Circular 2/2016 of the Bank of Spain on Supervision and Solvency Completing the Adaptation of Spanish Law to Directive 2013/36/EU and Regulation (EU) No 575/2013

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Circular 2/2016, of February 2, of the Bank of Spain, to credit institutions, on supervision and solvency, which completes the adaptation of the Spanish legal system to Directive 2013/36/EU and Regulation (EU) No 575/2013 (BOE of February 9, 2016) (Correction of errors BOE of July 29, 2016)

In recent years, following the international financial crisis, there has been a substantial change in the regulation applicable to the financial sector, and especially to the banking sector. The fundamental objective of the new regulation is to reduce the probability of bank crises and the cost derived from them for taxpayers, for which it has been considered essential to increase the resilience of credit institutions in adverse situations. One of the manifestations of this regulatory change has been the "Global regulatory framework to strengthen banks and banking systems" (known as Basel III), presented by the Basel Committee on Banking Supervision in December 2010, which constitutes the basis on which international prudential regulation pivots.

The adaptation of Basel III to the legal order of the European Union has taken place through two fundamental norms: Regulation (EU) No 575/2013 of the European Parliament and of the Council, of June 26, 2013, on prudential requirements for credit institutions and investment firms, and amending Regulation (EU) No 648/2012 (hereinafter, Regulation (EU) No 575/2013) and Directive 2013/36/EU of the European Parliament and of the Council, of June 26, 2013, on the 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 (hereinafter, Directive 2013/36/EU).

In Spain, the transposition of the new European regulation has been carried out in two stages. In a first phase, Royal Decree-Law 14/2013, of November 29, on urgent measures for the adaptation of Spanish law to European Union regulation on the supervision and solvency of financial entities, was published, which transposed the most urgent aspects of this framework. In exercise of the authorization conferred by that royal decree-law, the Bank of Spain approved Circular 2/2014, of January 31, on the exercise of various regulatory options contained in Regulation (EU) No 575/2013 (hereinafter, Circular 2/2014), which determined the national options chosen, both permanent and transitional, for their application by credit institutions from the entry into force of said regulation in January 2014. Subsequently, that circular was modified, regarding the treatment of the deduction of intangible assets during the transitional period, by Circular 3/2014, of July 30, of the Bank of Spain.

In a second phase, Law 10/2014, of June 26, on the organization, supervision, and solvency of credit institutions (hereinafter, Law 10/2014), was promulgated, which laid the foundations for a complete transposition of Directive 2013/36/EU. Subsequently, in February 2015, Royal Decree 84/2015, of February 13, developing Law 10/2014, of June 26, on the organization, supervision, and solvency of credit institutions (hereinafter, Royal Decree 84/2015), was published.

The present circular has as its fundamental objective to complete, with regard to credit institutions, the transposition of Directive 2013/36/EU into the Spanish legal order. In addition, it includes one of the options that Regulation (EU) No 575/2013 attributes to national competent authorities, in addition to those that the Bank of Spain already exercised in Circular 2/2014.

On the other hand, the present circular also develops some aspects of the transposition of Directive 2011/89/EU of the European Parliament and of the Council, of November 16, 2011, amending Directives 98/78/EC, 2002/87/EC, 2006/48/EC and 2009/138/EC with regard to the additional supervision of financial entities that form part of a financial conglomerate. This directive has already been transposed in its fundamental aspects through the modifications that both Law 10/2014 and Royal Decree 84/2015 introduced, respectively, in Law 5/2005, of April 22, on the supervision of financial conglomerates and amending other laws of the financial sector, and in Royal Decree 1332/2005 which develops it.

In the application of this regulation, it must be taken into account the guidelines or directives issued by the Bank of Spain itself, and those issued by international bodies and committees active in banking regulation and supervision, such as the European Banking Authority (hereinafter, EBA), and adopted as their own by the Bank of Spain.

In parallel with these regulatory developments, a transcendental change has occurred in Europe in the supervision model of credit institutions. The approval of Council Regulation (EU) No 1024/2013, of October 15, 2013, which entrusts the European Central Bank (hereinafter, ECB) with specific tasks regarding policies related to the prudential supervision of credit institutions (hereinafter, Regulation (EU) No 1024/2013), has meant the creation of the Single Supervisory Mechanism (hereinafter, SSM), composed of the ECB and national competent authorities, among which is the Bank of Spain.

