Banking Law And Corporate Refinancing Risk Regulation In Spain

Introduction

Corporate refinancing risk in Spanish banking law refers to the legal, prudential and financial risks arising when a bank, financial institution or corporate borrower replaces, restructures, renews or modifies existing debt obligations. Refinancing may involve extending maturity dates, replacing old loans with new facilities, changing interest rates, consolidating debts, modifying collateral or granting concessions to borrowers experiencing financial difficulty.

Refinancing is an important part of ordinary banking activity because it may help viable businesses manage temporary liquidity difficulties. However, repeated or inappropriate refinancing can conceal deterioration in credit quality and postpone recognition of losses.

Spanish banks therefore have to distinguish genuine commercial refinancing from refinancing or restructuring granted because a borrower is experiencing financial difficulties. The latter may constitute forbearance and can trigger additional classification, reporting, provisioning and supervisory requirements.

Spain regulates refinancing risk through a combination of European Union prudential legislation, Spanish banking legislation, Banco de España rules and the supervisory framework of the European Central Bank.

1. Legal and Regulatory Framework

The principal framework governing refinancing risk includes:

A. Regulation (EU) No. 575/2013 – Capital Requirements Regulation (CRR)

The CRR establishes prudential requirements concerning credit risk, capital adequacy, default, non-performing exposures and related risk calculations.

Refinanced exposures can affect:

• Risk-weighted assets.

• Regulatory capital requirements.

• Default classification.

• Non-performing exposure treatment.

• Minimum loss coverage.

• Credit-risk reporting.

Refinancing therefore cannot simply be treated as creation of an entirely new and healthy loan where the economic substance indicates continuing borrower distress.

B. Capital Requirements Directive

The Capital Requirements Directive establishes governance and supervisory requirements for European credit institutions.

Banks must maintain effective systems for identifying, measuring, managing and monitoring credit risks.

This includes risks generated by refinancing and restructuring portfolios.

Spain implements important parts of the EU prudential framework through Law 10/2014 on the organisation, supervision and solvency of credit institutions, together with implementing regulations.

Banco de España confirms that the Spanish solvency framework is based principally on the CRR and Capital Requirements Directive, supplemented domestically by Law 10/2014 and implementing regulations.

2. Meaning of Refinancing Risk

Refinancing risk arises where repayment of existing debt depends substantially upon obtaining new financing or modifying existing obligations.

For example, suppose a company owes a bank €20 million that becomes payable shortly.

Instead of repaying the loan, the company obtains another facility from the same bank and uses it to replace or extend the original debt.

This transaction does not automatically eliminate the original credit risk.

The bank must examine whether the borrower is genuinely financially viable or whether refinancing merely postpones recognition of financial deterioration.

Important indicators include:

• Continuing operating losses.

• Weak cash flows.

• Excessive leverage.

• Repeated maturity extensions.

• Dependence on new borrowing to repay existing borrowing.

• Significant concessions by the lender.

• Failure to satisfy original repayment conditions.

3. Refinancing and Forbearance

One of the most important concepts in refinancing regulation is forbearance.

Forbearance generally occurs when a bank grants concessions to a debtor that is experiencing or is likely to experience financial difficulty.

Possible measures include:

• Extending the repayment period.

• Reducing interest payments.

• Temporarily suspending instalments.

• Refinancing an existing loan.

• Changing repayment schedules.

• Partially forgiving debt.

• Replacing several obligations with a new facility.

A refinancing operation therefore has to be examined according to its economic substance rather than merely its contractual form.

The European Banking Authority has specifically clarified that derecognition of an exposure as part of refinancing or forbearance does not necessarily terminate its regulatory status. A newly recognised exposure may have to continue being reported as forborne until the applicable exit criteria have been satisfied.

4. Classification of Refinanced Exposures

Spanish banking supervision requires banks to maintain detailed information regarding refinanced and restructured exposures.

Banco de España's regulatory reporting framework expressly includes reporting concerning restructured or refinanced exposures, including through the relevant FINREP reporting categories.

A bank therefore cannot automatically classify a refinancing as performing simply because a new contract has replaced an older contract.

The institution must assess matters such as:

Borrower financial condition

The bank must determine whether the borrower has sufficient financial capacity to meet the revised obligations.

Reason for refinancing

There is an important difference between ordinary refinancing undertaken for commercial reasons and refinancing granted because of borrower financial distress.

Probability of repayment

Banks must evaluate whether repayment is realistically expected under the revised contractual conditions.

History of restructuring

Repeated refinancing can indicate that the borrower is unable to service its obligations normally.

