Circular 1/2018 modifying Circular 5/2016 and Circular 8/2015 regarding Deposit Guarantee Fund contributions and risk profiles

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Circular 1/2018, of January 31, amending Circular 5/2016, of May 27, on the calculation method for contributions by entities affiliated with the Deposit Guarantee Fund of Credit Institutions to be proportional to their risk profile; and Circular 8/2015, of December 18, to entities and branches affiliated with the Deposit Guarantee Fund of Credit Institutions, on information to determine the bases for calculating contributions to the Deposit Guarantee Fund of Credit Institutions. (BOE of February 9, 2018)

Royal Decree-Law 11/2017, of June 23, on urgent measures in the financial sector, has as one of its fundamental objectives to allow certain credit institutions to adopt policies and strategies to improve their resilience to the risks they face in the exercise of their activity. To this end, the legal regime for credit cooperatives expressly incorporates the possibility that these entities integrate into one of the Institutional Protection Systems (SIPs) provided for in the regulations. In addition, measures are adopted to facilitate their establishment and promote their effective functioning.

The regulations provide for two distinct types of SIPs: first, the so-called reinforced SIPs or full mutualization SIPs, regulated in the additional fifth provision of Law 10/2014, of June 26, on the ordering, supervision, and solvency of credit institutions; and, second, the so-called regulatory SIPs, regulated in Article 113.7 of 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 [Regulation (EU) No 575/2013].

The establishment of an SIP serves to reinforce the liquidity and solvency of the credit institutions that are part of it. This implies a modification of their risk profile. To favor the establishment of an SIP and guarantee adequate treatment for entities belonging to it, Royal Decree-Law 11/2017 has introduced, among other aspects, modifications in the regulation regarding the determination of contributions to the Deposit Guarantee Fund (FGD), in line with Article 13 of Directive 2014/49/EU of the European Parliament and of the Council, of April 16, 2014, on deposit guarantee schemes.

The aforementioned directive has been transposed into our legal order through the modification of Royal Decree-Law 16/2011, of October 14, creating the Deposit Guarantee Fund of Credit Institutions. Through Article 6.3 of this royal decree-law, the Bank of Spain was tasked with developing the necessary methods so that contributions to the FGD would be proportional to the risk profile of the entities. In compliance with this mandate, the Bank of Spain approved Circular 5/2016, of May 27, on the calculation method for contributions by entities affiliated with the FGD to be proportional to their risk profile.

Royal Decree-Law 11/2017 has modified Article 6.3 of Royal Decree-Law 16/2011. In the mandate to the Bank of Spain, provided for in that provision, to develop the necessary methods so that contributions by entities affiliated with the FGD are proportional to their risk profile, a new factor has been added regarding the participation of credit institutions in one of the types of SIPs contemplated in current regulations. This new factor consists of the membership of credit institutions, either in the so-called reinforced SIPs or full mutualization SIPs (additional fifth provision of Law 10/2014), for which consolidated data are considered for the calculation of contributions to the FGD, or in the so-called regulatory SIPs [Article 113.7 of Regulation (EU) 575/2013], which may make lower contributions to the FGD, in the event that an ex ante fund has been established to reinforce the liquidity and solvency of the SIP members.

The modification of Circular 5/2016 aims to adapt our legal order to this circumstance, ensuring that the FGD contribution regime takes into account the risk profile of affiliated entities that are part of an SIP.

Additionally, the proper implementation of the modification of Circular 5/2016 requires the Bank of Spain to have sufficient information. It is therefore necessary to modify Circular 8/2015, of December 18, of the Bank of Spain, to entities and branches affiliated with the Deposit Guarantee Fund of Credit Institutions, on information to determine the bases for calculating contributions to the Deposit Guarantee Fund of Credit Institutions. This modification is based on the enabling titles held by the Bank of Spain for the elaboration and adoption of Circular 8/2015 and, specifically, the Ministerial Order of March 31, 1989, which authorizes the Bank of Spain to establish and modify the accounting rules of Credit Institutions. Ultimately, this seeks to gather information on the SIP's ex ante fund to allow the Bank of Spain to exercise its control and inspection functions.

For all these reasons, this circular complies with the principles of necessity, effectiveness, proportionality, legal certainty, transparency, and efficiency regulated in Article 129 of Law 39/2015, of October 1, on the Common Administrative Procedure of Public Administrations. It achieves the pursued ends by establishing the minimum indispensable regulation, not imposing unnecessary or ancillary administrative burdens, and being coherent with the rest of the legal order, both national and European Union.

