Royal Decree-Law 22/2018 establishing macroprudential tools

OFFICIAL STATE BULLETIN No. 304 Tuesday, December 18, 2018 Sec. I. Page 124062

I. GENERAL PROVISIONS HEAD OF STATE 17294 Royal Decree-Law 22/2018, of December 14, establishing macroprudential tools.

I In a complex and interconnected financial system such as the current one, it is of special relevance to guarantee its stability. To this end, it is essential to prevent risks that may have a systemic character, that is, those derived from a deterioration in all or part of the financial system that may generate a disturbance in the financial services markets that ultimately negatively affects the real economy. In this context, along with the creation of a national macroprudential authority, it is key that public authorities have a broad catalogue of macroprudential measures, with a global impact on the entire system, and that go beyond the microprudential measures applied to financial entities individually.

During the last financial crisis, the traditional tools of economic policy and financial supervision available to authorities showed their limitations in preventing and mitigating some of these risks. On February 25, 2009, the report of the High-Level Group on Financial Supervision in the European Union, known as the De Larosière Report, was published, aimed at strengthening European supervision mechanisms. The report recommended the creation of a body in the European Union responsible for supervising risks in the entire financial system. Thus, Regulation (EU) No 1092/2010 of the European Parliament and of the Council of November 24, 2010, on the macroprudential oversight of the financial system in the European Union and establishing the European Systemic Risk Board, was approved. This authority is responsible for the macroprudential supervision of the financial system of the European Union for the prevention of systemic risk. With a view to fulfilling this mandate, the aforementioned European board monitors and analyzes potential systemic risks and may issue alerts and recommendations.

The European Systemic Risk Board issued the Recommendation of December 22, 2011, on the macroprudential mandate of national authorities, in which it urged the Member States of the European Union to designate an authority responsible for macroprudential supervision and to "ensure that the macroprudential authority has control over the appropriate instruments to achieve its objectives". The deadline to comply with this Recommendation expired on July 1, 2013, which highlights the urgency of having adequate tools and a national macroprudential authority.

In the banking sector, the Basel Committee on Banking Supervision agreed in December 2010 on the "Global regulatory framework for strengthening banks and banking systems" (Basel III), in which, in addition to updating microprudential tools, it introduced macroprudential tools in the field of credit institutions.

The European Union transposed the aforementioned agreements into its legal order through Directive 2013/36/EU of the European Parliament and of the Council of June 26, 2013, on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC and Regulation (EU) No 575/2013 of the European Parliament and of the Council of June 26, 2013, on the prudential requirements for credit institutions and investment firms, and amending Regulation (EU) No 648/2012. However, Article 458 of Regulation (EU) No 575/2013 of June 26 itself recognizes the capacity of Member States to adopt additional measures to those provided for in European legislation in order to maintain financial stability.

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OFFICIAL STATE BULLETIN No. 304 Tuesday, December 18, 2018 Sec. I. Page 124063

More recently, in the Financial Sector Assessment Program (FSAP) for Spain of 2017, the International Monetary Fund indicated that "the existing set of macroprudential tools available would benefit from an expansion, in particular, of the inclusion of more effective tools to address risks associated with real estate exposures". More specifically, the International Monetary Fund recommended, in the short term, empowering the Bank of Spain to impose limits on the loan-to-value ratio and the debt service-to-income ratio as well as on maximum amortization periods.

For its part, in the field of investment funds, the Financial Stability Board (FSB) published its economic policy recommendations in January 2017 to address structural vulnerabilities in asset management activities, in which it took note of the spectacular growth of this industry and broke down the vulnerabilities associated with it with special reference to liquidity and leverage risks. In the same vein, the Recommendation of the European Systemic Risk Board of December 7, 2017, on the liquidity and leverage of investment funds contains recommendations to the European Commission and to the European Securities and Markets Authority in their respective areas of action.

