fragmentation: just three savings banks had assets in excess of 100 billion euros, 2009, total exposure to the construction and whereas 36 had less than 35 billion euros. real estate sector for the banking sector as a whole accounted for 19% of overall outstanding credit, 15% on average in the case of the banks This map would be turned upside down in versus 23% in the case of the savings banks. mid-2010, when the capitalisation of the However, there were major differences entity- Fund for Orderly Bank Restructuring (FROB in its Spanish acronym), whose bailout wise in each segment, such that the savings funding required consolidation in order to banks could not be solely blamed for that reduce capacity, triggered an unprecedented overexposure, as was later highlighted by the wave of mergers. Specifically, the framework resolution of Banco Popular, whose relative sparked a total of 12 consolidation processes exposure at the time was similar to that of the through conventional mergers, the creation of most exposed cajas. institutional protection schemes (IPSs) or the acquisition of previously intervened entities, Regardless, over two years after the start of which involved the vast majority of savings the international financial crisis, the map banks. Of those 12 processes, nine took the of entities in the savings banks segment form of applications for funding from the FROB remained intact at 45, a number which (the other three were undertaken without had hardly moved in nearly a decade. The applying for public funds). In the processes

Exhibit 3 Ranking of savings banks in 2009 (pre-consolidation process)

300,000

250,000

200,000

150,000 Milions € 100,000

50,000

0 RIOJA MURCIA CAJASOL BANCAJA NAVARRA LAIETANA IBERCAJA MANRESA SABADELL CAIXANOVA ONTINYENT CATALUNYA TARRAGONA CAJA DUERO CAJA CAJA ESPAÑA GUADALAJARA BURGOS MPAL. EXTREMADURA BURGOS C.C.O. BURGOS INSULAR CANARIAS GENERAL CANARIAS

Note: Not all savings banks are represented. Source: CECA, Afi and authors’ own elaboration.

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The map of savings banks entities pre consolidation was marked by “ significant fragmentation: just three savings banks had assets in excess of 100 billion euros, whereas 36 had less than 35 billion euros. ” that resorted to public funding, the Faced with this staggered requirement, Spain incremental cost of the funds received (very went ahead and implemented a new capital high and escalating coupons) was supposed to requirements framework for its financial act as an incentive to produce synergies and institutions that was far more demanding reduce capacity and costs. than the international standards introduced under Basel III. It included a higher capital However, the economy deteriorated far more requirement (8%) and an extraordinarily tight than was anticipated, undercutting the scenarios timeframe (six months) for full compliance. contemplated in the merger plans and reducing the value of the banking sector’s assets. In addition to the stringent new capital requirements introduced in Spain and of the associated implementation timeline, it is That downturn would be amplified by the worth noting the discrimination implied by the vicious circle of the deterioration of bank establishment of an even higher requirement asset quality and macroeconomic conditions, for entities not traded on the stock exchange, which in turn put growing pressure on without significant shareholders and reliant vulnerable public finances, sparking doubts –to a significant degree (over 20%)– on the over the sustainability of Spain’s sovereign wholesale funding markets. For those entities, debt. These doubts were particularly intense essentially the savings banks, the core capital throughout 2011, when the spread between requirement was set at 10%, i.e., 2 percentage the sovereign bonds of the so-called peripheral points higher than for the listed banks. This issuers, including Spain, and those of discriminatory and aggressive (timewise) capital the core issuers, widened significantly and the requirement may have prompted some of the primary markets all but shut down, making it entities created as a result of the merger of savings difficult for the Treasuries to issue the bonds banks ( or Banca Cívica) to rush their IPO they needed. Another contagion effect was plans as the only means for availing themselves the higher cost of sovereign funding, which of a capital requirement of 8%, compared to the exerted additional pressure on the banks’ penalising 10% applicable to unlisted entities. cost of funding, further undermining their earnings performance. The adverse economic context in which those capital requirements were introduced took Crisis, bailout and transformation of an irreversible turn for the worse when the cajas contagion and fear spread to the retail deposit The widespread deterioration of the Spanish segment. The divergence between countries economy generated increasing doubts about (core versus periphery) marked a clearcut the quality of its banking assets, particularly fracture in the eurozone’s financial integration those related with the real estate sector. and interfered with the ECB’s monetary All this occurred against the backdrop of transmission mechanism. an international regulatory environment (Basel III) which called for higher capital The asymmetric trend in bank deposit requirements, albeit over a sufficiently withdrawals between the two blocks of staggered timeframe so as not to jeopardise eurozone countries depicted a significantly the economic recovery. Indeed, the new core fragmented banking system, posing risks for capital requirements were set to virtually financial stability in the monetary area, which double between then and 2019. in Spain reached its zenith in the spring of 2012,

