The European Commission has given green light until 31 December 2012 to a new Spanish scheme aimed at strengthening the capital basis of credit institutions under EU state aid rules. The scheme serves as a backstop facility for banks with urgent capital needs materialising before the stress test is completed, and will provide state support to banks which need to cover short-term capital needs following the stress test.

The European Commission found the Spanish recapitalisation scheme for credit institutions to be in line with its rules on state for supporting banks during the crisis, because it is limited in time and scope and contains exit incentives. In fact, the Commission has approved until 31 December 2012 the new Spanish scheme. It is aimed at strengthening the capital basis of credit institutions under EU state aid rules. On the 20 of July, the Eurogroup decided that the FROB will receive the funds and channel them to the financial institutions concerned in Spain.

The scheme sets the conditions under which the Fondo de Reestructuración Ordenada Bancaria (FROB) will strengthen the own resources of credit institutions which, after the stress tests -currently being conducted under the Memorandum of Understanding on Financial Sector Policy Conditionality (MoU), would show a capital shortfall that they intend to cover with private sector resources in the mid-term but need support from the State during an interim period.

This recapitalisation scheme is an essential element for the completion of the restructuring of the Spanish banking sector and the first of a series of milestones planned in the Memorandum of Understanding in order to increase the long-term resilience of the banking sector in Spain. Banks benefiting from a capital injection need to provide a restructuring plan showing how they will restore their long-term viability without continued State support.