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01INTRODUCTION. b Letter from the Chairman b Letter from the Chief Executive Officer

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CONTENTS 01 Introduction 02 Self-Definition 03 Corporate Governance: Governing Bodies 04 Management Report 07 Human Capital 08 Strategic Forums For Sector Collaboration 09 Structures And Services 05 Consolidated
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CONTENTS 01 Introduction 02 Self-Definition 03 Corporate Governance: Governing Bodies 04 Management Report 07 Human Capital 08 Strategic Forums For Sector Collaboration 09 Structures And Services 05 Consolidated Financial Statements 06 Profile - International - NaTional 10 Social Work 11 Annexes 01INTRODUCTION b Letter from the Chairman b Letter from the Chief Executive Officer 01INTRODUCTION b Letter from the Chairman Letter From The Chief Executive Officer LETTER FROM THE CHAIRMAN During this year 2010 we have been fully immersed in the severe world economic and financial recession, which has in Spain materialised in high unemployment rates, fragile business activity and growth rates incompatible with job creation. Savings banks are obviously not immune to these circumstances of the economy, the financial market and their customers. This has certainly been a year of profound changes in the sector, which has undergone a process of unprecedented concentration and experienced a decisive reform of its regulatory framework. For the CECA, in the centre of the sector, these difficulties raised a clear challenge in its mission and main vocation: serving savings banks. Spanish savings banks have endured pressure from all sides. First and foremost, the tensions deriving directly from the economic crisis: turbulence in the sovereign bond markets, tough adjustment in the property sector and recession in economic activity. This difficult economic situation has affected the financial sector, in particular putting a great strain on earnings, mainly by the narrowing of the interest margin and the need to make larger provisions. But it hasn t all been bad news. The stress tests carried out by the European Central Bank revealed the strength and resilience of the Spanish financial system. They also demonstrated the clear inclination towards transparency of the Spanish system, particularly our Savings Banks: there was nothing to hide, since the figures published corresponded to 90% of the banking system (as against other countries with a far lower coverage). After analysing the causes of the present crisis, international regulators set about reforming market operation, which triggered off an unprecedented deluge of new regulations. These measures affect the behaviour of markets, agents and supervisors. The international reform of capital requirements is a clear example of this. Although many of these reforms are apparently necessary to avoid further crises in the future, the accumulation of numerous measures could nonetheless choke traditional banking. This would be especially harmful, since it seems to have a more adverse effect on the traditional banking model, which has proved to be the most solvent in the crisis. I appeal to the need for a balanced, neutral reform that will permit the free-flowing financing of business and household requirements. Against this backdrop and according to its mission, CECA fiercely defended the interests of the Spanish savings bank sector throughout It has worked hard to defend this traditional banking model as a stabilizer in difficult times and to provide financing for the local economy. It has also endeavoured to ensure that the new capital adequacy regulations do not hamper credit recovery or penalise the long-term financing of companies. In short, CECA has focused its activities on preventing greater difficulties and anticipating regulatory impacts to reduce the sector s adaptation costs. 4 01INTRODUCTION b Letter from the Chairman Letter From The Chief Executive Officer The pressure on operating efficiency led to a search for economies of scale and scope that has unleashed the most intensive process of consolidation in the recent history of the Spanish financial sector. Over a space of just over twelve months, we have witnessed a drastic reduction in the number of savings banks (from 45 savings banks to 17 entities or groups) and a parallel increase in their average size, which has multiplied by 2.5 to reach EUR 78,400 million. This business combination process has been accompanied by a farreaching change in regulation and, consequently, in the organisation of savings banks. I should stress that these changes have been designed to put savings banks in a better position to face future challenges. The new financial regulations will be very strict on capital adequacy and it is essential for savings banks to have adequate instruments to improve their capitalisation ability. The new corporate formulas offered by the legal reform, namely indirect performance of financial business, institutional protection schemes and the issuing of cuotas participativas with voting rights, enable greater flexibility and capitalisation power while at the same time preserving the essential features of the savings banks model: their focus on the retail business and their commitment to regional development through Social Work. Another positive aspect of the reform is that it fosters good corporate governance through measures such as reducing political influence and enhancing the professional competence of the Boards of Directors. CECA has naturally also been with the savings banks throughout this process. On the one hand, it has acted as liaison with the Spanish and European authorities to defend the interests and proposals of savings banks. The outcome of the process has thankfully been satisfactory and commensurate with the needs of our sector. On the other hand, CECA, in its role of services provider, is responding to the needs for strategic and operating counselling generated by these processes. The sector closes the year with its structures ready and about to complete the greatest consolidation process in its lengthy history. It is time to design the long-term strategy of its banking model and relations with the society and community. The plural (stakeholder) model of corporate governance and social responsibility are still the distinguishing features of our entities. We must now implement these changes, which will also affect CECA as association and service provider of Spanish savings banks. Isidro Fainé Casas 5 01INTRODUCTION ANNUAL REPORT Letter from the Chairman b Letter from the Chief Executive Officer LETTER FROM THE CHIEF EXECUTIVE OFFICER The essential purpose of this Report is to inform on the most significant actions taken by CECA during a year in