29 with the eruption of problems in Bankia. The by means of a rights issue that substantially fact that Bankia was the result of the merger of diluted its shareholders’ stake in the firm. seven savings banks (five of which were small and the number two and three cajas by assets) Second, as early as the stress tests in 2012, cast serious doubts over the logic behind the but also in the tests later performed by the consolidation process which had taken place in European Banking Authority, several of Spain during the two previous years. the entities created from mergers between savings banks have systematically rated as The loss of confidence in the Spanish banking the best positioned and the most resilient in the system occurred at a time when the banks had scenarios tested, demonstrating that not all − − emerged as the main indeed nearly the only the savings banks were in bad shape by virtue buyers of Spanish sovereign bonds. The result of being cajas, just as not all the banks were in was extraordinarily negative for how the market good shape by virtue of being banks. perceived the two risks and for the ability of the Treasury and financial institutions to tap those markets for refinancing purposes. Nevertheless, the initial perception that the problem was limited to the savings banks − It was that perception of extreme risk that drove and some of their legal idiosyncrasies the Spain to request a bailout for its banking system, lack of shareholders and market discipline which was approved by the eurozone’s finance to exact correct corporate governance− ministers at the end of June 2012. It consisted became entrenched and contributed to of a maximum bailout of 100 billion euros of one of the conditions imposed as part of which, following the pertinent stress tests, the bank bailout: a legislative change to 41.4 billion euros would ultimately be used: eliminate the cajas as a separate legal form 2.4 billion euros to capitalise the SAREB, Spain’s of incorporation. so-called bad bank, and around 39 billion euros to shore up the capital of the entities that came In particular, Law 26/2013, of December 27th, up short in the stress tests and were not able to 2013, on Savings Banks and Bank Foundations raise capital by alternative means (Exhibit 4). (hereinafter, the Act), imposed as a condition as part of the Memorandum of Understanding The fact that all of the entities that received (MoU) with the EU associated with the bank public funding (a total of seven) were bailout, forced the cajas to convert to banks, entities resulting from savings bank mergers unless they were very small in size and/or had supported the perception that the banking narrower geographic spheres of influence, crisis in Spain was a problem that was specifically those that met the following exclusive to and widespread within the requirements: savings bank segment. This idea is misguided for two reasons. First, the difficulties and ultimate resolution of Banco Popular has ■■ Assets of less than 10 billion euros; demonstrated that the institution already presented symptoms equivalent to those of ■■ A market share in terms of deposits in their the neediest savings banks back in 2012 and geographic spheres of influence of ≤ 35% of was only able to sidestep public intervention the total;

The perception that the banking crisis in Spain was a problem exclusive to and “ widespread within the savings bank segment is misguided−several of the entities created from mergers between savings banks have systematically rated as the best positioned and the most resilient in the EBA stress tests. ”

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Exhibit 4 Bank bailout: Public capital injections by groups of entities

G1 G2 G3

Public capital injection €3 7 Bn €1 .9 Bn €2 .5 Bn € 41.4 Bn

SAREB

€2.4 Bn

Notes: Group 1: Nationalised banks (BFA/Bankia, Catalunya Caixa, NCG) Group 2: With capital deficit and state aid needs (BMN; CEISS, Caja3, Liberbank) Group 3: With capital deficit, but they can get it from other sources (Banco popular, Ibercaja) Source: CECA, Afi and authors’ own elaboration.

