Circular 5/2011 of the Bank of Spain modifying Circular 4/2004 on public and reserved financial information standards and financial statement models

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Circular 5/2011, of November 30, of the Bank of Spain, modifying Circular 4/2004, of December 22, on standards for public and reserved financial information and models for financial statements. (BOE of December 9) [ 1 ]

[1]

Take into account the transitional regime of this circular: The modifications made will be applied for the first time in the annual accounts corresponding to December 31, 2011, without prejudice to what is stated in the following sections. The new S.3-1, S.3-2, S.6, S.7, S.8, C.17, and C.18 statements, corresponding to December 31, 2011, may exceptionally be sent to the Bank of Spain until March 31, 2012. The modifications in Annex X, Special Accounting Records of Mortgage Activity, must be incorporated no later than December 31, 2012.

The international financial crisis that began in 2007 has highlighted the great importance, from the point of view of financial stability, that market transparency has for financial entities. For this reason, the Bank of Spain has maintained a policy of transparency, both through its publications and by requesting that credit institutions provide greater quantitative and qualitative information about their financial situation, so that the market, analysts, and investors (in short, the users of financial information) can evaluate for themselves the degree of strength of the Spanish financial system.

One of the areas that arouses the most interest for the market, with respect to the Spanish financial sector, is its exposure to the construction and real estate development sector, as well as to financing for the acquisition of housing and the volume of assets acquired in payment of debt. And it is precisely this aspect on which the Bank of Spain has most recently focused, requesting greater transparency in the notes to the annual accounts of the vast majority of Spanish credit institutions, as well as in the results presentations of the interim semesters.

Since the harmonization and comparability of information constitute a desirable objective as a reinforcement of transparency, it has been considered appropriate to formally incorporate into the regulations on information that must be included in the notes to the annual accounts of credit institutions those related to exposure to the real estate sector, which, since the situation as of December 31, 2010, had been requested from banks, savings banks, and credit cooperatives, thus extending the obligation to report to all Spanish credit institutions.

On the other hand, taking into account the usefulness of such information for supervision, as well as for any analysis on the matter that may be desired, and considering that until now the Bank of Spain did not have equivalent information available, it has been considered appropriate to incorporate that information into the set of information that entities must report to the Bank of Spain on a periodic and reserved basis.

Thus, this Circular modifies certain norms and annexes of Circular 4/2004, of December 22, on standards for public and reserved financial information and models for financial statements, addressing, first, the information that both individual credit institutions and their consolidated groups must incorporate into the notes to their annual accounts, and which they must also publish at least for the situation as of June 30 each year. For the latter, in addition, the channel of publication is established as the same one they must use to comply with market information obligations regarding solvency, or otherwise on their Internet page.

Subsequently, the Circular establishes the information that, on a reserved basis, and especially referring to their activity in Spain, these entities and groups must send to the Bank of Spain, modifying for this purpose the formats of the currently existing reserved statements or, where appropriate, introducing new statements. In this regard, it should be highlighted that, in accordance with the objective of harmonization and comparability mentioned above, the breakdown and presentation of the quantitative information referred to in the previous paragraph must take as a mandatory reference the formats of the reserved statements provided for to report the same information to the Bank of Spain.

Finally, the Circular includes, as a technical improvement, some additional information in the Special Accounting Records of Mortgage Activity, created by Circular 3/2008, of November 26, which modified Circular 4/2004, mentioned above, whose relevance should be recalled since the information from these records includes, among others, the corresponding to the special accounting record referred to in Article 21 of Royal Decree 716/2009, of April 24, which develops certain aspects of Law 2/1981, of March 25, regulating the mortgage market and other norms of the mortgage and financial system.

Consequently, in exercise of the powers granted, the Governing Council of the Bank of Spain, upon proposal of the Executive Committee, has approved this Circular, which contains the following norms:

SINGLE NORM

The following modifications are introduced in Circular 4/2004, of December 22, to credit institutions, on standards for public and reserved financial information and models for financial statements [ 2 ]:

1. The following section is added to the fourth norm, Other individual public information:

«5. Regardless of what is stated in the previous sections, credit institutions shall publish, at least for data as of June 30, minimum qualitative and quantitative information on the mortgage market, financing for construction, real estate development, and housing acquisition, and regarding assets received in payment of debts, corresponding to business in Spain referred to in the sixtieth norm of this Circular.

