Daniel Pérez, jefe de la división de análisis de estabilidad financiera del Banco de España, explicó el sábado a los analistas financieros junto al Director General de Regulación, José María Roldán, las medidas para la reforma del sistema financiero aprobadas el viernes por RDL y anunciadas el jueves por el Ministro de Economía, Luis de Guindos. Las medidas se estructuran en tres: 1, provisiones específicas de 25.000 millones para cubrir pérdidas esperadas en activos problemáticos (fundamentalmente suelo); 2, incremento de capital de 15.000 millones para solventar incertidumbres respecto a la valoración de estos activos (suelo y viviendas en construcción), y 3, provisiones de 10.000 millones que cubran potenciales migraciones de los activos sanos (148.000 millones) a los problemáticos.

1. New measures for the Spanish Banking System
4 February 2012
Madrid

2. The new measures
 The new measures are designed to clean up institutions’ problematic
exposures to construction and real estate developers in Spain - particularly
land – from their balance sheets…
 … as well as to consider potential migrations from normal to problematic
portfolios
 As a reminder, BdE considers as the following problematic exposures:
 Doubtful loans: Loans in which some installment has not been paid for a period of more than
90 days, and those exposures in which there are reasonable doubts as to total repayment under
the terms agreed
 Substandard loans: Loans showing some general weakness associated with the fact they are
to a specific troubled group or sector or if weaknesses are apparent in certain operations, even if
these operations do not qualify individually for classification as doubtful or write-off
 Asset foreclosures: Assets ownership goes to the credit institutions, as a result of the
application of these regular tools in a crisis situation such as the present. Supervisors prevent
them from becoming potential mechanisms to defer the recognition of losses
2

3. The new measures
 The measures are applied to the stock of legacy assets at 31.12.2011 …
 … and not to new operations
 It could be expected that new operations are subject to stricter lending standards. In this
respect, note that the 2010 reform of the CBE 4/2004 already included different
considerations in order to incentivise higher lending standards by institutions to this sector.
– For instance, it is considered that, as a general practice, financing the acquisition cost of land for its
further urban development will not be higher than the 50% of the minimum between the appraisal
value and the price registered in the public deed (escritura pública)
 To avoid a negative impact on new real estate sector activity in future cycles
3

4. The new measures
 The new measures are particularly focused on land because their key
objective is to eliminate the major uncertainty affecting the Spanish institutions’
balance sheets, that is the uncertainty associated with the value of land
Exposure to construction and property developers, €bn
200 Value
180 ?
160
Land
140 73
120
100
15 Housing under development
80 148
60
40 87
Rest (Finished housing,54%; foreclosed retail
20 houses, 21%; Personal guarantee and others, 25%)
0
Normal (46%) Problematic (54%)
4

5. The new measures
 The measures are based on three complementary tools:
Exposure to construction and property developers,
€bn
Land
Housing under development
Rest (Finished housing,54%; foreclosed retail houses, 21%; Personal
guarantee and others, 25%)
200
180
160
Specific Capital add-on
140 73 provisions to to consider valuation
120
100
consider incurred uncertainties
15
80 148 losses in regarding land and
60
87
problematic assets, housing under
40
20 particularly in land development
0
Normal Problematic
General provisions to take into account potential
migration from normal to problematic portfolio
5

6. The new measures
1. Specific provisions € 25bn
2. General provisions € 10bn € 50bn
3. Capital add-on € 15bn
 A figure of €50bn means a 5%
of Spanish GDP … on Cleaning-up of bank balance sheets
New measures From Jan 2008 to June 2011
15%
top of the cleaning-up
160
GDP
already conducted by institutions
Cleaning uo of bank balance sheets, Jan 2008 to June 2011
120
50
€bn
120
Provisions charged to
100 institutions' P&L
80
80
66 Reduction in general
60 provisions 105 105
40
40
17
Provisions charged to
20
reserves of institutions
22 undergoing
0 restructuring 0
6

7. The new measures
 Additional specific provisions: €25bn
Land related assets: provisions for this type of assets represent a 76% of total additional
specific provisions
LAND LAND
CBE 4/2004 New Measures
Foreclosed 10% 1st year; 20% 2nd year; 30%
3rd year
Doubtful – past Provisions = [loan – 50% haircut
due 90 days appraisal value of the collateral]; to 60% of the value of
be set in one year from 25% to the loan
100%
Rest of doubtful Minimum of 25% of the value of the
loan
Substandard Minimum of 10% of the value of the
loan
31% 60%
coverage coverage
ratio ratio
7