which very important changes have taken place in the regulation and composition of the sector, present the results obtained, compared with the budgets, and explain the most prominent aspects of risk management and the actions that are going to be taken to develop the strategic lines defined for The main historic landmark was the approval of Royal Decree- Law 11/2010 of 9 July on Savings Banks (Governing Bodies and Other Legal Aspects). This instrument made a sweeping reform of these institutions, to the extent that it is one of the most significant milestones in their long, productive history. The most characteristic element of the reform is accepting the principle of institutional diversity, which has been recognised since the first regulation of savings banks having the rank of law, back in 1880, and it pursues, above all, two objectives in view of the prospects of greater own resources required by Basel III: capitalisation of savings banks through the option chosen by each one and a greater professionalization of their governing bodies. The profound, rapid, complex transformation of savings banks and the support they have received from CECA in the consequent merger and consolidation processes has required extraordinary dedication by specialist human and technical resources in all areas. The traditional focus of cooperation among savings banks has mainly been used to find innovating solutions to enhance efficiency and efficacy, through different projects channelled through COAS (CECA s Organisation, Automation and Service Committee), such as implementation of the Mosaico platform, which applies the principles of free software to the community of savings banks, or putting into operation the digitalized signature platform in other financial institutions. In Social Work, guidelines and documents have been published on strategic positioning to strengthen the Social Work brand image, with a view to providing arguments to enhance its conveyance and visibility. A pioneer study has also been published, together with FUNCAS, on equal opportunities in Spain and the role of Social Work in this area. The pawnbrokers auction portal also finally got off the ground during Moreover, certain actions have been taken to improve processes and computer systems and incorporate new tools with a view to cutting costs and increasing the value of the services provided for savings banks. As a result of these processes, costs have been reduced through automation and using fewer resources, the enhanced results being passed on to savings banks in lower rates. 6 01INTRODUCTION ANNUAL REPORT Letter from the Chairman b Letter from the Chief Executive Officer We also bolstered the internationalisation plan in 2010 by increasing the volume of business with correspondent banks, pension remittances, pan-european debits, a non-deal road show through the principal financial markets in Europe and the USA to inform on the new reform of the Savings Banks Act, explain the model with total transparency and thereby facilitate access by Spanish savings banks to international financial markets. We also offered a broader range of financial services to increase the number of security loans, foreign exchange transactions, repos and CDS (credit default swaps). With the aim of providing new financial solutions to cover savings banks needs on the market, the necessary actions have been taken to include CECA as a direct member of the different international central counterparty clearing houses, such as the LCH Clearnet in London. The Suspicious Transaction Reporting service has also been started up on the securities markets. The opportunities for innovating technological services have enabled, inter alia, improvement of the security standards for Visa and MasterCard in PCI/DSS, further development of operations associated with the detection and solving of incidents in the Euro 6000 network, new functions in the savings banks own network and the incorporation of acquiring technologies. With regard to New Channels, the efficiency of E-Banking has been greatly improved by reengineering of servers and incorporating the latest advances in the digital security platform. In IT systems new indicators have been added to the management control platform to analyse accounting and operational risk. We also continued working on the integration of accounting transactions and the migration to a multi-currency financial accounting system on the SAP platform has commenced. Before closing I must mention the outstanding results achieved by the Financial Area in Markets both on its own initiative and by observing a very strict risks policy. It is obviously not possible here to include an exhaustive list of all the projects and actions performed professionally and efficiently by all those who work in CECA with the ultimate aim of offering savings banks whatever financial, operating, technological, association and other services they may consider necessary; but I would like to point out that they are all proof of the effort and perseverance with which these professionals tackle every day the challenges currently facing our sector. That spirit of adaptation has characterised savings banks since their foundation and will help us to face the coming year enthusiastically in an environment of changes marked by the uncertainty created by the severe international economic crisis. José Antonio Olavarrieta Arcos 7 02 SELF-DEFINITION b Vision b Mission b CECA s principal objectives b History of CECA 02 SELF-DEFINITION CECA undertakes to publicise, defend and represent the interests of savings banks b Vision Mission CECA s principal objectives History of CECA VISION MISSION CECA s strategic goal is to strengthen the position of savings banks among the most important and highly valued institutions of the Spanish and international financial system, in terms of both financial activity and exercise of social responsibility. Apart from the National Association of Savings Banks, CECA is a credit institution, providing competitive technological and financial products and services for both savings banks and other entities operating on the market. To achieve this goal, the Confederation acts as a forum of strategic reflection for all savings banks and undertakes to publicise, defend and represent their interests, offering them guidance and competitive products and services. CECA promotes the brand image of savings banks and highlights their community welfare projects, in both instances linking the image with the attributes of efficiency, professionalism, innovation, soundness, modernity, competitiveness and corporate social responsibility. 