This information shall be made public no later than the end of the second month to which the data correspond, through the same channel used to comply with market information obligations established by Bank of Spain Circular 3/2008, of May 22, to credit institutions, on determination and control of minimum own funds, or on their Internet page.

Credit institutions that include the information required in this section in their individual interim financial statements are exempt from this obligation.»

2. The following section is added to the fifth norm, Other consolidated public information:

«4. Regardless of what is stated in the previous sections, credit institutions shall publish, at least for data as of June 30, minimum qualitative and quantitative information corresponding to business in Spain, regarding financing for construction, real estate development, and housing acquisition carried out by the credit institutions of the group, as well as regarding assets received in payment of debts by the group of credit institutions, referred to in the sixty-first norm of this Circular.

This information shall be made public no later than the end of the second month to which the data correspond, through the same channel used to comply with market information obligations established by Bank of Spain Circular 3/2008, of May 22, to credit institutions, on determination and control of minimum own funds, or on their Internet page.

Credit institutions that include the information required in this section in their consolidated interim financial statements are exempt from this obligation.»

3. The sixtieth norm, Notes to individual accounts, is modified as follows:

a) Section 16 bis is added within heading D.5) Risk Concentrations, with the following text:

«16 bis. Without prejudice to the information required in other sections of this norm, entities shall report on the policies and strategies they have established to address problematic recovery financing intended to finance real estate projects, including urban development and subsequent construction.

The information shall contain all relevant aspects regarding the situation and prospects for liquidity recovery of this type of financial assets, including, where applicable, those of the real guarantees taken to cover them, in order to facilitate a better understanding of the risks and uncertainties of this type of assets.

Entities shall provide all qualitative and quantitative information they consider relevant for these purposes. In any case, as a minimum, for activity corresponding to business in Spain, the following shall be included:

a) The gross amount, the excess of said amount over the value of the assets serving as collateral -estimated in accordance with the provisions of Annex IX of this Circular- and impairment losses on assets that have the nature of specific coverage for all financing, in the form of loans and credits, with and without mortgage collateral, and debt securities, intended for construction and real estate development, with an additional breakdown of financing classified as "substandard" and "doubtful".

Likewise, the gross amount of such financing that has been written off from assets, having been classified as non-performing assets, shall be indicated.

Along with this information, as a memorandum, the book value of total credit to customers, excluding Public Administrations, corresponding to business in Spain and of total assets corresponding to total business shall be provided. Additionally, the total amount of impairment losses on assets and provisions established by the entity that have the nature of generic coverage for credit risk, corresponding to total business, shall also be provided.

b) The gross amount of financing intended for construction and real estate development, broken down by whether it has mortgage collateral or not. The financing with mortgage collateral shall be detailed, according to the nature of the asset serving as collateral, in completed buildings (distinguishing between housing and others), buildings under construction (housing and others), and land (developed land and others).

c) The gross amount of total financing to households for housing acquisition, with a breakdown of the amount classified as doubtful, distinguishing for both whether it has mortgage collateral or not.

d) The gross amount of financing to households for housing acquisition with mortgage collateral, breaking down the amount classified as "doubtful", distributed into the following bands based on the percentage of risk on the amount of the latest available valuation of the collateral: less than or equal to 40%, greater than 40% and less than or equal to 60%, greater than 60% and less than or equal to 80%, greater than 80% and less than or equal to 100%, and greater than 100%.

The breakdown and presentation of the quantitative information to be published in the notes in accordance with the provisions of this section shall be carried out in accordance with the format of statement S.7 Information on financing for construction, real estate development, and housing acquisition (business in Spain), insofar as this information is concerned.

For the purpose of determining the activity corresponding to total business and business in Spain, the provisions of section 2 of the sixty-fourth norm shall apply.»

b) Section 55 bis is added within heading K) Non-current assets held for sale, with the following text:

«55 bis. Without prejudice to the information required in other sections of this norm, entities shall report on the policies and strategies they have established to address real estate assets awarded or received in payment of debts.