8. The new measures
 Additional specific provisions: €25bn
Housing under development: provisions for this type of assets represent a 12% of total
additional specific provisions
HOUSING UNDER DEVELOPMENT HOUSING UNDER DEVELOPMENT
CBE 4/2004 New Measures
Foreclosed 10% 1st year; 20% 2nd year; 30%
3rd year
Doubtful – past Provisions = [loan – 50% haircut
due 90 days appraisal value of the collateral]; to
50% of the value of the loan
be set in one year from 25% to
100%
Rest of doubtful Minimum of 25% of the value of the
loan
Substandard Minimum of 10% of the value of the 50% of the value of the loan or
loan 24% for on-going developments (*)
27% 46%
coverage coverage
ratio ratio
(*) The exposure on-going under development
classified as substandard is around €2bn
8

9. The new measures
 Additional specific provisions: €25bn
Other different from land and housing under development: provisions for this type of assets
represent a 12% of total additional specific provisions
 Finished housing and other real estate collateral
 Foreclosed: the new measures apply the same treatment as CBE 4/2004, but increasing the value
of the provisioning coefficients: 10% (1st year); 20% (2nd year) and 30% (3rd year) to 25% (1st year);
30% (2nd year); 40% (3rd year) and 50% (4th year)
 Doubtful and substandard: the new measures eliminate the exceptions for minimum
provisioning requirements, that are set at 25% for doubtful and 20% for substandard
 Foreclosed housing from households (first residence)
 The new measures apply the same treatment, but expanding one year the provisioning
coefficients: 10% (1st year); 20% (2nd year) and 30% (3rd year) to 10% (1st year); 20% (2nd year);
30% (3rd year) and 40% (4th year)
 Other with personal guarantee
 For those classified as substandard the minimum provisioning coefficient goes from 10% to 24%
 These changes give greater incentives to sell the assets in the market
9

10. The new measures
 To sum up: specific provisioning requirements
New operations:
CBE 4/2004 criteria are
maintained, but coverage
requirements for foreclosed
assets will be 40% for the 4th
year
10

11. The new measures
 Additional specific provisions: €25bn
The increase in specific provisions means a direct increase in coverage ratios
Loan Coverage Ratio, %
CBE 4/2004 New Specific Provisions
70
60
50 60
40
46
30 43
20 27
29 31
10
0
Total problematic portfolio Housing under Land
development
11

12. The new measures
 General provisions: €10bn
€10bn represents a 7% of the construction and real estate developers normal
portfolio
 This provision is established to take into account that there may still be the
possibility that migration to the problematic portfolio of construction and
real estate developers exposures which are currently classified as normal
 Collective assessment for impairment
 This is for specific portfolios
 It is not a reform of the present Spanish dynamic provision
 This one-off provision does not enter into the definition of regulatory capital
12

13. The new measures
 General provisions: €10bn
 When a loan classified as normal is re-classified to the problematic portfolio,
the amount accumulated in this fund of provisions can be used as much
as necessary depending on the provisioning requirements resulting from
the re-classification
 These potential re-classifications will not have an impact on the P&L until
the provision fund constituted as a result of the application of the new
measures is completely depleted
13

14. The new measures
 Capital add-on: €15bn
The capital add-on is computed for land and housing under development classified
in the problematic portfolio (*) over the ‚capital principal‛ minimum requirements of
8% / 10%
 It takes into account valuation uncertainty regarding this type of assets increasing
their coverage: +20pp for land related assets and +15pp for housing under
development in the problematic portfolio (*)
Coverage ratios considering the capital add-on, %
90
80
70 Specific provisions
Specific provisions
60
+ capital add-on
50
40
Land Housing under
development
(*) Except on-going housing under development classified as substandard that represents an exposure around €2bn
14

15. The new measures
 Summing-up
The total estimated amount of the new measures is €50bn of additional cleaning-
up
Specific provisions: +€25bn; Capital add-on: +€15bn; General provisions: +€10bn
Coverage Ratio, %
The measures also
CBE 4/2004 New Specific Provisions New Specific Provisions + Capital Add-on consider potential
migration from the
90
80 ‘normal’ portfolio to the
70 80 ‘problematic’ portfolio
60
50 65
60
40 53
46
30
43
20 29 27 31
10
0
Total problematic portfolio Housing under Land
development
15

16. The new measures
 To compute a decline in the prices of the collateral compatible with a given
level of coverage, it is necessary to consider the loan to value ratio (LTV)
EXAMPLE:
 A loan of €60 where the value of the collateral is €100 has a LTV of 60%: that means that the value
of the loan is protected against an initial decline in the value of the collateral of 40%
 A loan of €60 with a LTV of 60% and a coverage ratio of 50% means that the implicit decline in the
value of the collateral is 70%
INITIAL VALUE OF INITIAL VALUE OF VALUE OF THE LOAN
THE COLLATERAL THE LOAN NET OF PROVISIONS
100 60 30
LTV = 60% Coverage Ratio = 50%
IMPLICIT DECLINE IN THE VALUE OF THE COLLATERAL = 70%
16

