Spain: Introduction To The Spanish Legal Banking Framework

Banking industry in Spain represents, in relation to the size of the Spanish economy as a whole, a quite large sector which has increasingly grown during the last 10-15 years, prompted, amongst others, by a few remarkable mergers between some of the largest banks in the late nineties, and a progressive investment policy of such entities abroad, specially in South America, where major Spanish banks have consolidated their positions at the head of important banking markets.

As far as the regulatory aspects are concerned, Spanish banking market is a regulated sector, so that it is subject to a detailed regulation on a number of aspects of the banking practice (capital adequacy, prudential supervision, insolvency requirements, money laundering, consumer protection, and many more).

However, banking law is characterised to be rather dispersed legislation which, to some extent, may give rise to confusion in terms of application. Additionally, Spanish banking industry is a fully harmonised sector, having been implemented the European legislation and international guidelines (for instance, Basel Committee) into the national law.

Article 1 of the Royal Legislative Decree 1298/1986, June the 28^th, as amended by the recently enacted Act 44/2002, November the 22^nd, on Measures to Reform the Financial System (known as "Financial Act"), defines a Credit Entity as the company carrying out, on a regular basis, activities consisting of receiving funds from the public which take form of deposits, loans, temporally transfer of financial assets or other related instruments, bearing the obligation to reimburse them, and applying them to the granting of credits or other activities of similar nature. Furthermore, the concept "Credit Entity" also includes those legal entities, other than the aforementioned, which issue means of payment in shape of electronic money.

This definition has been introduced in the Spanish legislation as a consequence of the implementation of Directive 2000/12/CE, of the 20^th of March, on the access to the activity of credit Entities and its practice.

Conceptually, the Royal Legislative Decree 1298/86, as amended, sets out the types of entities entitled by statute to carry out the activity properly reserved for Credit Entities; these are the following: Banks, Savings Banks, Credit cooperatives, Financial Credit Establishments ("Establecimientos Financieros de Crédito", hereinafter, "EFC"), the recently created Electronic Money Entities ("Entidades de Dinero Electrónico", hereinafter, "EDE"), and lastly, the Official Credit Institute ("Instituto de Crédito Oficial", hereinafter, "ICO") and the Spanish Confederation of Savings Banks ("Confederación Española de Cajas de Ahorro", hereinafter, "CECA").

ICO is a public law entity aimed at contributing to the growth of national economy, giving financial assistance in case of natural disasters, economic crisis, and implementing certain economic measures adopted by the Government. Likewise, CECA is an association with a non profit aim, grouping Saving Banks with the purpose to provide services and give reciprocal assistance.

Apart from the ICO, CECA, which are subject to specific regulation, and EDEs, which are entities created by Directive 2000/12/CE and subsequently by Spanish Act 44/2002 (which is still in needs of further regulations), banking regulatory provisions on main subjects apply to Banks, Saving Banks, and Credit Cooperatives (also known as "deposit entities"). Given that these three types of credit entities are designed for different purposes and take different legal forms, they are also subject to special legislation setting out the particular aspects of each entity.

The general regulatory framework for credit entities imply the latter falling under the supervisory body, that is, the Bank of Spain, being subject to its supervision, control, inspection, regulation, and thus, having to meet all the requirements in terms of capital reserves, solvency standards, corporate governance, consumer protection, etc.

Banks are Credit Entities, taking legal form of specific limited liability corporations that, once authorised by the Ministry of Economy and registered with the Specific Register for Credit Entities at the Bank of Spain, may undertake the activities statutorily contemplated for Credit Entities.

Saving Banks are public foundations of a mercantile nature, which act as Credit Entities under certain conditions set by statute: part of their profits must be addressed to social and charitable goals. The legal regimes governing them include both specific national legislation setting out particular aspects of their functioning and legislation by each of the Autonomous Regions under competences transferred to the Regions regarding Saving Banks.

Both legal form and statutory goals to be achieved are based on historic reasons since Saving Banks used to be entities closely linked to the local public authorities focussed on helping unprotected collectives and managing their savings. Nowadays, Saving Banks are proper "banking entities" concerned on the same business areas as the rest of the Credit Entities.