■■ A geographic sphere of influence no bigger Alternatively, an Ordinary Foundation does than an autonomous region, unless such not consist of the direct or indirect ownership outside business is performed in a maximum interest of 10% of a credit institution’s capital of 10 conjoined . or voting rights nor does it have the power to appoint or remove any of the members of the investee credit institution’s governing body. In addition, the new legislation also regulated Ordinary Foundations are governed exclusively the banking foundations derived from the by Law 50/2002, Article 2, which defines them former savings banks. This was a legislative as “non-profit organisations which, at the amendment of great impact for the entities behest of their creators, earmark their capital on resulting from the integration of savings banks. an ongoing basis to matters of general interest. Specifically, the legislation defined a Banking They shall be governed by the wishes of their Foundation as an entity that “holds an interest founders, their bylaws and, in any case, the law.” in a credit institution, whether directly or indirectly, equivalent to at least 10% of the Each of the foundations had to choose entity’s capital or voting rights or an interest between Banking and Ordinary Foundations that permits it to appoint or remove a member depending on the fulfilment of the above of its governing body. Its corporate purpose criteria. However, there was a certain amount of ambiguity, particularly as regards the ability shall be welfare-oriented and its core business to appoint directors. In several instances focused on the development of community involving entities that initially formed part work and the adequate management of its of an IPS, which was later integrated into ownership interest in a credit institution.” a larger-scale entity, the right to appoint a These foundations are governed by the board member in that larger-scale entity contents of the Act, regional regulations, their may be rotated among the various original own bylaws and, on a supplementary basis, the foundations. In these cases, it is unclear provisions of Law 50/2002, of December 26th, whether each foundation has the right to name 2002, on Foundations. a director and therefore must necessarily

31 take the form of a Banking Foundation or outcome is a landscape of entities that is very whether this right is shared, exonerating different to that observed before the crisis. them from that obligation. This is the reason for the coexistence of Banking and Ordinary Specifically, just two of the 45 savings banks in Foundations, with similar shareholdings −in existence in 2008 have been able to maintain all cases less than 10%− in a given financial their legal status: Caixa Ontinyent and Caixa institution. Pollença. Both entities passed the restrictive conditions imposed by the Act as they were Beyond the definitions of these two classes small in size (1.3 billion euros of assets of foundations, the most important feature of between the two) and highly concentrated in the Act is the shareholder limit imposed their regions of origin. on the Banking Foundation into which the savings banks have transformed. Specifically, Except for those two small entities, all the the Act stipulates that Banking Foundations other cajas in existence before the crisis have with an ownership interest of 50% or more in completed their transformation into banks, a credit institution draw up a divestment plan either via: (i) absorption by previously- in order to reduce that stake to below 50% or, existing banks; or, (ii) conversion into banks if they opt to retain a higher interest, requires of the indirect vehicles (IPSs) used in the initial them set up a reserve fund to cover possible integration processes to facilitate the desired capital requirements. concentration. The distinction between the origin of today’s caja-derived banks (cajas This requirement left the Banking Foundations integrated into existing banks versus banks with ownership interests of 50% or higher with newly created as a result of conversion) has two choices: (i) a divestment plan which no relevance from a legal perspective as they would in all likelihood entail an IPO roadmap are both equivalent to banks for all intents or dilution if the entity was already listed; or, and purposes. However, we believe the route (ii) endowment of the above-mentioned taken is of interest to the extent that those reserve fund, eroding the resources available deriving from conversion may still be closer to for the performance of community work. the savings banks’ traditional spirit in terms of local roots, customer orientation and giving back to society. The old cajas in today’s financial system To start with, the first group (savings banks If the initial and successive waves of savings merged into previously-existing banks) consists bank mergers had irreversibly altered the caja of the former cajas (seven with total assets of landscape, the above Act would provide the around 180 billion euros) which, following definitive push for the transformation of their intervention and/or nationalisation as a the resulting entities, not only in terms of their result of significant injections of public funds, legal form (conversion into banks) but also were later auctioned off to the banks. The in terms of the adaptation of their ownership first of these was Banco CAM (created from structures (opening up of the shareholder Caja de Ahorros del Mediterráneo), which ranks), with the attendant ramifications on was acquired by ; the second the corporate governance front. The final consisted of the sale to BBVA, in two separate

