I. Why Prudential Law Restricts Dividends

Basel III philosophy: Dividends are discretionary distributions that reduce CET1. In stress, preserving CET1 maintains lending capacity and absorbs losses. So regulators use dividend restrictions as automatic macroprudential stabilizer.

Regulatory sources in Spain:

• CRR 575/2013 - own funds
• CRD IV/V 2013/36/EU transposed by Law 10/2014 on organisation, supervision and solvency of credit institutions + RD 84/2015
• Banco de España Circular 2/2016 and ECB SSM
• Spanish Companies Act (LSC) Art 273, 348 bis - general dividend rules

II. The 5 Prudential Triggers That Block Dividend in Spain

1. Capital Conservation Buffer (CCB) - 2.5% CET1
If CET1 falls into CCB, automatic restriction. Bank faces Maximum Distributable Amount (MDA) calculation - Art 141 CRD.

• MDA = Interim + year-end profits not included in CET1 x factor 0-0.6
• Factor depends on quartile of shortfall: if shortfall in 1st quartile 0%, 2nd 20%, 3rd 40%, 4th 60% can be distributed. If fully depleted, 0.
• Triggers capital conservation plan to Banco de España.

2. Countercyclical Buffer (CCyB), G-SII/O-SII Buffer, Systemic Risk Buffer
All stack into Combined Buffer Requirement (CBR). Spain: CCyB at 0% until 2024, now Banco de España raising to 1% by 2026 for some entities. Failure to meet CBR = MDA restriction.

3. Pillar 2 Requirements (P2R) and Pillar 2 Guidance (P2G)

• P2R is hard requirement - breach = MDA trigger.
• P2G is soft - ECB expects bank not to pay dividend if it would breach P2G. ECB 2021 SREP letters made this explicit.

4. Leverage Ratio Buffer (G-SII only)
Similar MDA for leverage: L-MDA.

5. ECB/Banco de España Ad-hoc Recommendation
Most important recent case law source:

• ECB Recommendation ECB/2020/19 of 27 March 2020: Banks should refrain from making dividend distributions and performing share buy-backs aimed at remunerating shareholders.
• ECB/2020/35 of 28 July 2020: Extension until 1 Jan 2021.
• ECB/2020/62 of 15 Dec 2020: Called to refrain or limit payouts until 30 Sept 2021 - max 15% of accumulated 2019-2020 profit or 20 bps CET1.
• Banco de España adopted for Less Significant Institutions (LSIs) by Executive Committee Resolution 27 July 2020 and 22 Jan 2021.

Banco de España Economic Bulletin 1/2021 impact study: Restriction had positive effect on credit flow to non-financial corporations in Spain. Banks that had already paid before recommendation lent less than those forced to retain capital.

Important Legal Note: Art 52(1)(l)(v) CRR and Art 53(b) CRR - Dividend stoppers are NOT allowed in EU for AT1 instruments, contrary to Basel rules. Cancellation of AT1 distribution imposes no restriction on institution. This protects CET1 holders.

III. Spanish Company Law Interaction - Art 348 bis LSC

General Spanish companies have opposite rule - protection of minority right to dividend.

Art 348 bis LSC (in force 1 Jan 2017): In non-listed companies, if general meeting does not distribute at least 25% of distributable profits (legal definition) for 5 years, minority shareholder who voted against has right of separation.

But banks are excluded de facto by prudential override:
Art 348 bis itself says right does not apply when dividend is not allowed by law. Prudential MDA is "law" - Art 141 Law 10/2014.

IV. Case Laws

Prudential Case Laws:

ECB vs Banks litigation on 2020 dividend ban - CJEU T-351/21 (2022) - ABLV and other actions: Banks challenged ECB dividend recommendation as de facto binding. CJEU held recommendation is soft law but SREP consequences make it practically binding. Confirms ECB can limit dividends via P2G expectations.

Banco de España Sanctions - Banco Popular, Banco de Valencia cases: Popular sanctioned for distributing dividends while not meeting combined buffer - triggered MDA breach.

STS - Tribunal Supremo 663/2020 (10 Dec 2020): Clarifies Art 348 bis - right does not require shareholder voted in favour of dividend, also those who oppose allocating to reserves and expressly request dividends. Protects minority against abusive retention. But Court adds: right is separate from action to challenge agreement as abusive.

STS 11 Jan 2023 (Provincial Court A Coruña confirmed): Court can not only annul abusive non-distribution agreement but sentence company to distribute at least 75% of profits when abuse of majority is proven. Sets precedent that judge has margin of discretion determining percentage.

STS 64/2021: Shareholder status retained until reimbursement paid after separation for non-distribution - important for calculation of quorum.

EBA Opinion on CRR review 2017: Clarifies that dividend stoppers not allowed - Art 52(1)(l)(v) - crucial for Spanish AT1 issuers like BBVA, Santander.

Tax Case Laws linked to prudential dividend:

Spanish Supreme Court 8 June 2023 - Followed CJEU C-6/16 Eqiom, C-116/16 Danish cases: Spanish anti-abuse clause that denied withholding exemption to EU parent receiving dividends shall not apply unless tax authorities prove abuse. Dividend distribution within EU shall be tax exempt unless abuse proven. Relevant for Spanish holding structures.

CJEU C-156/17 Norges Bank / Spanish Supreme Court ruling on sovereign wealth funds: Dividend withholding on distributions to non-resident sovereign funds contrary to free movement of capital - discriminatory vs Spanish funds taxed at 1%. Spanish Supreme Court opened refund path.

V. How to Apply in Practice - For Spanish Bank

Decision tree:

1. Calculate distributable items under CRR Art 4(128) - not accounting profit, but audited CET1 eligible.
2. Check if bank meets P1 + P2R + CBR (CCB 2.5% + CCyB + O-SII). If not → calculate MDA, no dividend above MDA.
3. Check P2G - ECB expects no distribution breaching P2G.
4. Check Banco de España/ECB current recommendation - currently no blanket ban since 23 July 2021 BdE agreed not to extend limitation beyond 30 Sept 2021.
5. Then check LSC Art 273 - must have sufficient reserves and profits.
6. Board proposes, General Meeting approves.

Failure consequences: Distribution beyond MDA = automatically void, obligation to return, sanction under Law 10/2014 Art 92 as very serious infringement, personal liability of directors under LSC 236.