17. The new measures
 Considering the coverage of land related assets (80%) and the average LTV of
the portfolio, the implicit decline in land prices is, on average, 87%
 For housing under development the decline in the implicit value of the collateral
is, on average, 82%
Decline in the value of land and housing under development compatible
with new coverage ratios, considering the average LTV of the portfolios %
NO DECLINE IN PRICES 0
-20
At present
New Measures
-40
-60
-82
-80 -87
MAXIMUM DECLINE IN PRICES (VALUE = 0)
-100
Housing under development Land
17

18. The new measures
 The impact of the measures is a one-off: the objective is to eliminate uncertainty regarding
banks’ balance sheets, and particularly the value of land related assets value
 €50bn is the initial impact: in order to assess this figure it is necessary to take into account
 Possible merger and acquisitions may change provisioning figures. Under IFRS
 Need to identify the acquirer and the acquiree
 The acquiree must put its balance sheet at fair value
 Under this context, (part of) the adjustment will go directly against own funds
No final data for year-end 2011, and in fact all calculations are based on June 2011
figures
This is particularly relevant because many institutions have announced a strong increase in
provisioning in 4Q-11
 The position of each particular institution needs to be considered
 BE transparency requirements have obliged institutions to disclose risks and coverage to the
construction and real estate sector
 For the global assessment of the impact the asset protection schemes given to CCM,
Cajasur and CAM need to be factored in
18

19. The new measures
 Timeline if there is not an integration process during 2012
 3rd of February of 2012: approval of RD-L
 31st of March of 2012: presentation of a plan to comply with the measures
• BdE approval within 15 working days
 Year-end 2012: compliance with the measures
 In order to facilitate these processes the FROB can buy shares of
the institutions. These shares must be sold through competitive
procedures in, at a maximum, 3 years
19

20. The new measures
 Timeline if there is an integration process during 2012
Conditions for the integration:
 As a general rule, the resulting entity must have a
 3rd of February of 2012: balance sheet which is 20% higher than the largest
approval of RD-L institutions participating in the process
 Improvements in corporate governance
 Objectives on lending to households and SMEs
 31st of May of 2012:
presentation of an integration plan  Objectives on reducing exposure to construction and
real estate developers
• Approval by the Ministry of
 IPS type agreements not contemplated
Economy in one month
 12 months after the FROB can provide funds to facilitate the
approval of the integration plan: processes:
 The new RD-L opens the possibility for the FROB to
compliance with the measures. The instrument the funds through Cocos
integration must be operative
since 1.1.2013 at the latest  Convertible in shares in 5 years
 FROB capital from €9bn to €15bn, reducing its leverage
20

21. The new measures
 Other relevant measures included in the RDL are those related to the rules for loans and
credits other than mortgages to be considered as collateral in Central Bank operations
 This set of measures respond to accommodate the measures in order to increase
collateral availability recognition announced by the ECB on 8 December 2011
 The ECB measures, and particularly the 3 years LTRO has improved the liquidity situation
of the banking sector reducing funding tensions
 Looking ahead, at some point the huge amount of liquidity in the hands of banks will come
back to the markets, but in any case the re-opening of wholesale markets requires:
 Regaining confidence for Europe
 National authorities and institutions solving potential weaknesses
 Opening of interbank markets
21

22. Conclusions
 There were basically 4 uncertainties regarding the Spanish banking sector:
 Uncertainties regarding the corporate model of savings banks have been resolved:
from 45 savings banks to 15 commercial banks
 Uncertainties regarding balance sheet cleaning-up have been resolved: €50bn of
additional cleaning-up, meaning a coverage ratio for land related assets of 80%,
that is, 87% decline in land prices
 Uncertainties regarding funding have been alleviated and funding tensions reduced
after the ECB 3 year LTRO
 Uncertainties regarding the impact of the negative macro outlook in asset quality are
present but contained, as a moderate increase in NPL could be expected
22

23.  Background material
GDP projections and NPL evolution
Housing prices
Government net borrowing and Nation net borrowing
Exports
Foreign claims of the Spanish banking sector
23