Consequently, in exercise of the powers conferred upon it, the Government Council of the Bank of Spain, upon proposal of the Executive Commission and in agreement with the Council of State, has approved this circular, which contains the following norms:

First Norm.

Modification of Circular 5/2016, of May 27, of the Bank of Spain, on the calculation method for contributions by entities affiliated with the FGD to be proportional to their risk profile.

Circular 5/2016, of May 27, of the Bank of Spain, on the calculation method for contributions by entities affiliated with the FGD to be proportional to their risk profile, is modified as follows [1]:

One. In the section "Normative References Used in this Circular," the following modifications are introduced:

i) The reference to:

«Circular 4/2004

Bank of Spain Circular 4/2004, of December 22, to credit institutions, on public and reserved financial information standards, and financial statement models».

Is replaced by the following reference:

«Circular 4/2017

Circular 4/2017, of November 27, of the Bank of Spain, to credit institutions, on public and reserved financial information standards, and financial statement models».

ii) Two new references are introduced, drafted as follows:

«Law 10/2014

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

«Circular 8/2015

Circular 8/2015, of December 18, of the Bank of Spain, to entities and branches affiliated with the Deposit Guarantee Fund of Credit Institutions, on information to determine the bases for calculating contributions to the Deposit Guarantee Fund of Credit Institutions».

Two. In Norm 1, section 4 is drafted as follows:

«4. The aggregate risk weighting resulting for each affiliated entity will be incorporated into the formula included in phase 6 of Annex 1, to determine the contribution of said entity. This contribution will be modulated, as provided in phases 7 and 8 of Annex 1, based on its participation as a member in an SIP provided for in Article 113.7 of Regulation (EU) No 575/2013, which has established an ex ante fund guaranteeing that the SIP has funds directly available for the purposes provided for in letter e) of Article 6.3 of Royal Decree-Law 16/2011».

Three. The following modifications are introduced in Norm 2:

i) Sections 3.1, 3.2, 4, 4.1, 4.2, and 5.2 are drafted as follows:

«3.1 Ratio of doubtful debt instruments: is the quotient between, on the one hand, the gross book value (without deducting the accumulated impairment amount) of doubtful debt instruments other than i) financial assets held for trading, ii) financial assets not held for trading valued mandatorily at fair value through profit or loss, and iii) financial assets designated at fair value through profit or loss; and, on the other hand, the gross book value of debt instruments other than i) financial assets held for trading, ii) financial assets not held for trading valued mandatorily at fair value through profit or loss, and iii) financial assets designated at fair value through profit or loss, in accordance with the criteria established in Circular 4/2017».

«3.2 Ratio of coverage of doubtful debt instruments: is the quotient between, on the one hand, the accumulated impairment amount of doubtful debt instruments other than i) financial assets held for trading, ii) financial assets not held for trading valued mandatorily at fair value through profit or loss, and iii) financial assets designated at fair value through profit or loss; and, on the other hand, the gross book value of doubtful debt instruments other than i) financial assets held for trading, ii) financial assets not held for trading valued mandatorily at fair value through profit or loss, and iii) financial assets designated at fair value through profit or loss, in accordance with the criteria established in Circular 4/2017».

«4. Business model and management model category: reflects, on the one hand, the quality of the entity's corporate governance and internal controls, taking into account the risk related to the entity's current business model and strategic plans; and, on the other hand, the entity's participation as a member of an SIP provided for in Article 113.7 of Regulation (EU) No 575/2013».

«4.1 Ratio of risk-weighted assets to total assets: is the quotient between, on the one hand, the total exposure to risk referred to in Article 92, paragraph 3, of Regulation (EU) No 575/2013 and, on the other hand, the total assets of the reserved balance referred to in Circular 4/2017».

«4.2 Return on assets ratio: is the quotient between, on the one hand, the result of the year obtained by the entity and, on the other hand, the total assets of the reserved balance referred to in Circular 4/2017».