The SSM is constituted as one of the pillars of the Banking Union, joined by the Single Resolution Mechanism, recently created, and a harmonized deposit guarantee system, still in the development phase. The three pillars are fundamentally based on two sets of rules that apply to all Member States: capital requirements for credit institutions (Regulation (EU) No 575/2013 and Directive 2013/36/EU) and provisions on the restructuring and resolution of credit institutions and investment firms (Directive 2014/59/EU).

Regulation (EU) No 1024/2013 establishes the attribution to the SSM, and singularly to the ECB, of the functions of direct supervision over significant entities and indirect supervision over less significant entities, according to the definition established in said regulation. The relevance of the implementation of the SSM for Spain is appreciated not only in the importance of the functions ceded, but also in the fact that groups of credit institutions identified as significant represent more than 90% of the assets of the system.

In this circular, a definition of competent authority has been introduced, which will be the ECB or the Bank of Spain according to the assignment and distribution of competences established in Regulation (EU) No 1024/2013, and which is completed in Regulation (EU) No 468/2014 of the European Central Bank, of April 16, 2014, which establishes the framework for cooperation in the SSM between the ECB and national competent authorities and designated national authorities. In general terms, the entry into force of the SSM implies a reassignment of supervisory responsibilities, which are transferred from the national scope to the ECB. Since November 4, 2014, the ECB is responsible for the direct supervision of significant entities, while the direct supervision of less significant entities is the competence of the Bank of Spain. Additionally, other supervisory functions not attributed to the ECB, as well as the supervision of certain entities not included in the definition of credit institution, remain the competence of the Bank of Spain.

The SSM Regulation also regulates the so-called "common procedures," in which the decision corresponds to the ECB upon proposal of the Bank of Spain, regardless of whether the credit institution in question is significant or less significant. These are the procedures applicable to authorizations for access to the activity of a credit institution, the revocation of said authorizations, and the procedures for the assessment of significant shareholdings.

The content of the circular has been divided into nine chapters, based on the various matters regulated. Chapter 1 establishes some definitions and the scope of application of each of the chapters, with the exception of Chapter 9, which, dealing with the information obligations of entities to the Bank of Spain, includes in each rule its corresponding scope. Likewise, the specific treatment of branches and the free provision of services in Spain by credit institutions headquartered in non-EU Member States is clarified.

Chapter 2 incorporates a new regulatory option of an additional nature to those exercised by the Bank of Spain through Circular 2/2014. Specifically, that provided for in Article 116.4 of Regulation (EU) No 575/2013, regarding the possibility that exposures to certain public sector entities may receive the same weighting as the administration from which they depend. The Bank of Spain considers that the appropriate circumstances exist for this in those entities cited in Article 56.2 of Royal Decree 84/2015 that are not commercial companies or foundations and are sectorized as Public Administrations or Social Security Administrations in the European System of National and Regional Accounts of the European Union, as well as in the Official Credit Institute. In the case of entities dependent on Autonomous Communities and Local Corporations, it is additionally necessary that these exposures can be included within the scope of the additional financing mechanisms provided for in the additional provision first of Organic Law 2/2012, of April 27, on Budgetary Stability and Financial Sustainability.

Chapter 3 develops the combined capital buffer requirement. The capital conservation buffer, the countercyclical capital buffer, the capital buffer for global systemically important institutions, the capital buffer for other systemically important institutions (O-SII), and finally, the buffer for other systemic risks are regulated. In this way, credit institutions must maintain additional Common Equity Tier 1 capital levels beyond those required in Regulation (EU) No 575/2013, and in case of non-compliance with the combined buffer requirement, certain restrictions on distributions and other obligations are established. Regarding the capital buffer for O-SII, it should be noted that the criteria for the identification of these entities are incorporated into the text of the circular, following the EBA Guidelines on the criteria to determine the conditions for the application of Article 131(3) of Directive 2013/36/EU in relation to the assessment of other systemically important institutions (EBA/GL/2014/10). Likewise, in the first transitional provision, a transitional period for the application of said buffer is established.

Chapter 4 introduces various provisions related to the internal organization of credit institutions. This chapter is in turn divided into four sections. Section 1 develops the characteristics of the risk, appointment, and remuneration committees that credit institutions must constitute pursuant to Law 10/2014, establishing some of the conditions under which the competent authority will allow the risk committee and the audit committee, or the appointment and remuneration committees, to be unified. Likewise, certain minimum rules that credit institutions must observe regarding their internal governance are included, with the Guide on Internal Governance (GL 44) issued by the EBA being a relevant reference in this regard. Section 2 establishes the suitability assessment procedure that must be carried out on members of the board of directors and on general managers and equivalent executives of the entities. This section also addresses the incompatibility regime and the procedure for the authorization and communication of loans, guarantees, and securities to the senior management of credit institutions. In Section 3, a series of provisions on the remuneration policy of entities are established, applicable to the so-called identified staff. Finally, in Section 4, the minimum requirements that entities must meet for the delegation of the provision of services or the exercise of functions are established.

