Circular 1/2022 of the Bank of Spain on liquidity, prudential standards, and information obligations for credit financial establishments

I. GENERAL PROVISIONS BANK OF SPAIN 1718 Circular 1/2022, of January 24, of the Bank of Spain, to credit financial establishments, on liquidity, prudential standards, and information obligations, and which modifies Circular 1/2009, of December 18, to credit institutions and other supervised entities, regarding information on the capital structure and shareholdings of credit institutions, and on their offices, as well as on the senior management of supervised entities, and Circular 3/2019, of October 22, by which the power conferred by Regulation (EU) 575/2013 is exercised to define the significance threshold for overdue credit obligations. (Entry into force will be 3 months after its publication).

INDEX Chapter 1. General Provisions. Standard 1. Scope of application. Standard 2. Exemptions. Chapter 2. Liquidity. Section 1. Definitions. Standard 3. Definitions. Section 2. Liquidity Buffer. Standard 4. Liquidity Coverage Ratio. Standard 5. Composition of the liquidity buffer. Standard 6. General liquidity requirements for assets. Standard 7. Operational management of liquid assets. Standard 8. Valuation of liquid assets. Standard 9. Secured financing operations and real collateral swaps. Standard 10. Non-compliance with the admissibility criteria for a liquid asset and alternative approaches in the treatment of liquidity. Standard 11. Net liquidity outflows. Standard 12. Minimum value of the liquidity buffer. Section 3. Structure of funding sources. Standard 13. Net Stable Funding Ratio. Standard 14. General rules for the calculation of the net stable funding ratio. Standard 15. Available stable funding. Standard 16. Required stable funding. Chapter 3. Solvency Obligations. Standard 17. Annual report on internal capital self-assessment. Standard 18. Review and supervisory assessment by the Bank of Spain. Chapter 4. Information obligations to the Bank of Spain regarding solvency. Standard 19. General provisions. BOLETIN OFICIAL DEL ESTADO No. 29 Thursday, February 3, 2022 Sec. I. Page 14821 cve: BOE-A-2022-1718 Verifiable at https://www.boe.es

Standard 20. Periodic information to be reported on own funds, own fund requirements, large exposures, leverage, and non-performing loans. Standard 21. Periodic information to be reported on the own funds of hybrid credit financial establishments. Standard 22. Periodic information to be reported on the liquidity buffer. Standard 23. Periodic information to be reported on the structure of funding sources. Standard 24. Periodic information to be reported on interest rate risk in the banking book. Standard 25. Periodic information to be reported on remuneration. Chapter 5. Authorization of credit financial establishments. Standard 26. Guarantees required in the authorization of credit financial establishments subject to the control of foreign persons. Transitional Provisions. First Transitional Provision. Introduction of the liquidity buffer. Second Transitional Provision. Introduction of the structure of funding sources. Third Transitional Provision. Application of the final and transitional provisions of Delegated Regulation (EU) 2015/61. Final Provisions. First Final Provision. Modification of Circular 1/2009. Second Final Provision. Modification of Circular 3/2019. Third Final Provision. Entry into force. Appendices. Appendix 1. Information on the own funds of hybrid credit financial establishments. Appendix 2. Information on the liquidity buffer and the structure of funding sources. I A) Background. Previous legal framework for credit financial establishments. Credit financial establishments were considered, until the end of 2013, as credit institutions, and as such they were governed, in terms of supervision and solvency, by the legislation on own funds and consolidated basis supervision of credit institutions, issued from Law 36/2007, of November 16, which modifies Law 13/1985, of May 25, on investment coefficients, own resources, and information obligations of financial intermediaries, and other norms of the financial system. Credit financial establishments lost their status as credit institutions with the adaptation of Spanish law to the fundamental legal regime of the European Union in matters of supervision and solvency and access to the activity of credit institutions, materialized in 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 in Regulation (EU) No 575/2013 of the BOLETIN OFICIAL DEL ESTADO No. 29 Thursday, February 3, 2022 Sec. I. Page 14822 cve: BOE-A-2022-1718 Verifiable at https://www.boe.es