Credit Cooperatives are cooperative partnerships which purpose is to provide financial services to solve financial needs of its partners and third parties by means of carrying out the activities reserved for credit entities, with no limit of number of partners, whose liability is limited to the contributions made in favour of the partnership.

Credit Financial Establishments (EFC) are entities able to carry out specific activities for Credit Entities such as loan of money, granting credits and other financial services, although they are not allowed to receive deposits, loans, etc, from the public.

The EFCs are entities under Bank of Spain supervision, however, since they are not allowed to receive deposits from the public, the obligation to be adhered to the Deposit Guarantee Fund does not apply. Additionally, the requirements to establish an EFC are not as strict as the ones for creating other Credit Entities.

EFCs are therefore suitable vehicles to carry out certain financial activities without having to face the setting up process of a Credit Entity.

Electronic Money Entities (EDEs) are entities providing e-money or digital cash, that is, electronic modes accepted as means of payment in the place of cash. This kind of entity, although strictly speaking a Credit Entity, and thus subject to Bank of Spain supervision, is confined to issuing electronic money without being allowed to either loan money or receive deposits or other similar financial instruments from the public.

As of December, 2002, there were, registered with the Bank of Spain Register for Credit Entities, 84 Banks, 47 Saving Banks, 87 Credit Cooperatives and 83 Credit Financial Establishments.

The public body which supervises, controls and regulates credit entities is the Bank of Spain, which is an autonomous public body belonging to the Ministry of Economy and regulated by the Act 13/1994, of the 1^st of June, on Bank of Spain Autonomy (hereinafter, "Act 13/1994").

Apart from the credit entities supervisor, the financial system supervision is completed by two more bodies, namely: the CNMV, that is, the Securities Market Commission, for supervising capital markets, and the DGS, that is, the General Directorate of Insurance and Pension Funds, for supervising insurance and pension markets and insurance companies and pensions funds and schemes.

Under Act 13/1994, the Bank of Spain is empowered to make regulations in order to implement provisions contained in regulations already in force issued by the Government or Ministry of Economy, implement instructions from the European System for Central Banks, as well as to regulate other aspects of its own internal functioning.

The Bank of Spain is, therefore, the Public Body which monitors and regulates the credit market, and controls, supervises and, when necessary, fines and intervenes Credit Entities.

However, although every Credit Entity practicing in Spain falls under the Bank of Spain supervision, the latter is also the Supervisory Body for other kind of entities other than Credit Entities, namely, Mutual Guarantee Companies, Real Estate Valuation Companies and Currency Exchange Establishments.

Establishing a Credit Entity is subject to a double source of legislation: the general regime given by the Act 26/1988, July the 29^th, on Discipline and Intervention on Credit Entities, and, secondly, a specific regime for each of the three main Credit Entities, namely, Royal Decree 1245/1995 for Banks, Decree 1838/1975 for Saving Banks, and Act 13/1989 and related regulations for Credit Cooperatives.

For a Credit Entity to access the credit activity, the granting of a previous Authorisation from the Ministry of Economy is required. Such granting is conditioned to the compliance of certain requirements, which vary from a type of Credit Entity to another.

As far as Banks are concerned, the conditions to be met for a new Bank to access the activity may be summarised as follows:

• Limited liability incorporated by the procedure of simultaneous foundation.
• Initial minimum corporate capital of 18 millions €.
• Corporate purpose limited to the statutory activity for credit entities.
• No special conditions or remunerations for founding partners.
• Corporate domicile and effective management set in the national territory.

• Board of Directors formed by at least 5 members
• Professional honourability requirements

• Correct administration and accounting organisation
• Internal compliance and control suitable for prudent and healthy management

• Suitability of shareholders holding significant stakes (holding the 5% or more of the share capital or of the voting rights).

In relation to the Saving Banks, both the national and regional legislations (from those Autonomous Regions that have assumed competences on creation and mergers of Saving Banks domiciled in their respective territories) establish analogical requirements, except from the composition of the shareholders, since their capital is not divided into shares due to their nature of foundation.

