The European Commission will not allow financial firms who have received aid to exchange the preferred shares that they issued to clients. The only legal option left for this complex product is to convert them into shares into equity shares of that bank's stock. Preferentials are technically not deposits, but they do offer a kind of fixed interest return.
In other words, clients will take on stock shares and assume the same risks as the respective banks. The swaps could entail capital gains losses for clients. The EU's position is understandable because its obligation is to mitigate the impact that a bailout of Spanish banks could have on EU coffers and, as a result, on European taxpayers.
It's true that many account holders that put their money in preferential shares feel deceived, and now the only thing left for them to do is to go to court. Litigation will increase dramatically, but there?s more.
The preferential share case shows a big failure and the the CNMV, Spain's stock market regulator, might not be a disinterested institution. Of this CNMV's five advisers, one is the director of the Treasury and another is the vice-governor of the Bank of Spain. The rest were appointed by the Ministry of the Economy. When ailing banks needed to raise capital, the Bank of Spain advised them to use preferential shares.
The CNMV ought to have done a better job divulging the risks associated with this product. The firms that haven't asked for aid, most of them, have swapped the preferential shares in order to keep their clients. Still, clients who own preferentials issued by banks who received aid funds are stuck facing major losses.