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. In particular, it is Royal Decree-Law 14/2013, of November 29, on urgent measures for the adaptation of Spanish law to European Union legislation in matters of supervision and solvency of financial entities, which introduced into the Spanish legal order the updated definition of credit institution contained in Regulation (EU) No 575/2013, which, with effect from January 1, 2014, excluded credit financial establishments, as receiving deposits or other repayable funds from the public was not among their activities. At the same time, Royal Decree-Law 14/2013 established a provisional regime applicable to this type of entity until the approval of its new legal regime. B) Currently applicable legal regime for credit financial establishments. Title II of Law 5/2015, of April 27, on the promotion of business financing, established the new general legal regime for credit financial establishments. The second additional provision of Law 5/2015 highlights the legislator's intention that credit financial establishments remain subject to prudential requirements comparable in terms of solidity to those of credit institutions for the purposes of Article 119(5) of Regulation (EU) No 575/2013. For this reason, Article 7 of Law 5/2015 establishes that credit financial establishments shall be governed by the provisions of said law and its development regulations, and that, for anything not contemplated in said regulations, their legal regime shall be that provided for credit institutions. Article 12 of Law 5/2015 provides that the solvency regulations applicable to credit financial establishments shall be Law 10/2014, of June 26, on the organization, supervision, and solvency of credit institutions, and its development regulations, with the particularities foreseen by regulation. In this sense, Article 39 of Law 10/2014 specifies that the solvency regulations of credit institutions (applicable, therefore, to credit financial establishments) are those provided in Regulation (EU) No 575/2013, in that law, and in its development provisions. The same Article 12 of Law 5/2015 incorporates some particularities of the solvency regulations of credit institutions for credit financial establishments. Specifically, among other matters, they are exempt from: – the obligation to maintain a capital conservation buffer and a countercyclical capital buffer (included in Articles 44 and 45 of Law 10/2014), for those credit financial establishments that have the status of an SME according to Recommendation 2003/361/EC, of the Commission, of May 6, 2003, on the definition of micro, small, and medium-sized enterprises, and – the application of Part Six (relating to liquidity) of Regulation (EU) No 575/2013. Royal Decree 309/2020, of February 11, on the legal regime of credit financial establishments and modifying the Commercial Register Regulation, approved by Royal Decree 1784/1996, of July 19, and Royal Decree 84/2015, of February 13, which develops Law 10/2014, of June 26, on the organization, supervision, and solvency of credit institutions, was responsible for developing the legal regime of credit financial establishments provided in Title II of Law 5/2015. Regarding the differences with credit institution regulations, Article 3 of Royal Decree 309/2020 introduces additional particularities BOLETIN OFICIAL DEL ESTADO No. 29 Thursday, February 3, 2022 Sec. I. Page 14823 cve: BOE-A-2022-1718 Verifiable at https://www.boe.es