24. Background material
GDP projections and NPL evolution
60 -5
€ bn
%
NEGATIVE RATE OF CHANGE OF GDP -4
50
-3
-2
40
-1
30 0
1
20
2
3
10
4
0 5
sep-09
sep-11
sep-07
sep-08
sep-10
sep-12
sep-13
jun-08
jun-10
jun-13
jun-07
jun-09
jun-11
jun-12
mar-07
dic-07
mar-09
mar-12
dic-06
mar-08
dic-10
dic-12
dic-13
dic-08
dic-09
mar-10
mar-11
dic-11
mar-13
2012E 2013E
Year-on-year change in doubtful assets. Other than construction and real estate
Year-on-year change in doubtful assets. Construction and real estate sectors
Year-on-year rate of change in GDP
Year-on-year rate of change in GDP. 2012-average forecast
Year-on-year rate of change in GDP. 2013-average forecast
24

25. Background material
Housing prices (1/3)
Real housing prices acumulated adjustment PROVINCIAL BREAKDOWN OF HOUSE PRICES ADJUSTMENT DEMAND. Before a notary
since the peak (year 2007), % (in last twelve months)
-11,3
-13,7
-8,8
-14,3 -17,8
-11,2 TOTAL
0 -17,2
-10,9
-13,2
-10,6
-17,3 NEW HOUSING
-20,9 -15,7
-7,2 -18,3 -12,0
-18,1
Thousands SECOND-HAND HOUSING
-14,7
-16,9 -18,6
-5,5 -26,1
1200
-5 -3,2 -16,8
-23,3 -18,2
-28,0
-21,2 -8,9
-24,8
-21,8
1000
3,1 -24,3 -4,7
-19,6
-10 -21,0
800
-10,2 -10,4
-7,5 -15,8
-21,7
-12,5
-10,4
-23,9
600
-15 -24,4
-13,7
-15,1 -27,6
-15,7 -23,7
400
-17,5
-20 -6,7
200
-17,5
-25,4
0,0
-22,4 0
-25 CHANGE IN NOMINAL TERMS FROM 2008 PEAK TO Q4-2011 (%). NATIONAL AVERAGE = -19% 04 05 06 07 08 09 10 11
2008 2009 2010 2011 MAXIMUM FALL - PERCENTILE 25
PERCENTILE 25
PERCENTILE 75 - MINIMUM FALL
Source: Ministerio de Fomento and Banco de España.
25

26. Background material
Housing prices (2/3)
HOUSING PRICES (real terms)
SPAIN. THE ADJUSTMENT OF HOUSING PRICES (In real terms)
Ireland (a) Spain
COMPARISON BETWEEN THE CURRENT AND PREVIOUS CYCLES USA (Case-Shiller) (a) UK (Nationwide)
France (a)
1979 1991 2007 Index 1997=100
120 280
115 260
110 240
Real prices: peak year = 100
105 220
100 200
95 180
90
160
2010
85
140
80 2011 120
75
100
70
80
65 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
0 1 2 3 4 5 6 7 8 9 10
Years subsequent to peak in real prices (a) Data for 2011 refers to Q1-Q3 average.
26

27. Background material
Housing prices (3/3)
Percentage increase in house proces not attributable to Households asset split (% of total assets)
Source: Oliver Wyman
fundamentals, IMF April 2008
35 Real Estate Other non-financial assets Financial assets
30
SP 79
25
DE 55
20
IT 53
15
FR 52
10
UK 39
5
JP 33
0
Denmark
Ireland
Germany
Italy
Spain
Sweden
US
Finland
Netherlands
France
Norway
Belgium
United Kingdom
Australia
26
0% 20% 40% 60% 80% 100%
27

28. Background material
Government net borrowing and Nation net borrowing
National economy's net borrowing as % of GDP
Government net borrowing as % of GDP
0 0
-1,4 0
-2 -2
-3
-4 -3,7
-4 -4,7 -4 -4,5 -4,4
-6 -6
-8,1
-8 -8
-9,2 -9,3
-10 -10
-11,2
-12
-12
2008 2009 2010 2011E 2012E 2013E
2008 2009 2010 2011E 2012E 2013E
28

29. Background material
Exports
EXPORT MARKET SHARES OF GOODS (REAL TERMS)
1998 = 100
120
110
100
90
80
70
60
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
JAN-SEP
SPAIN FRANCE GERMANY ITALY
SOURCES: Eurostat and IMF.
29

30. Background material
Foreign claims of the Spanish banking sector
Consolidated Foerign Claims of Spanish banks as % of consolidated total assets of the
Spanish deposit institutions. September 2011
10
8
6
4
2
0
Netherlands
Mexico
Luxembourg
Germany
France
Switzerland
Brazil
Poland
Turkey
Ireland
Italy
China
United States
Portugal
United Kingdom
30