Chapter 5 regulates certain aspects of the capital self-assessment process that entities must carry out and the supervisory review process to be carried out by the competent authority.

Chapter 6 establishes specificities regarding the treatment of certain risks by entities, completing what is established by Royal Decree 84/2015. In this sense, concentration risk, securitization risk, market risk, interest rate risk, and liquidity risk are addressed. Likewise, a rule is included to collect the principles for effective data aggregation and risk reporting, which the Basel Committee approved in January 2013.

Chapter 7 details certain aspects of the additional supervision regime applicable to financial conglomerates, completing what is established in Law 5/2005 and Royal Decree 1332/2005.

Chapter 8 establishes certain transparency rules for credit institutions. In addition to requiring the verification of the "Prudentially Relevant Information" document, which entities must publish in accordance with Article 85 of Law 10/2014 and Article 93 of Royal Decree 84/2015, the information on corporate governance and remuneration policy that entities must publish on their website is developed, as well as some aspects of its configuration.

Chapter 9 collects the information obligations to the Bank of Spain additional to those established in Commission Implementing Regulation (EU) No 680/2014, of April 16, 2014, laying down technical standards for the communication of information for supervisory purposes by entities, in accordance with Regulation (EU) No 575/2013 of the European Parliament and of the Council. In this sense, entities must submit, according to the scope of application established in each rule, information on interest rate risk, remuneration, and financial conglomerates.

Finally, this circular includes seven transitional provisions in which it is established: i) the transitional regime of capital buffers for O-SII; ii) the transitional regime applicable to branches of credit institutions headquartered in non-EU Member States; iii) the necessary update of data in the Register of Senior Management of the Bank of Spain; iv) the information that entities must provide to the Bank of Spain regarding certain securitizations; v) the date on which the first submission of information on financial conglomerates will be mandatory; vi) the need to continue temporarily submitting certain liquidity statements from Bank of Spain Circular 3/2008; and, finally, vii) the deadline for publishing on the entities' website the information on corporate governance and remuneration policy.

Consequently, in exercise of the powers conferred, the Governing Council of the Bank of Spain, upon proposal of the Executive Commission and in agreement with the Council of State, has approved the present circular, which contains the following rules:

INDEX

Chapter 1. Definitions and scope of application.

Rule 1. Definitions.

Rule 2. Scope of application.

Rule 3. Branches in Spain of credit institutions headquartered in EU Member States.

Rule 4. Branches and free provision of services in Spain of credit institutions headquartered in non-EU Member States.

Chapter 2. Exercise by the Bank of Spain of permanent regulatory options provided for in Regulation (EU) No 575/2013.

Rule 5. Exposures to public sector entities.

Chapter 3. Capital buffers.

Rule 6. Combined capital buffer requirement.

Rule 7. Capital conservation buffer.

Rule 8. Entity-specific countercyclical capital buffer.

Rule 9. Countercyclical buffer percentage applicable to exposures located in Spain.

Rule 10. Countercyclical buffer percentage applicable to exposures located in other EU Member States.

Rule 11. Countercyclical buffer percentage applicable to exposures located in non-EU Member States.

Rule 12. Recognition of countercyclical buffer percentages higher than 2.5%.

Rule 12 bis. Countercyclical buffer percentage on risk exposure to one or more sectors applicable to exposures located in Spain and possibility of recognition of countercyclical buffer percentages on risk exposure to a sector applicable to exposures located in other States.

Rule 13. Capital buffer for global systemically important institutions.

Rule 14. Identification of other systemically important institutions.

Rule 15. Setting of the capital buffer for other systemically important institutions.

Rule 16. Notification obligations of the Bank of Spain regarding global systemically important institutions and other systemically important institutions.

Rule 17. Setting of the buffer against systemic risks.

Rule 18. Procedure for setting the buffer against systemic risks up to 3%.

Rule 19. Procedure for setting the buffer against systemic risks higher than 3% and up to 5%.

Rule 20. Procedure for setting the buffer against systemic risks higher than 5%.