«5.2 Ratio of own funds and eligible liabilities: is the quotient between, on the one hand, the amount of own funds referred to in paragraph 118 of Article 4.1 of Regulation (EU) No 575/2013, and eligible liabilities referred to in Article 41 of Law 11/2015, minus the minimum volume of own funds and eligible liabilities required of the entity in accordance with Article 44 of Law 11/2015, and, on the other hand, the total assets of the reserved balance referred to in Circular 4/2017».

ii) A new section 4.3 is introduced with the following wording:

«4.3 Participation of the entity as a member in an SIP provided for in Article 113.7 of Regulation (EU) No 575/2013: reflects the fact that the entity is a member of an SIP provided for in the aforementioned regulation that has established an ex ante fund guaranteeing that the SIP has funds directly available for the purposes provided for in letter e) of Article 6.3 of Royal Decree-Law 16/2011».

Four. Norm 3 is drafted as follows:

«Risk indicators will receive the following weightings:

a) Leverage ratio: 10.5%. b) Common Equity Tier 1 ratio: 10.5%. c) Liquidity coverage ratio: 10%. d) Net stable funding ratio: 10%. e) Ratio of doubtful debt instruments: 13%. f) Ratio of coverage of doubtful debt instruments: 5%. g) Ratio of risk-weighted assets to total assets: 6.5%. h) Return on assets ratio: 6.5%. i) Participation of the entity as a member in an SIP provided for in Article 113.7 of Regulation (EU) No 575/2013: 8%. j) Ratio of unencumbered assets: 13%. k) Ratio of own funds and eligible liabilities: 7%».

Five. The following modifications are introduced in Norm 4:

i) A new section 1 bis is introduced with the following wording:

«1 bis. As an exception to the provisions of the previous section, credit institutions that, as of December 31 of the year immediately preceding the one corresponding to the contribution, belong to an SIP provided for in the additional fifth provision of Law 10/2014, will be subject globally to the risk weighting determined for the central entity and the members consolidated, and therefore, the value of their risk indicators will be calculated at the consolidated level».

ii) Sections 2, 3, and 5 are drafted as follows:

«2. As an exception to the provisions of section 1, when an exemption has been granted to an affiliated entity in accordance with Articles 8 and 21 of Regulation (EU) No 575/2013, the risk indicators indicated in letters c) and d) of Norm 3 will be assigned the value calculated for the single liquidity subgroup of which it is part».

«3. As an exception to the provisions of section 1, when an affiliated entity has been exempted from the application of prudential requirements on an individual basis, in accordance with Article 7 of Regulation (EU) No 575/2013, or from the application of the minimum requirement for own funds and eligible liabilities, in accordance with paragraph 6 of Article 44 of Law 11/2015, the risk indicators indicated in letters a), b), g), and k) of Norm 3 will be assigned the corresponding indicator value of the consolidatable group of which it is part».

«5. When information on an indicator is not available for legal reasons or due to the applicable supervisory regime, that indicator will not be used. The weighting attributed to said indicator will be added to the weighting of the other available indicator corresponding to the same risk category, or, in the event that the risk category has at least two other indicators available, its weighting will be distributed equally among the weightings of the remaining indicators corresponding to the same risk category.

The indicator regarding the participation of the entity as a member in an SIP provided for in Article 113.7 of Regulation (EU) No 575/2013 will also not be used when no entity affiliated with the FGD belongs to the aforementioned SIP. In such a case, the weighting attributed to that indicator will be distributed equally among the weightings of the other two indicators corresponding to the same risk category, or, in the event that that risk category has only one indicator available, its weighting will be added to the weighting of the available indicator».

iii) A second paragraph is introduced in section 8, which will have the following wording:

«The provisions of this section will not apply to the risk indicator consisting of the participation of the entity as a member in an SIP provided for in Article 113.7 of Regulation (EU) No 575/2013. For this indicator, the value corresponding to December 31 of the immediately preceding year will be taken».

iv) A second paragraph is introduced in section 9, which will have the following wording:

«The provisions of this section will not apply to the risk indicator consisting of the participation of the entity as a member in an SIP provided for in Article 113.7 of Regulation (EU) No 575/2013. For this indicator, entities not integrated into an SIP will be assigned to the first risk interval, while entities that are integrated will be assigned to the second risk interval».