The Law on Savings Banks and Bank Foundations, imposed as a condition “ as part of the MoU associated with the bank bailout, forced the cajas to convert to banks, unless they were very small in size and/or had narrower geographic spheres of influence. ”

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Compared to cajas absorbed into existing banks, those cajas deriving “ from conversion may still be closer to the savings banks’ traditional spirit in terms of local roots, customer orientation and giving back to society. ” auctions, of two entities arising from the into BFA, the subsequent IPO of 2011 and integration of the Catalan cajas: Unim (Caixa the subsequent recapitalisation by the FROB, Sabadell, Caixa Terrassa and Caixa Manlleu) with the total loss of capital for the original and Catalunya Banc (Caixa Catalunya, Caixa foundations and, lastly, in early 2018, the Manrresa and Caixa Tarragona). addition to its scope of consolidation of BMN, also the result of the merger of four cajas The vast majority (36, with total assets of (Murcia, Granada, Penedés and Sa Nostra). 1.1 trillion euros) have morphed into banks This group of ‘caja-banks’ is rounded out by means of the conversion of former cajas by the stock-market listed Liberbank (made or groups of cajas. As alluded to earlier, up of the cajas of Asturias, Extremadura, we believe that this route should imply a Cantabria and CCM) and Unicaja Banco more pronounced maintenance of local ties (the former cajas Unicaja, Jaen, España and and a more prominent role for the Banking Duero). Foundations with shares in the banks created upon conversion. Among those entities not yet listed, there are three other caja-derived banks. Firstly, Ibercaja Indeed, it is the presence of these foundations Banco (which, on the basis of Ibercaja, absorbed in the shareholder ranks and the restrictions on CajaTres: Caja Inmaculada, Badajoz and their presence imposed under the Act that has Círculo Católico), an entity with IPO plans shaped and continues to shape the existence of but whose comfortable capital position (it has different shareholder models and/or market already repaid all of the funds injected into listings for the new banks arising from the CajaTres by the FROB) gives it sufficient margin transformation of the old cajas. The key lies to optimise the timing of its IPO. Secondly, with the above-mentioned requirement under , the bank which encompasses the the Act whereby foundations with shares in a former Basque cajas (BBK, and Vital), bank of over 50% draw up a divestment plan or set up a reserve fund to cover the investee as well as Cajasur, acquired by BBK. In the bank’s potential capital requirements. wake of the Act, Kutxabank opted to create the required reserve fund, thereby avoiding Four of the above caja-derived banks a reduction in the foundations’ shares and, have listed on the stock exchange, thus, having to publicly list in order to dilute thereby achieving the goal of diluting the the value of their holdings. foundations’ ownership interests. The first, the ‘caja-bank’ which has been listed the Thirdly, , which originated from longest, is CaixaBank. That bank, building NovaGalicia Banco, was created from the on the foundations of the former Caixa de merger of the former Galician cajas (CaixaNova Pensiones (La Caixa), has gone on to absorb and Caixa ) and was sold in auction one caja (Caixa Girona), one ‘caja-bank’ to the Venezuelan bank Banesco. Given that (Banca Cívica, created by the integration Abanca’s shareholder ranks do not include of the former Caja Navarra, Cajasol, Caja any foundations, it is not obliged to dilute General de Canarias and Caja Burgos) and their holdings under the Act or, by extension, several Spanish and international banks. The to list its shares publicly, a decision that is second to emerge is Bankia, this time created solely within the purview of its shareholder, from the initial integration of seven cajas Banesco.

