Spain sets out tougher terms for 'cajas' controlling banks

Mon Jan 21, 2013 3:31pm EST

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MADRID Jan 21 (Reuters) - Spanish savings banks will have to set aside reserve funds to cover capital needs and face deeper checks from supervisors if they are to keep majority stakes in the lenders they control, a draft law showed on Monday.

Most of Spain's savings banks, or "cajas", will also have to become banking foundations with tighter corporate governance rules, and those with stakes of 30 percent or more in lenders will also come under greater scrutiny.

The new measures would apply, for instance, to Spain's third largest banking group, La Caixa, a savings bank which owns 61 percent of Caixabank, when taking into account convertible bonds.

But the draft law, published by Spain's Economy Ministry, also marked a victory for the cajas after many feared they would be forced by Brussels to altogether lose control of their banking businesses as the price of a European banking bailout.

A real estate boom that turned to bust five years ago crippled many of Spain's banks, forcing the country to take over several lenders and to request up to 100 billion euros ($133 billion) in European rescue aid last year for the weakest firms.

As a condition of receiving the funds, rescued banks have to shed jobs and shrink their balance sheet among other measures.

The bailout terms had also specified that even healthy savings banks that did not need aid, like Catalonian group La Caixa, would have to shrink their stakes in underlying lenders.

The cajas, unlisted entities often deeply linked to different Spanish regions, have come under intense scrutiny since Spain's banking crisis worsened in 2009, as some became associated with the worst excesses of the sector.

Many had been hijacked over the years by local governments that put politicians on their boards and bankrolled grandiose -- and loss-making -- construction projects, including art centres, airports and film studios.

Spain had to pump money into many of the small savings banks while slicing the number of cajas from 45 to less than 10, through a series of mergers.

Spain's compromise with Brussels will limit the power of the savings banks, but allow them to retain control of their lucrative banking businesses.

"It's been discussed with the (European) Commission...we've reached a text that we consider absolutely balanced, in which it is guaranteed that keeping a majority stake by the foundations will not be detrimental to the solvency or capital requirements of the underlying banking entities," a government source said.

The draft law sets out that any caja with over 10 billion euros in assets, or with a market share of more than 35 percent of deposits in its region, will have to become a foundation. Only two tiny savings banks do not fit the bill.

Foundations or savings banks with 30 percent or more of a lender will also come under greater scrutiny from the Bank of Spain, which will examine how board members are appointed for instance or look for conflicts of interests between the caja and the bank in which it owns a stake.

Foundations with more than 50 percent of a lender will have to put in place a special risk control plan and build up a reserve fund to help plug possible capital needs. Kutxabank and Unicaja are two other savings banks this applies to, along with La Caixa.

The size of those reserves will depends on that of the foundation's stake and its worth.

The draft law is likely to be passed at the end of this year or in early 2014, and savings banks will then have five months to turn into foundations. ($1 = 0.7510 euros) (Writing by Sarah White; Editing by Leslie Adler)

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