and clarifies the scope of the supplementary application of the legal regime of credit institutions to credit financial establishments. C) Matters subject to regulatory development by the Bank of Spain. Royal Decree 309/2020 also has as one of its fundamental objectives to develop the solvency and liquidity obligations of credit financial establishments. To this end, Title II of Royal Decree 309/2020 collects the different obligations provided by the legislator. Regarding liquidity requirements, Article 30 of Royal Decree 309/2020 stipulates that credit financial establishments must maintain, under the terms determined by the Bank of Spain, a liquidity buffer to meet their liquidity outflows during a sufficiently broad period of stress in financial markets. Similarly, said article obliges credit financial establishments to maintain, under the terms determined by the Bank of Spain, an adequate structure of funding sources and maturities in their assets, liabilities, and commitments, in order to avoid potential liquidity imbalances or tensions that could damage or jeopardize their financial situation. Article 31 of Royal Decree 309/2020 contains the information obligations regarding solvency of credit financial establishments, which are the same as those established by Commission Implementing Regulation (EU) 2021/451, of December 17, 2020, laying down implementing technical standards for the application of Regulation (EU) No 575/2013 of the European Parliament and of the Council regarding the reporting of information for supervisory purposes by entities, and repealing Commission Implementing Regulation (EU) 680/2014, and Commission Implementing Regulation (EU) 2021/453, of March 15, 2021, laying down implementing technical standards oriented to the application of Regulation (EU) No 575/2013 of the European Parliament and of the Council regarding specific reporting requirements for market risk—which have replaced Commission Implementing Regulation (EU) 680/2014 of April 16, 2014, laying down implementing technical standards in relation to the reporting of information for supervisory purposes by entities, in accordance with Regulation (EU) No 575/2013 of the European Parliament and of the Council—for credit institutions. Likewise, said article requires credit financial establishments to communicate to the Bank of Spain, in the manner established by it, the composition of their share capital and the information necessary to assess compliance with the provisions regarding the liquidity buffer and the maintenance of an adequate structure of funding sources and maturities in assets, liabilities, and commitments. Furthermore, Royal Decree 309/2020 establishes that the Bank of Spain will determine the manner in which hybrid entities must integrate information on compliance with own fund requirements derived from payment service operations or the issuance of electronic money with the information of Commission Implementing Regulation (EU) 2021/451 and Commission Implementing Regulation (EU) 2021/453. On the other hand, Article 9 of Royal Decree 309/2020, relating to the authorization of credit financial establishments subject to the control of persons domiciled or authorized in a State not a member of the European Union, establishes in paragraph 3 that, in such cases, it may be required to provide a guarantee covering all activities of said entity through a surety insurance contract, joint and several guarantee, or any other guarantee determined by the Bank of Spain. Finally, Article 29 of Royal Decree 309/2020, relating to solvency obligations, establishes in paragraph 1 that the Bank of Spain, when it deems necessary for the exercise of its supervisory function, will determine the specific cases in which credit financial establishments must BOLETIN OFICIAL DEL ESTADO No. 29 Thursday, February 3, 2022 Sec. I. Page 14824 cve: BOE-A-2022-1718 Verifiable at https://www.boe.es