33 184 € SAB ~ ~ asset Banks ( Banks listed Banks listed integrated into traditional traditional into integrated ) BBVA Savings Bn 7 Not ABAN required KUTX Banksconversion: Reserve fundReserve Bn Savings list IBER 1,300 Plans to to Plans from € UNI 2008 2017 integratedinto 7 banks ) Bn LIB 1,100 Banks with total assets ~ € 4 are listed 4 are consolidation and reform Savings BKIA 45 Banks (assets ~ ~ (assets Banks cajas Savings 36 CBK 1.3 1.3 € assets de Ahorro Banks ( Banks regulated by Ley de Cajas de Cajas Ley by regulated ) The roadmap of the Spanish Savings Bn Source: CECA, Afi. Source: 2 Exhibit 5

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Exhibit 5 graphically sums up the routes taken by the former cajas in their evolution into banks (separately showing the two small surviving cajas referred to earlier). For a more detailed snapshot of the transition from caja to bank, the Appendix itemises the initiatives taken by the 45 cajas in existence in 2009 en route to forming part of one of the entities in existence today.

Lastly, it is worth underscoring the fact that all of the banks into which the former cajas have morphed constitute significant entities from the standpoint of the European supervisor (SSM), such that irrespective of whether they are publicly listed or not, they are all subject to the same oversight and corporate governance requirements as traditional banks.

Ángel Berges and Fernando Rojas. A.F.I. - Analistas Financieros Internacionales, S.A.

35 Bankia 2017 Integra 2016 BBVA Abanca Unicaja Banco 2015 Caixabank Ibercaja Banco Integration 4 Bankia 201 Liberbank Kutxabank Banco Sabadell Integration Banco Mare Nostrum Integration EVO Banco 2013 BBVA Catalunya Banc CEISS Integration NCG Banco Banco CEISS Unicaja Banco Banco Etchevarría 2012 Caixabank Caixabank Ibercaja Banco Banco Caja 3 ration g Integration FROB Control FROB Inte FROB Control FROB FROB Control FROB Merger NCG Banco 2011 CEISS Banco Sabadell Banco Caja 3 Liberbank Banca Cívica Banco CEISS Unnim Banc BFA - Bankia Kutxabank Ibercaja Banco Catalunya Banc Unicaja Banco Banco Mare Nostrum Caixabank Banco de Valencia Indirect Integration Indirect Indirect Indirect IPS + Indirect IPS + Indirect IPS + Indirect IPS + Indirect Indirect Indirect Indirect 2010 Nova Caixa Galicia Kutxa Banco CAM Cajastur Caja Vital Banca Cívica CAI Unnim Catalunya Caixa BFA - Bankia CEISS Unicaja BBK Banco Mare Nostrum Ibercaja Caja Círculo Caja Badajoz Caja Extremadura La Caixa Cajasol-Guadalajara Caja Cantabria Merger Merger Merger Merger Merger Merger Merger IPS IPS + Indirect IPS + Indirect Indirect Businesstransfer Assets transfer 2009 Timeline of the savings banks transformation Source: CECA, Afi. Source: BBK Cajasur Caja Vital Kutxa Caja Duero Caixa Manlleu Caixa Catalunya Caixa Tarragona Caixa Manresa La Caixa Caixa Girona Cajasol Caja Guadalajara Caja Navarra Caja Burgos Caja Canarias Caja Ávila Caja Segovia Caja Rioja Caja Murcia Caixa Penedés Caja Granada Sa Nostra CAM Caja Bancaja Caja Insular Canarias Caixa Laietana Caixa Sabadell Caixa Terrasa Caja España Unicaja Caja Jaén Ibercaja CAI Caja Círculo Caja Badajoz Caixa Galicia Caixanova Cajastur CCM Caja Cantabria Caja Extremadura Appendix

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