9 02 SELF-DEFINITION Vision Mission b CECA s principal objectives History of CECA CECA S PRINCIPAL OBJECTIVES As described in its Articles of Association, CECA has the following objects: b Promote, facilitate and boost the domestic and international operations of savings banks, based on the social and economic importance of saving, while safeguarding the general and reciprocal interests of savings banks and the markets on which they operate. b Represent its members individually or collectively before the public authorities, facilitating their support for the government s economic and social policy, without prejudice to any powers of representation that savings banks may decide to exercise directly or delegate to the corresponding Federations in matters specifically affecting the savings bank or federation in question, which are not of general interest for members on the whole. In order to achieve these objectives, CECA may: - Encourage savings banks to fulfil the important role they must play in society. - Work jointly with member institutions to spread and promote the virtue of saving as efficiently as possible. CECA encourages teaching all classes of society to save and make good use of wealth - Work directly or indirectly to instil in all social classes the value of saving and making good use of personal and collective wealth. - Report on such issues as the government may submit for study, voluntarily or in response to official requests. b Represent savings banks internationally, particularly in the World Savings Banks Institute (WSBI), the European Savings Banks Group (ESBG) and any other international organisations. b Offer savings banks whatever financial or other services they may request and facilitate the drawing and transfer of funds and notes between members, providing any support that may be required for members to make optimum use of their resources and overcome management difficulties. b This notwithstanding, the Confederation may provide financial, technological, administrative and counselling services to government bodies and any other public or private entity. 10 02 SELF-DEFINITION Vision Mission CECA s principal objectives History of CECA HISTORY OF CECA Confederación Española de Cajas de Ahorros, the Spanish Confederation of Savings Banks, was founded in 1928 at the initiative of Federación de Cajas de Ahorros Vasco Navarra (the Basque- Navarre Federation of Savings Banks) to combine the efforts of all its members and represent them in different forums. In 1971, the Confederation took on most of the duties of Instituto de Crédito de las Cajas de Ahorros (ICCA), the Savings Banks Credit Institute, including: purchase and trading of securities and investment of funds on behalf of the savings banks; drawing and transfer of funds and passbooks between members; and acting as a subsidiary agency of the savings banks in their customers deposits and withdrawals. At the same time, the Confederation inherited ICCA s principal coordination function, granting loans to savings banks with funds that they had voluntarily deposited. As a result, CECA no longer had a purely representative role. It began a new phase, with services, operations and financial duties typical of credit institutions. A research unit was set up in 1976 and its work was later used as the basis for the reform of the Spanish financial system. In addition to recruiting staff with a new professional profile, new training policies were introduced in the sector around that time and the ESCA (Escuela Superior de Cajas de Ahorros) college was opened. In 1971, CECA took on financial services, operations and duties typical of a credit institution With the deregulation of the Spanish financial system in 1977, savings banks recovered their traditional independence and full operating capacity (which had been severely undermined by the interventionism of the authorities as from 1940, particularly evident in the regulation of compulsory investments). The changes in legislation in the late seventies and early eighties had a significant effect on the operating procedures and organisation of savings banks, which were put on an equal footing with banks, the constraints on deposit interest rates were lifted, the process was begun to eliminate mandatory investment ratios and a new structure was introduced for governing bodies, with the participation of depositors, employees, founding bodies and local institutions. 11 02 SELF-DEFINITION Vision Mission CECA s principal objectives History of CECA CECA adapted its services to the demands of savings banks, on free market conditions Royal Decree 2290/1977 of 27 August clearly defined the scope of the Spanish Confederation of Savings Banks for the first time, defining CECA as the National Association and financial services provider of all member savings banks. The Savings Banks (Governing Bodies) Act (LORCA) of 1985 confirmed the model initially designed within the reforms of the seventies. Since then, owing to the major expansion of the savings banks sector within the Spanish financial system, savings banks have had to reconcile their cooperation within the Confederation with their growing commercial competition with one another on the market. Against this new backdrop and upon recommendation by the Board of Directors, the General Assembly approved a change of strategy and organisation in 1990, basically redefining the Confederation s objectives to bring its services in line with the demands of savings banks on free market conditions. Under this new arrangement, it became common practice to set rates for the operating, financial and technological services provided for and voluntarily acquired by savings banks, with the ultimate aim of making them self-financing. Moreover, as the productivity of its association duties has grown, it has steadily lowered membership fees since 1995, fees for last year being EUR for every EUR 6,010 of deposits. Another milestone in this evolution was the passing of the 2002 Financial System (Reform Measures) Act ( Financial Reform Act ) and the 2003 Transparency Act. The purpose of the Financial Reform Act was twofold: to achieve further progress in making the management of savings banks more professional and to facilitate their access to the capital market. The Transparency Act increased savings banks disclosure requirements to the State, regulatory bodies and the public. Since its entry into force, savings banks have published an annual corporate governance report informing on the decision-making processes of their governing bodies. 12 02 SELF-DEFINITION Vision Mission CECA s principal objectives History of CECA Reform of the Legal Framework for Savings Banks The publication in July 2010 of Royal Decree-Law 11/2010 of 9 July on Governing Bodies and Other Aspects of the Legal Framework of Savings Banks introduced an extremely significant reform in Spanish law. It is the most importa
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