REQUIREMENTS FOR PREFERENCE SHARES

CHANGE IN THE REQUIREMENTS FOR PREFERENCE SHARES TO BE ELIGIBLE AS OWN FUNDS

In order to adapt the legal regime governing credit institution preference shares to international
requirements and thus ensure they are an effective instrument for meeting solvency
requirements, Spanish legislation has been changed in certain respects.
Specifically, the issuance conditions may not include early redemption incentives and
must set the remuneration to which the securityholders are entitled, provided always that
it shall be conditional on the existence of distributable profit or reserves. The Board of
Directors or equivalent body of the issuing or parent credit institution has the power to
cancel, at its discretion, when necessary, the payment of interest or dividends for an unlimited
period of time, on a non-cumulative basis. Payment may also be cancelled if the
issuing or parent credit institution or its consolidatable group or sub-group does not meet
the minimum capital requirements. In any event, the Banco de España may require the
cancellation of remuneration payments based on the financial and solvency situation of
the issuing or parent credit institution or on that of its consolidatable group or sub-group.
Also, a mechanism should be established to ensure that preference shareholders participate
in the absorption of present or future losses of the issuer or controlling institution.
That mechanism should be defined clearly and not hinder possible recapitalisation processes,
whether they be through the conversion of preference shares into ordinary shares,
non-voting equity units or capital contributions to credit cooperatives, or through the reduction
of the nominal value.
The mechanism must be applied in either of the following circumstances: a) where the issuing
or parent institution, or its consolidatable group or sub-group, has an original own
funds ratio, calculated in the same way as the solvency ratio, below 4% (the Banco de
España may set any other solvency ratio provided it is more demanding), or b) where the
issuing or parent institution, or its consolidatable group or sub-group, has an original own
funds ratio below 6% and material accounting losses.
When the mechanism is that of conversion into ordinary shares, non-voting equity units or
capital contributions to credit cooperatives of the issuing or parent credit institution, the
issuer has to allow immediate conversion and specify an exchange ratio which sets a floor
on the number and nominal amount of shares to be delivered. When the mechanism consists
in reducing the nominal amount of the preference shares, the losses incurred by the
issuer shall be apportioned between total capital and reserves, on the one hand, and total
preference shares outstanding, on the other.
The Banco de España may specify the preference share conversion conditions in accordance
with the aforementioned criteria and the manner of determining the losses and the
other indicators stated, particularly in the case of issues guaranteed by various institutions,
on the basis that the stipulated loss absorption mechanisms do not hinder possible
recapitalisation processes.
The limit on the outstanding nominal amount of preference shares remains at 30% of the
original own funds of the consolidatable group or sub-group of the controlling entity of the
issuing subsidiary, including the amount of the issue itself, without prejudice to any additional
limitations that may be imposed for solvency purposes. However, from now on, the
Banco de España may change this percentage, although it may never exceed 35%.
Preference shares continue to be perpetual and the issuer continues to have the option
of agreeing to early redemption from the fifth year after they were paid in, following
prior authorisation from the Banco de España. From now on, this authorisation is subject
to the financial situation or solvency of the credit institution or its consolidatable
group or sub-group being unaffected. It may also be made subject to the institution
replacing the redeemed preference shares with eligible capital items of the same or
higher quality.
In this respect the Banco de España may authorise at any time the early redemption of
dated or undated instruments in the event of any change in the fiscal regime or in the eligibility
of such instruments as own funds that was not envisaged at the issue date.
The payment of remuneration may be replaced, if so stipulated in the terms of issue, by the
delivery of ordinary shares of commercial banks or non-voting equity units of savings
banks or capital contributions to credit cooperatives, provided that this enables the institution
to preserve its financial resources.
This delivery of capital instruments will only be permissible if it produces the same economic
result as redemption, i.e. if it does not entail the reduction of capital of the institution,
10 and the issuer has full discretion to opt not to pay the remuneration in cash and,
furthermore, may cancel delivery of the capital instruments when necessary.
Lastly, the transitional regime envisaged in Law 6/2011 is implemented, such that the preference
shares issued before the entry into force of this Law (13 April 2011) and not meeting
the requirements under it may continue to be eligible as the own funds of credit institutions
and of their groups, subject to certain limits detailed in Royal Decree 771/2011.

CREDIT INSTITUTION REMUNERATION POLICIES

In accordance with the transposition of Directive 2010/76/EU of the European Parliament and of the Council of  24 November 2010, credit institutions have to apply certain requirements for those categories of staff whose professional activities have a material impact on their risk profile at group, parent and subsidiary levels.
Most notable among other requirements are the following:
a) a list indicating the categories of the aforementioned staff must be submitted to the Banco de España ;
b) the remuneration policy is consistent with sound and effective risk management, does not encourage risk-taking that exceeds the level of tolerated risk of the credit institution and incorporates measures to avoid conflicts of interest;
c) the management body adopts and periodically reviews the general principles of the remuneration policy at least annually, and the implementation of the remuneration policy is subject to central and independent internal review for compliance with the remuneration policies and procedures in place;
d) staff engaged in control functions are independent from the business units they oversee, and are remunerated in accordance with the achievement of the objectives linked to their functions; and
e) the remuneration of the senior officers in the risk management and compliance functions is directly overseen by a remuneration committee or, if such a committee has not been established, by the relevant management body.
The new legislation regulates the design of remuneration schemes, in which the fixed and variable components should be appropriately and efficiently balanced. The variable remuneration components should be sufficiently flexible such that their adjustment includes the possibility to pay no variable remuneration component.
For these purposes, the Banco de España may establish specific criteria for determining the appropriate proportion between fixed and variable components. The variable remuneration components should create incentives aligned with the long-term interests of the institution and meet certain requirements set out in Royal Decree 771/2011.
The remuneration schemes of credit institutions which receive government financial support
for restructuring purposes have to meet, in addition to the foregoing requirements, the following ones:
a) where variable remuneration is incompatible with a sound capital base and with an appropriate waiver of government support, it shall be strictly limited to a percentage of net income and
b) the directors and managers who effectively direct the activity of the institution may not receive variable remuneration unless it is duly justified in the opinion of the Banco de España, which may, moreover, set limits on their total remuneration.

Most of the remuneration policy is extended to investment firms, such that the references
to the Banco de España and to credit institutions shall be deemed to be to the CNMV and
to investment firms, respectively.