Without prejudice to the measures adopted in the European Union, the strong growth of the asset management industry and its high relative weight within the financial sector make it necessary and urgent to provide the National Securities Market Commission (CNMV) with additional tools that allow it to respond in an agile and effective manner to risks to financial stability that may originate from collective investment institutions.

On the other hand, with regard to the insurance sector, there are currently ongoing works in the European Union to develop macroprudential tools for insurance and reinsurance entities within the framework of the revision of Directive 2009/138/EC of the Parliament and of the Council of November 25, 2009, on the taking-up and pursuit of the business of Insurance and Reinsurance, commonly known as Solvency II. It is therefore extraordinarily necessary and urgent to introduce some of these macroprudential tools in this royal decree-law.

II In view of the recommendations made at the international level by the International Monetary Fund, the Financial Stability Board, and the European Systemic Risk Board regarding the introduction in the short term of the necessary macroprudential tools to address possible vulnerabilities to the financial system, it is extraordinarily urgent and necessary to address this issue without delay.

Specifically, and in line with what is established in Article 458 of Regulation (EU) No 648/2012 of July 4, 2012, and the recommendation of the International Monetary Fund in its Financial Sector Assessment Program of 2017, it is necessary and urgent to empower the Bank of Spain with the authority to set limits on the indebtedness of economic agents. The currently existing tools act mainly via prices, making credit granting more expensive through the imposition of capital buffers. These tools have only an indirect impact on credit flows and, in fact, their effectiveness is diminished when entities already have relatively high prudential requirements, as is the case currently after the notable increase in them following recent financial reforms. Thus, it is necessary that the Bank of Spain can limit the granting of credit directly via quantities. By extension, and to avoid the transfer of credit activity from the banking sector to the securities or insurance sectors, the National Securities Market Commission and the General Directorate of Insurance and Pensions are enabled to establish restrictions with respect to entities subject to their supervision.

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OFFICIAL STATE BULLETIN No. 304 Tuesday, December 18, 2018 Sec. I. Page 124064

Additionally, it is necessary and urgent to attribute to the Bank of Spain the capacity to limit risk assumption at the sectoral level, restricting measures to exposures to a specific sector where risks are concentrated. Thus, and as happened in the recent crisis in the case of the real estate sector, it is possible that vulnerabilities are located in very specific areas of the system. Financial authorities must respond to the emergence of risks by trying to limit their intervention to the specific area where it is really necessary.

With this last objective, this royal decree-law attributes to the Bank of Spain the power to, with a sectoral approach, set the countercyclical capital buffer and limits to exposure.

In the case of investment funds, it is necessary and urgent to attribute to the National Securities Market Commission the power to, under certain circumstances, set liquidity requirements for institutions and collective investment entities. The former constitute open funds, that is, with the ability of their participants to make withdrawals from funds at any time, which makes them especially vulnerable to possible mass withdrawals due to market tensions. In addition, these funds are marketed among individuals, which makes them sensitive from a social point of view.

For its part, in the case of the insurance sector, to avoid the transfer of risks from one sector to another, it is necessary to attribute to the current supervisor, the General Directorate of Insurance and Pensions, those tools in the insurance sector that help avoid those risk transfers as well as possible regulatory arbitrage.

Once these tools with the capacity to contribute to mitigating eventual disturbances with a potential systemic impact have been identified, it is urgent and necessary that they are immediately available for possible use by sectoral supervisors.

III The figure of the royal decree-law is constitutionally lawful, provided that the purpose justifying the urgency legislation is, as our Constitutional Court has repeatedly required (judgment 6/1983, of February 4, F. 5; judgment 11/2002, of January 17, F. 4; judgment 137/2003, of July 3, F. 3 and judgment 189/2005, of July 7, F. 3), to meet a concrete situation, within governmental objectives, which for reasons difficult to foresee requires immediate normative action in a shorter period than that required by the normal route or by the urgency procedure for the parliamentary processing of laws, especially when the determination of said procedure does not depend on the Government.