The information shall include all relevant aspects regarding the strategy followed for the liquidity recovery of this type of assets, in line with the requirements contemplated in section D) of the thirty-fourth norm of this Circular, in order to facilitate a better understanding of the risks and uncertainties surrounding this type of assets.

Entities shall provide all qualitative and quantitative information they consider relevant for these purposes. In any case, as a minimum, for activity corresponding to business in Spain, the book value, with a breakdown of impairment losses on assets established, of the following shall be included: real estate assets from financing intended for construction and real estate development, regardless of the economic sector to which the company or entrepreneur belongs, detailed by their nature in completed buildings (housing and others), buildings under construction (housing and others), and land (developed land and others); real estate assets from mortgage financing to households for housing acquisition, and the rest of real estate assets awarded or received in payment of debts, as well as capital instruments, participations, and financing to companies holding such assets.

The breakdown and presentation of the quantitative information to be published in the notes in accordance with the provisions of this section shall be carried out in accordance with the format of statement S.8 Information on assets received in payment of debts (business in Spain), insofar as this information is concerned.»

c) Letter a) of block A) of section 71 is replaced by the following text:

«a) Nominal value of mortgage loans and credits backing the issuance of mortgage bonds and mortgage certificates, indicating their calculation as the difference between the nominal value of the entire portfolio of loans and credits guaranteed by mortgages registered in favor of the entity and pending collection (including those acquired through mortgage participations and mortgage transfer certificates), even if they have been written off from the balance sheet, regardless of the percentage that represents the risk on the amount of the latest available valuation for purposes of the mortgage market, minus mortgage loans and credits transferred through mortgage participations or mortgage transfer certificates, regardless of whether they have been written off from assets or not, and those affected as collateral for received financing. For mortgage loans and credits transferred, the amount registered in the asset of the balance sheet shall also be indicated.»

d) Letter d) of block A) of section 71 is replaced by the following text:

«d) Nominal and updated (calculated in accordance with what Article 23 of the aforementioned Royal Decree establishes) values of the entire portfolio of mortgage loans and credits covering the issuance of mortgage bonds.»

e) Letter b) of block B) of section 71 is replaced by the following text:

«b) Aggregate nominal values of mortgage certificates issued by the entity pending amortization, even if they are not registered in the liability (because they have not been placed with third parties or have been repurchased), breaking down those registered as deposits and those accounted for as debt securities, with distinction for the latter between those issued through public offering and the rest of issuances, expressing, for each of these classes, their residual maturity according to the following categories: up to three years, more than three years and up to five years, more than five years and up to ten years, and more than ten years. As a breakdown of the total amount of mortgage certificates issued, the amount of those not registered in the balance sheet liability shall be indicated.»

f) The following paragraph is added at the end of section 71:

«71. (…) The breakdown and presentation of the quantitative information to be published in the notes in accordance with the provisions of this section shall be carried out in accordance with the format of statement S.6 Information on the mortgage market, insofar as this information is concerned.»

g) The following paragraph is added at the end of section 72:

«72. (…) The breakdown and presentation of the quantitative information to be published in the notes in accordance with the provisions of this section shall be carried out in accordance with the format of statement S.6 Information on the mortgage market, insofar as this information is concerned.»

h) The first paragraph of section 73 is drafted as follows:

«In the note to the notes to individual accounts in which the explicit statement of the Board of Directors or equivalent body of the credit institution must be included, regarding the existence of explicit policies and procedures related to their activities in the mortgage market approved by that body or by a delegated body of it, and by which said body expressly assumes responsibility for compliance with mortgage market regulations, a description with a certain degree of detail of the content of said policies shall be included, explicitly indicating whether the aforementioned policies and procedures include criteria on the following points:»

4. Letters F) and G), and sections 12 and 13 are added at the end of the sixty-first norm, Notes to consolidated accounts, with the following text:

«F) Risk Concentrations.

12 The information referred to in section 16 bis of the sixtieth norm shall include, at least in aggregate, the activity of credit institutions corresponding to their business in Spain.