Rule 21. Publication of buffers against systemic risks.

Rule 22. Recognition of the percentage of the buffer against systemic risks.

Rule 23. Joint application of buffers for global systemically important institutions, other systemically important institutions, and against systemic risks.

Rule 24. Restrictions on distributions.

Article 24 bis. Restrictions on distributions in case of non-compliance with the leverage ratio buffer requirement.

Rule 25. Capital conservation plan.

Chapter 4. Internal organization.

Section 1. Internal governance and internal organization.

Rule 26. Appointment and remuneration committees.

Rule 27. Risk committee.

Rule 28. Internal governance.

Rule 29. Head of the risk management unit.

Section 2. Suitability.

Rule 30. Application of suitability assessment requirements and procedures.

Rule 31. Internal suitability assessment procedures.

Rule 32. Suitability requirements.

Rule 33. Suitability assessment of board members, general managers, and equivalent executives by the competent authority.

Rule 34. Incompatibility regime.

Rule 35. Procedure for the authorization and communication of loans, guarantees, and securities to the senior management of credit institutions.

Article 35 bis. Procedures and requirements regarding loans to general managers or equivalent executives of the credit institution.

Article 35 ter. Procedures and requirements regarding loans to parties related to board members of the credit institution.

Section 3. Remuneration.

Rule 36. Personnel subject to remuneration rules.

Rule 37. Annual internal assessment report on remuneration policy.

Rule 38. Personnel belonging to the identified staff.

Rule 39. Remuneration policy.

Rule 40. Payments for early contract termination.

Rule 41. Pension benefits.

Rule 42. Entities receiving public financial support for their resolution and restructuring.

Section 4. Delegation of the provision of services or the exercise of functions.

Rule 43. Delegation of the provision of services or the exercise of functions.

Article 43 bis. Definition of essential services or functions.

Article 43 ter. Delegation policy.

Article 43 quater. Delegation of essential services or functions.

Article 43 quinquies. Limitations on the delegation of services or functions.

Article 43 sexies. Communication obligations to the competent authority regarding the delegation of services or functions.

Article 43 septies. Register of delegation agreements.

Chapter 5. Capital self-assessment and supervisory review process.

Rule 44. Process and report of capital self-assessment.

Rule 45. Supervisory review and evaluation process.

Chapter 6. Risk treatment.

Rule 46. Regulation applicable to the treatment of risks.

Rule 47. Concentration risk.

Rule 48. Securitization risk.

Rule 49. Market risk.

Rule 50. Interest rate risk of the balance sheet.

Rule 51. Liquidity risk.

Rule 52. Data aggregation and risk reporting.

Chapter 7. Financial conglomerates.

Rule 53. Identification of financial groups as financial conglomerates.

Rule 54. Application of additional supervision and partial exemption.

Rule 55. Capital adequacy.

Rule 56. Risk concentration.

Rule 57. Intragroup transactions.

Rule 58. Internal control mechanisms and risk management procedures.

Chapter 8. Information obligations to the market.

Rule 59. Prudentially relevant information.

Rule 60. Information on corporate governance and remuneration policy on the credit institutions' website.

Rule 61. Configuration of information on corporate governance and remuneration policy on the credit institutions' website.

Chapter 9. Information obligations to the Bank of Spain.

Rule 62. General provisions.

Rule 63. Periodic information to be submitted on interest rate risk of the balance sheet.

Rule 64. Periodic information to be submitted on remuneration.

Rule 65. Periodic information to be submitted for the identification of financial groups as financial conglomerates.

Rule 66. Notification of securitizations.

Rule 67. Periodic information to be submitted on risk exposure to the sectors collected in Rule 12 bis, paragraph 2.

Chapter 10. Limits to sectoral concentration

Rule 68. Objectives.

Rule 69. Definitions.

Rule 70. Setting a limit to concentration in an economic activity sector.

Rule 71. Application of a limit to concentration in an economic activity sector.

Rule 72. Publication of the limit to concentration in an economic activity sector.

Rule 73. Compliance with the limit to concentration in an economic activity sector.

Rule 74. Publication of the removal of a limit to concentration in an economic activity sector.

Chapter 11. Other macroprudential tools

Rule 75. Imposition of limits and conditions for the granting of loans and other operations secured by residential or commercial real estate to households and non-financial companies and individual entrepreneurs (business activity) located in Spain.

Rule 76. Imposition of limits and conditions for the granting of loans and other operations unsecured by real estate to households and non-financial companies and individual entrepreneurs