5. Non-Performing Refinanced Exposures

Refinancing does not automatically convert a non-performing exposure into a performing exposure.

Where a borrower remains unable to meet its obligations, the exposure may continue to be classified as non-performing.

This prevents banks from using refinancing transactions to artificially improve the apparent quality of their loan portfolios.

The EBA has explained that where forbearance fails to improve the debtor's position and the debtor subsequently enters bankruptcy, foreclosure or comparable proceedings, the exposure should remain classified as a non-performing forborne exposure.

This principle is particularly important for banking transparency.

6. Capital and Provisioning Consequences

Refinancing risk can directly affect a bank's capital position.

If refinancing reveals increased credit risk, the bank may have to:

• Increase impairment allowances.

• Recognise expected credit losses.

• Increase regulatory capital allocated against the exposure.

• Reclassify the exposure.

• Strengthen collateral requirements.

• Apply additional monitoring.

EU prudential rules also establish minimum loss-coverage requirements for certain non-performing exposures.

The EBA has clarified that where refinancing constituting forbearance increases the institution's overall exposure to a borrower, it can affect the regulatory treatment of the original exposure under the CRR.

7. Refinancing and Net Present Value Loss

A refinancing arrangement may produce an economic loss even where the nominal principal amount remains unchanged.

Suppose a bank extends a €10 million loan for several additional years while reducing the interest rate.

The present economic value of the revised cash flows may be lower than the value of the original contractual payments.

Banks therefore have to consider the economic effect of restructuring rather than merely nominal amounts.

The EBA has addressed the calculation of net-present-value losses arising from refinancing and explained that relevant cash flows under the revised arrangement are assessed using the applicable regulatory methodology.

8. Corporate Governance and Refinancing Decisions

Refinancing risk is also a corporate governance issue.

Banks must establish appropriate internal procedures governing major refinancing decisions.

Depending on the size and risk of the transaction, responsibility may involve:

• Credit committees.

• Risk-management departments.

• Senior management.

• Internal audit.

• Compliance functions.

• Board risk committees.

Large refinancing arrangements should not be approved merely to avoid recognising a problematic loan.

Senior management must ensure that restructuring decisions are based upon realistic assessments of borrower viability.

9. Concentration Risk

Corporate refinancing becomes particularly significant where a bank has large exposures to one borrower, corporate group or economic sector.

For example, excessive exposure to:

• Real-estate developers.

• Construction companies.

• Highly leveraged corporations.

• Commercial-property businesses.

can create systemic refinancing vulnerabilities.

If many borrowers require refinancing simultaneously, deterioration in collateral values or economic conditions may substantially increase losses.

Spanish banking supervision therefore connects refinancing risk with broader credit-risk and concentration-risk management.

10. Supervisory Role of Banco de España and ECB

Spanish banks operate within the European Banking Union.

Significant Spanish banks are generally subject to direct prudential supervision by the European Central Bank, while Banco de España performs important supervisory and regulatory functions within the national and European framework.

Supervisors can examine:

• Refinancing portfolios.

• Non-performing loans.

• Forborne exposures.

• Provisioning practices.

• Credit underwriting.

• Collateral valuations.

• Capital adequacy.

• Internal governance.

• Risk-management systems.

Banco de España maintains Spain's consolidated financial-regulation framework and banking circulars covering financial reporting and prudential matters.

11. Refinancing and Bank Resolution

Severe refinancing and liquidity problems may eventually become questions of bank recovery and resolution.

Where deterioration becomes sufficiently serious, the framework established under the EU Bank Recovery and Resolution Directive and Spain's Law 11/2015 may become relevant.

Authorities can intervene where a bank is failing or likely to fail and statutory conditions for resolution are satisfied.

The Banco Popular crisis provides an important Spanish illustration of how deterioration in a bank's financial position can ultimately move beyond ordinary prudential supervision into the resolution framework.

Case Laws and Regulatory Proceedings

1. Fundación Tatiana Pérez de Guzmán el Bueno and SFL v Single Resolution Board – Case T-481/17

This case arose from the resolution of Banco Popular Español.

On 7 June 2017, the Single Resolution Board adopted a resolution scheme concerning Banco Popular, which was subsequently endorsed by the European Commission.

Various investors challenged the resolution.

The General Court dismissed the action in 2022. The litigation concerned important issues including the conditions governing bank resolution, valuation, procedural rights, property rights and the powers of European resolution authorities.

Importance

The case demonstrates the ultimate consequences that can arise where deterioration in a bank's financial condition becomes sufficiently severe that normal refinancing and liquidity measures cannot restore viability.