As has been explained, the introduction into our legal order of the necessary macroprudential tools to address possible vulnerabilities to the financial system is of extraordinary urgency and necessity, so that the Bank of Spain, the National Securities Market Commission, and the General Directorate of Insurance and Pensions have the instruments and tools necessary to contribute to mitigating eventual disturbances with a potential systemic impact. It is extraordinarily urgent and necessary that these macroprudential tools are immediately available for eventual use by sectoral supervisors without delay. Otherwise, there is a risk of having to face unexpected and sudden tensions in financial markets, with potential implications for financial stability and the real economy, without having the indispensable tools to face them. In fact, various international bodies, notably the International Monetary Fund and the Financial Stability Board, have insisted that one of the critical gaps that contributed to the outbreak of the recent crisis was the non-existence of macroprudential tools to prevent in advance the accumulation of imbalances in the financial system.

cve: BOE-A-2018-17294 Verifiable at http://www.boe.es

OFFICIAL STATE BULLETIN No. 304 Tuesday, December 18, 2018 Sec. I. Page 124065

The figure of the royal decree-law is, moreover, admissible in this case, since the limits established in Article 86.1 of the Spanish Constitution are not violated, given that it does not affect the ordering of the basic institutions of the State, the rights, duties and freedoms of citizens regulated in Title I of the Constitution, the regime of the Autonomous Communities nor the general electoral law.

The reasons exposed fully justify the concurrence of the constitutional requirements of extraordinary and urgent need, which enable the Government to approve this royal decree-law within the margin of appreciation that, as the political direction body of the State, Article 86.1 of the Spanish Constitution recognizes. The notes of exceptionality, gravity, and relevance also concur, which make immediate normative action necessary in a period shorter than that required for the parliamentary processing of a law, whether by the ordinary procedure or by the urgency procedure.

IV This royal decree-law responds to the principles of necessity, effectiveness, proportionality, legal certainty, and efficiency, as required by Law 39/2015, of October 1, on the Common Administrative Procedure of Public Administrations.

With regard to the principles of necessity and effectiveness, this royal decree-law is the optimal instrument to achieve the final objective of providing the Bank of Spain, the National Securities Market Commission, and the General Directorate of Insurance and Pensions, as soon as possible, with the appropriate tools to prevent and mitigate those risks they detect that could end up affecting the stability of the financial system.

As for the principles of proportionality, legal certainty, and efficiency, this royal decree-law establishes the minimum essential regulation for the fulfillment of its purposes, is coherent with the rest of the legal order, both national and international, and does not impose unnecessary or accessory administrative burdens. The modifications introduced in the regulations for credit institutions, collective investment institutions and entities, and insurance and reinsurance entities allow for the generation of a stable, integrated, and clear regulatory framework.

V This royal decree-law consists of five articles, one additional provision, one transitional provision, and three final provisions.

Articles one and three modify, respectively, Law 35/2003 of November 4, on Collective Investment Institutions, and Law 22/2014, of November 12, regulating venture capital entities, other closed-type collective investment entities, and management companies of closed-type collective investment entities, and amending Law 35/2003, of November 4, on Collective Investment Institutions, with the aim of granting the CNMV the capacity to adopt measures aimed at strengthening the liquidity of institutions and collective investment entities.

Article two introduces a series of modifications in Law 10/2014, of June 26, on the ordering, supervision, and solvency of credit institutions, with the object of expanding the macroprudential tools available to the Bank of Spain. Specifically, the Bank of Spain is enabled to increase capital requirements on a specific portfolio of exposures, to limit the exposures of credit institutions to specific economic sectors, and to establish limits and conditions on the granting of loans, acquisition of fixed income and derivatives by credit institutions. Thus, the Bank of Spain may set limits on the part of disposable income that a borrower can allocate to paying their debt (debt service to income) or on the maximum indebtedness that can be obtained given the collateral provided (loan to value), among other measures.

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OFFICIAL STATE BULLETIN No. 304 Tuesday, December 18, 2018 Sec. I. Page 124066

Article four modifies the Consolidated Text of the Securities Market Law, approved by Royal Legislative Decree 4/2015, of October 23, enabling the National Securities Market Commission to establish limitations on certain activities by its supervised entities that generate an excessive increase in the risk or indebtedness of economic agents that could affect financial stability.