perform the annual report on internal capital self-assessment and the Bank of Spain the review and supervisory assessment. D) Justification for the development of the various matters in the Bank of Spain Circular. a) Liquidity requirements. Credit financial establishments do not receive deposits or repayable funds from the public, and their activity of term transformation and liquidity transformation is more limited than that of credit institutions. Likewise, it has been taken into account that credit financial establishments present a lower risk to financial stability, compared to credit institutions, given their small size and the scarce interconnections they have with credit institutions. Furthermore, credit financial establishments currently do not have access to the permanent facilities or open market operations of the Eurosystem. They also do not have access to the interbank lending market. For this reason, the set of elements with which a credit financial establishment can meet net liquidity outflows in the defined period is more restricted than that available to credit institutions. With the objective of taking all these particularities into account, paragraph 3 of Article 30 of Royal Decree 309/2020 provides for an expansion of the list of liquid assets, allowing the liquidity buffer to be constituted, among others, by deposits from credit institutions and by the available and unused amounts of credit lines that meet certain conditions. These elements do not form part of the liquid assets established in the credit institution regulations. When fulfilling the mandate that Article 30 of Royal Decree 309/2020 makes to the Bank of Spain, the circular establishes liquidity requirements that, in terms of structure, are inspired by the liquidity coverage ratio (LCR) –required of credit institutions pursuant to Commission Delegated Regulation (EU) 2015/61, of October 10, 2014, supplementing Regulation (EU) No 575/2013 of the European Parliament and of the Council as regards the liquidity coverage requirement applicable to credit institutions– and by the simplified calculation of the net stable funding ratio (NSFR) –included in Chapters 5, 6, and 7 of Title IV of Part Six of Regulation (EU) No 575/2013–. As for content, the components integrating the liquidity requirements incorporate criteria of adaptation and proportionality, taking into consideration the idiosyncrasy and nature of credit financial establishments, their particular funding structure, and the liquidity risk of their activities. The result is a mechanism that allows for comparability in terms of solidity of the regimes, and at the same time respects the exemption provided in Article 12 of Law 5/2015 by which the liquidity requirements provided in Part Six of Regulation (EU) No 575/2013 will not apply to credit financial establishments. With regard to the liquidity buffer, the circular maintains, in its Standard 5, a buffer structure in three liquidity categories analogous to those determined for credit institutions –Level 1, Level 2A, and Level 2B–, with minimum composition requirements by liquidity category, which have been adapted to the nature of the operations of credit financial establishments. This structure guarantees that a high volume of assets classified as Level 1 can be used immediately in a situation of liquidity stress. To prevent the required buffer of liquid assets from being very low or even equal to zero in periods with a high situation of liquidity inflows relative to outflows, paragraph 2 of Article 30 of Royal Decree 309/2020 establishes that the liquidity buffer cannot be less than a percentage of gross cash outflows. This requirement is similar to the maximum limit imposed on inflows in the LCR of credit institutions. The restriction proposed in this circular differs from that required of credit institutions in Article 33 of Delegated Regulation (EU) 2015/61. The circular establishes, in its Standard 12, that the buffer cannot be less than 10% of gross outflows generally (25% for credit institutions), and 5% (0% or 10%, depending on the case, for credit institutions) when certain characteristics are met regarding the liquidity risk profile of the activities of the credit financial establishment and the composition of its balance sheet. The setting in the circular of a minimum buffer value lower than that of credit institutions is justified by the lower risks to financial stability they present compared to the activity of credit institutions. Furthermore, reducing the weight of the minimum buffer in periods with high liquidity inflows allows the size of the buffer to better adapt to the operations of each credit financial establishment. Finally, the reduction of the minimum buffer value through the increase in the computability of inflows does not leave the liquidity profile of credit financial establishments unprotected, given that the inflow and outflow indices established by the circular reflect demanding hypotheses of severe financial instability. The circular maintains, in its Standard 11, the treatment contemplated in Article 23 of Delegated Regulation (EU) 2015/61 by which credit financial establishments, like credit institutions, may calculate the volume and probability of potential liquidity outflows associated with certain products and services, such as, among others, credit cards or uncommitted financing lines granted. These outflows will be assessed based on a scenario of severe financial instability that will take into account the reputational damage derived from the contraction of the granting of these products to the market. Furthermore, the Bank of Spain, in the case of off-balance sheet positions associated with commercial financing, may establish an outflow index of up to 5%. Another of the particularities developed in this circular is the incorporation, in Standard 11, of the real forecast of operating expenses associated with the activity of the credit financial establishment in a situation of severe financial instability into the denominator of the ratio. These outflow flows, despite having an associated outflow index of 0% in the LCR of credit institutions, are considered a relevant part of the flows of credit financial establishments, so they are assigned an outflow index of 100%. The circular also considers the relevance, for credit financial establishments, of the financing provided by other entities or companies of the group or multigroup to which they belong. Thus, in Standard 11, outflow indices, ranging between 0% and 50%, are assigned to funding maturities coming from the group, provided there are firm commitments to renew or it can be demonstrated that the renewal of this type of instrument is stable over time, even in situations of severe financial instability. It is also necessary to regulate in the circular the circumstances in which an asset can be considered liquid, that is, the general liquidity requirements and the operational management requirement regarding unimpeded access to assets, to adapt, in application of the principle of proportionality, those established for credit institutions in Delegated Regulation (EU) 2015/61. Likewise, in Standard 8, the valuation criteria for the assets composing the liquidity buffer are established, with the appropriate adaptations derived from the differences between the list of liquid assets of Royal Decree 309/2020 and that provided for credit institutions in Delegated Regulation (EU) 2015/61. Similarly, in line with Delegated Regulation (EU) 2015/61, the circular configures a regime for non-compliance with the admissibility criteria for assets that will entail the denial of their recognition and provides for the application of alternative approaches in a situation of deficit of assets in a certain currency. With regard to the adequate structure of funding sources and maturities in their assets, liabilities, and commitments, in the adaptation of the simplified version of the NSFR requirement, the requirement of a 100% ratio between available stable funding and required stable funding has been maintained, nevertheless. The main adaptations made in this circular, on the one hand, reduce the requirement of required stable funding to loans to customers up to date on payments, and on the other hand, give greater recognition to available stable funding provided by the group. b) Information obligations. With the intention of adapting information obligations to the type of activity, business model, size, and relative importance of credit financial establishments, the Bank of Spain is empowered to set a lower frequency of submission than provided, set thresholds based on certain relevant variables, establish that certain templates that entities BOLETIN OFICIAL DEL ESTADO No. 29 Thursday, February 3, 2022 Sec. I. Page 14825 cve: BOE-A-2022-1718 Verifiable at https://www.boe.es

must not submit, and establish other specific reporting modalities adapted to their profile.