Similar criteria would apply to Credit Cooperatives, although with lower capital requirements.

According to the above mentioned, we must bear in mind that requirements on the suitability of shareholders holding a significant stake on a Credit Entity will not only apply to the creation of such a Entity, but also to further changes in the shareholder structure during the life of the Entity.

The cross border banking comprises both conditions for foreign entities to operate in Spain and conditions for Spanish entities to provide services abroad. We are now focussing on foreign banks intending to operate in Spain.

Having reached this point, we must distinguish between entities from a EU Member State and entities from a non EU Member State.

In this regard, the criteria established in EU legislation provide minimum requirements in order to obtain the authorisation to practice banking activity within the European Union. In this sense, banking authorities of each Member State of the EU are obliged to allow those Credit Entities authorised in other EU Member State to operate in its territory, that is to say, Member States banking authorities have to meet the principle of "European Passport", prior informing Authority in host Member State.

The activities enjoying a mutual recognition represent a wide range of banking and financial services, being "Universal Banking" the underlying concept in which the EU legislation is inspired.

Activities under mutual recognition

• Receiving funds reimbursable to the public.
• Loans and credits.
• Factoring and leasing.
• Payment transactions, payment services and money transfers.
• Issuance and management of means of payment, such as credit cards, travel cheques or letters of credit.
• Guarantees or similar instruments.
• Intermediation on the interbank market.
• Transactions with securities or other financial instrument, whether on its own behalf or on third person’s behalf.
• Participating in the issuance of securities and mediation in placing and ensuring the subscription of the issuance.
• Advising and providing services to companies on capital structure, corporate strategy, mergers, acquisition and related matters.
• Wealth management and advice to owners.
• Deposit of securities and representation of securities on account entries.
• Commercial briefing and reports.
• Renting of safe boxes.

On another hand, Credit Entities domiciled in third countries that are not authorised in a EU Member State do not benefit from the harmonisation of the European banking provisions. Therefore, for a non EU Member Credit Entity to carry out banking activities in Spain, an authorisation must be granted, under equivalent conditions to the ones for establishing a national bank.

The administrative authorisation granted by the Ministry of Economy may be rejected in cases the requirements are not met. Likewise, the principle of Reciprocity comes into scene, allowing Spanish authorities to reject the establishment of a foreign bank for not having received the same treatment for Spanish banks from the authorities of the third country where the bank intending to operate in Spain is domiciled (principles governing the liberalisation process at international level, under the World Trade Organisation negotiations).

Spanish jurisdiction also permits foreign banks having their own office of representation with the sole purpose to provide information or other commercial and advertising activities.

"Universal banking" and "bank- assurance"

Spanish banking industry is characterised by the fact that Credit Entities may offer a wide range of financial services apart from the specific activity for Credit Entities above defined, as a consequence of the European harmonisation. In this sense, for instance, it is important to remark that a Spanish Credit Entity is entitled to carry out investment activities supervised by CNMV, by virtue of article 65 of Capital markets Act, 24/1988, of the 28^th of July. In this regard, Credit Entities may widen their possibilities of business by means of undertaking investment services for third parties on a professional basis. As we said further above, "Universal Banking" is therefore a commercial trend which is backed by the European Legislation.

On the other hand, Spanish banking market is designed in such a way that phenomena such as "bank-insurance" may appear to be interesting: insurance legislation establishes flexible mechanisms for the distribution of insurance products. In this regard, for instance, an insurance company may appoint a Credit Entity as an agent. In this scenario, Credit Entities may commercialise insurance product under an insurance agency contract.

Consequently, Spanish banking regulation has given rise to commercial practices consisting of "banks" broadly speaking (as financial institution, for instance, groups headed by a Bank) establishing wide networks for distribution of financial services and products, both credit, investments and insurance products, such as contracting a current account, applying for a loan, giving investment orders, underwriting an insurance policy, as well as mortgages, deposits, loans to consumers, finance of large projects, discretional portfolios management, promotion or incorporation of collective investment institutions, etc.

Cuatrecasas. Banking Law and Financial Institutions practice Group. Madrid.