The sole additional provision foresees the obligation for sectoral supervisors to communicate to the authority designated as the macroprudential authority the adoption of macroprudential tools before they are communicated to the public and those affected.

In this sense, the European Systemic Risk Board urged the Member States of the European Union to create or designate an authority with macroprudential powers in its aforementioned 2011 Recommendation. Spain is one of only two countries among the twenty-eight that make up the European Union that still does not have a national macroprudential authority. Likewise, the International Monetary Fund has repeatedly insisted on the need for Spain to have a national macroprudential authority. Specifically, in the Financial Sector Assessment Program (FSAP) for Spain of 2017, the International Monetary Fund points out that "The establishment of an inter-institutional Systemic Risk Council would enhance systemic risk surveillance and macroprudential decision-making would help address the growing systemic interconnection of the financial sector".

Until the creation of this authority, the sole transitional provision provides that these communications be made to the Financial Stability Committee. This body is composed of representatives of the sectoral supervisors and the Ministry of Economy and Business and has as its main task the discussion on possible vulnerabilities to financial stability with a view to preventing crises with potentially systemic effects. In fact, it is planned that it will be replaced by the national macroprudential authority when this is created. Thus, this committee is the ideal one to receive said communications until the latter is operational.

The three final provisions include the competence titles, the enabling for regulatory development, and the entry into force of the norm.

This royal decree-law is issued under the provisions of Articles 149.1.11th and 13th of the Spanish Constitution, which attribute to the State the exclusive competences on the bases of the ordering of credit, banking, and insurance, and the bases and coordination of the general planning of economic activity, respectively.

In virtue thereof, making use of the authorization contained in Article 86 of the Spanish Constitution, on the proposal of the Minister of Economy and Business, and after deliberation of the Council of Ministers in its meeting of December 14, 2018,

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OFFICIAL STATE BULLETIN No. 304 Tuesday, December 18, 2018 Sec. I. Page 124067

I HEREBY ORDER:

Article one. Modification of Law 35/2003, of November 4, on Collective Investment Institutions.

The title of Article 71 septies of Law 35/2003, of November 4, on Collective Investment Institutions, is modified, and a new paragraph 7 is introduced with the following wording:

"Article 71 septies. Supervision of leverage limits, adequacy of credit assessment processes, and liquidity risk."

"7. The National Securities Market Commission, with the object of guaranteeing equitable treatment of participants or shareholders or for reasons of stability and integrity of the financial system, may, temporarily and justifying the necessity and proportionality of the measure, require the management companies of collective investment institutions regulated by this law, on an individual basis or with respect to a plurality of them, to strengthen the liquidity level of the portfolios of the collective investment institutions managed and, in particular, to increase the percentage of investment in especially liquid assets, as defined by the National Securities Market Commission itself."

Article two. Modification of Law 10/2014, of June 26, on the ordering, supervision, and solvency of credit institutions.

Law 10/2014, of June 26, on the ordering, supervision, and solvency of credit institutions, is modified as follows:

One. Paragraph 1 of Article 45 is drafted as follows:

"1. Credit institutions must maintain a countercyclical capital buffer calculated specifically for each entity or group. This buffer shall be equivalent to the total amount of risk exposure calculated in accordance with Article 92.3 of Regulation (EU) No 575/2013, of June 26, with the clarifications that the Bank of Spain may establish, as appropriate, multiplied by a specific capital buffer percentage.

In particular, the Bank of Spain may require the application of the countercyclical capital buffer to all exposures of the entity or group or to exposures to a specific sector."

Two. A new Article 69 bis is added with the following wording:

"Article 69 bis. Limits to sectoral concentration.

When the aggregate exposure of credit institutions or a subgroup thereof to a specific economic activity sector reaches levels that may constitute an element of systemic risk, the Bank of Spain may require credit institutions to limit

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