The breakdown and presentation of the quantitative information to be published in the notes in accordance with the provisions of this section shall be carried out in accordance with the format of statement C.17 Information on financing carried out by credit institutions for construction, real estate development, and housing acquisition, insofar as this information is concerned.

G) Non-current assets held for sale.

13. The information collected in section 55 bis of the sixtieth norm shall include, at least in aggregate, the activity of the group of credit institutions, as defined in the first norm, corresponding to their business in Spain.

The breakdown and presentation of the quantitative information to be published in the notes in accordance with the provisions of this section shall be carried out in accordance with the format of statement C.18 Information on assets received in payment of debts by the group of credit institutions (business in Spain), insofar as this information is concerned.»

5. Letters c) and d) are added in section 9 of the sixty-fifth norm, Off-balance sheet items and complementary information, with the following text:

«c) Loans eligible for the coverage of mortgage certificate issuances: Collects the total nominal amount of loans and credits with mortgage collateral that are eligible, in the amount that is computable to back the issuance of mortgage certificates in accordance with the regulatory framework of the mortgage market, registered in the asset of the balance sheet by entities that have issued mortgage bonds or mortgage certificates.

d) Other assets affected by the issuance of mortgage securities: Collects the nominal value of assets, other than loans and credits with mortgage collateral, computable to back the issuance of mortgage bonds and mortgage certificates, registered in the asset of the balance sheet by entities that have issued mortgage certificates or bonds and that are affected by live issuances of these mortgage securities. These assets are those that have the status of replacement assets according to the regulatory framework of the mortgage market.»

6. The sixty-seventh norm, Reserved individual statements of deposit entities, is modified as follows:

a) In section 1, the following is modified:

The statement "S.3 Information on the mortgage market (business in Spain)" is renamed "S.3 Information on mortgage activity (business in Spain)" and the statements "S.6 Information on the mortgage market", "S.7 Information on financing for construction, real estate development, and housing acquisition (business in Spain)" and "S.8 Information on assets received in payment of debts (business in Spain)" are added, all of them with semi-annual periodicity and a maximum presentation deadline at the end of the following month.

b) Section 14 is added, with the following text:

«14. Statement S.3 shall be sent by all entities that have mortgage operations, statement S.6 by entities that have issued mortgage bonds or mortgage certificates, statement S.7 by those that have granted financing intended for construction, real estate development, or housing acquisition, and statement S.8 by those that have real estate assets received in payment of debts or capital instruments, participations, or financing to companies holding such assets.»

7. Section 1 of the sixty-eighth norm, Reserved individual statements of financial credit establishments, is modified as follows:

The statement "S.3 Information on the mortgage market (business in Spain)" is renamed "S.3 Information on mortgage activity (business in Spain)" and the statements "S.6 Information on the mortgage market", "S.7 Information on financing for construction, real estate development, and housing acquisition (business in Spain)" and "S.8 Information on assets received in payment of debts (business in Spain)" are added, all of them with semi-annual periodicity and a maximum presentation deadline at the end of the following month.

8. The sixty-ninth norm, Reserved statements of consolidatable groups of credit institutions, is modified as follows:

a) In section 1, the following is modified:

The statements "C.17 Information on financing carried out by credit institutions for construction, real estate development, and housing acquisition (business in Spain)" and "C.18 Information on assets received in payment of debts by the group of credit institutions (business in Spain)" are added, all of them with semi-annual periodicity.

b) The current section 7 becomes section 8, and a new section 7 is added, with the following text:

«7. Statement C.17 shall be sent by entities that have granted financing intended for construction, real estate development, or housing acquisition. The information in this statement refers exclusively to the activity carried out by credit institutions corresponding to business in Spain.

Statement C.18 shall be sent by entities that have real estate assets received in payment of debts or capital instruments, participations, and financing to non-consolidated companies holding such assets registered in their public consolidated financial statements.»

9. In Annex IV, Reserved individual statements, the following modifications are made:

a) In statement "M.1-2 Complementary information to the balance sheet", the item "13 Assets eligible for the issuance of mortgage certificates" is renamed "13 Loans eligible for the coverage of mortgage certificate issuances".

b) The formats of statements S.3-1 and S.3-2 are replaced by