2. Del Valle Ruiz and Others v Commission and SRB – Case T-510/17

This was another major challenge relating to the Banco Popular resolution.

Applicants challenged the legality of the European resolution measures.

The General Court rejected the challenges.

The proceedings confirmed the importance of the EU resolution framework in dealing with failing banks while protecting financial stability.

Importance

For refinancing-risk regulation, the case illustrates that continued inability to obtain sustainable financing may eventually contribute to a situation requiring supervisory or resolution intervention.

3. Eleveté Invest Group and Others v Commission and SRB – Case T-523/17

This proceeding also concerned the Banco Popular resolution.

Investors sought annulment of decisions connected with the resolution.

The General Court dismissed the action as part of the major group of Banco Popular judgments delivered in June 2022.

Importance

The proceeding illustrates how bank credit, liquidity, funding and refinancing problems interact with the European crisis-management regime.

4. Algebris (UK) and Anchorage Capital Group v Commission – Case T-570/17

The applicants challenged measures connected with the Banco Popular resolution.

The General Court rejected the challenge.

The case forms part of the important European jurisprudence concerning the powers exercised under the Single Resolution Mechanism.

Importance

The decision demonstrates the legal consequences that can arise when ordinary capital, funding and restructuring solutions are insufficient to preserve a bank's viability.

5. Aeris Invest v Commission and SRB – Case T-628/17

Aeris Invest also challenged the resolution arrangements concerning Banco Popular.

The General Court dismissed the challenge along with the related Banco Popular cases.

Importance

The case is significant for understanding the relationship between prudential deterioration, valuation of bank assets and liabilities, resolution powers and investor rights.

It demonstrates why banks must identify credit and refinancing deterioration before problems reach the point of resolution.

6. Banco Popular Litigation – CJEU Case C-410/20

The Court of Justice considered the consequences of Banco Popular's resolution for claims brought by former investors.

The Court interpreted the EU Bank Recovery and Resolution Directive in relation to actions concerning securities that had been written down through the resolution process.

The judgment subsequently became important in Spanish litigation concerning claims against Banco Santander following the resolution of Banco Popular.

The Spanish Supreme Court has relied upon the CJEU's interpretation when considering the consequences of the Banco Popular resolution framework.

Importance

The case demonstrates that once deterioration progresses from ordinary refinancing problems to formal bank resolution, the special EU resolution regime can substantially affect ordinary contractual and investor remedies.

Key Principles Emerging From Spanish Refinancing Risk Regulation

The Spanish regulatory framework produces several important principles:

First, refinancing does not automatically eliminate credit risk.

Second, the economic substance of refinancing is more important than merely replacing one contractual instrument with another.

Third, concessions granted because of financial difficulty may constitute forbearance.

Fourth, refinancing cannot be used simply to conceal non-performing exposures.

Fifth, banks must maintain accurate classification and reporting of refinanced and restructured exposures.

Sixth, significant refinancing losses can affect provisions, capital requirements and regulatory classifications.

Seventh, repeated refinancing may indicate increased probability of borrower default.

Eighth, boards and senior management remain responsible for maintaining effective systems for identifying and controlling refinancing risk.

Ninth, Banco de España and ECB supervision can examine refinancing portfolios as part of wider credit-risk and prudential supervision.

Tenth, severe deterioration that cannot be corrected through sustainable refinancing may ultimately trigger recovery or resolution mechanisms.

Conclusion

Corporate refinancing risk regulation is an important component of Spanish banking law because refinancing can either restore the financial viability of a borrower or merely postpone recognition of credit deterioration.

Spain addresses this risk through the combined operation of the EU Capital Requirements Regulation, Capital Requirements Directive, Law 10/2014, Banco de España regulatory rules, EBA standards and the European Banking Union supervisory framework.

Banks must carefully identify refinanced and restructured exposures, determine whether concessions constitute forbearance, assess borrower viability, recognise deterioration in credit quality, maintain appropriate provisions and capital, and report exposures accurately.

The central regulatory principle is that refinancing must reflect economic reality. A bank cannot treat a troubled exposure as healthy merely because the contractual terms have been replaced or extended.

The Banco Popular litigation further demonstrates the wider significance of effective refinancing and credit-risk management. Where financial deterioration becomes sufficiently serious, the issue may move beyond ordinary loan restructuring and become a matter of bank recovery and resolution under Spanish and European banking law.

Therefore, effective regulation of refinancing risk protects depositors, investors, bank solvency and the stability of the Spanish and European financial system.