Six. The following modifications are introduced in Annex 1:

i) The first paragraph, following the title of Annex 1, is drafted as follows:

«To apply the method in the calculation of a specific contribution, the following eight phases will be applied:».

ii) In section 1 of phase 1, a second paragraph is introduced with the following wording:

«The provisions of the previous paragraph will not apply to credit institutions that belong to an SIP provided for in the additional fifth provision of Law 10/2014. In this case, to perform the classification referred to in this section, only the central entity of the SIP will be taken into account, which will be the one distributed into the different risk intervals established for each indicator, in accordance with the following section 4. To this end, the value of the risk indicators of the central entity at the consolidated level will be used, in accordance with what is provided in section 1 bis of Norm 4».

iii) In section 2 of phase 1, a second paragraph is introduced, with the following wording:

«The provisions of the previous paragraph will not apply to the distribution of entities into the intervals of the risk indicator consisting of the entity's participation as a member in an SIP provided for in Article 113.7 of Regulation (EU) No 575/2013. In this case, the criterion established in the second paragraph of section 9 of Norm 4 will be followed».

iv) In section 4 of phase 1, sections e) and f) are drafted as follows:

«e) Ratio of doubtful debt instruments: 12 intervals. f) Ratio of coverage of doubtful debt instruments: 12 intervals».

v) In section 4 of phase 1, sections i) and j) are renumbered as sections j) and k), and a new letter i) is introduced, with the following wording:

«i) Participation as a member in an SIP provided for in Article 113.7 of Regulation (EU) No 575/2013: 2 intervals».

vi) In phase 3, the table is drafted as follows:

[Table omitted in source text]

vii) In phase 6, the first paragraph and the definition of what "PRAn" represents are drafted as follows:

«In order to determine the contribution of each affiliated entity to the FGD in accordance with Article 6 of Royal Decree-Law 16/2011, the aggregate risk weighting (PRAn) obtained will be integrated into the following calculation formula:».

«"PRAn" represents the aggregate risk weighting of entity "n" (see phase 5). In the case of entities that belong to an SIP provided for in the additional fifth provision of Law 10/2014, the aggregate risk weighting of each of those entities will be the one obtained by the central entity of the SIP. This weighting will be applied to each of the entities belonging to the SIP».

viii) Phases 7 and 8 are introduced with the following wording:

«Phase 7. Treatment of contributions of entities belonging to an SIP provided for in Article 113.7 of Regulation (EU) No 575/2013 that has established an ex ante fund

1. The entity belonging to an SIP provided for in Article 113.7 of Regulation (EU) No 575/2013, which has established an ex ante fund guaranteeing that the SIP has funds directly available for the purposes provided for in letter e) of Article 6.3 of Royal Decree-Law 16/2011, will reduce its annual contribution to the FGD by an amount equal to what it has transferred to the ex ante fund of that SIP in the previous year, with a maximum limit of 60% of the annual contribution the entity must make to the FGD according to the method provided for in phases 1 to 6 of this Annex 1.

2. The reduction provided for in this phase will be applicable provided that the volume of the ex ante fund reaches 0.5% of the risk-weighted assets at the aggregate level of all entities belonging to the SIP.

As an exception to the provisions of the previous paragraph, the reduction provided for in this phase will also be applicable, even if the ex ante fund does not reach the 0.5% volume, if the entities belonging to the SIP have signed a firm commitment providing for clearly defined contributions to:

a) initially fund the ex ante fund up to the 0.5% volume before December 31 of the year in which the SIP is established, this exception not applying in subsequent years, while the volume of the ex ante fund does not reach at least 0.5%; or

b) replenish the ex ante fund if, after the 0.5% volume has been reached, the latter decreases below that threshold due to exceptional circumstances and as a result of the use of the ex ante fund for the purposes provided for in paragraph e) of Article 6.3 of Royal Decree-Law 16/2011. This exception will apply for a maximum of three consecutive years.

3. The reduction provided for in this phase will not be applicable when the volume of the ex ante fund is above 3% of the risk-weighted assets at the aggregate level of all entities belonging to the SIP.

4. To determine the limits referred to in paragraphs 2 and 3, the risk-weighted assets at the consolidated level of each entity belonging to the SIP will be used, except when such data does not exist, in which case the individual level data will be used.

Phase 8. Distribution of contributions of entities affiliated with the FGD

The treatment provided for in the previous phase for entities belonging to an SIP provided for in Article 113.7 of Regulation (EU) No 575/2013, which has established an ex ante fund guaranteeing that the SIP has funds directly available for the purposes provided for in letter e) of Article 6.3 of Royal Decree-Law 16/2011, will not affect the fulfillment of the annual contribution objective to the deposit guarantee compartment set by the FGD.

To this end, the amount by which the aggregate contribution to the FGD has been reduced by the treatment provided for in phase 7 will be distributed among the entities that do not belong to an SIP provided for in Article 113.7 of Regulation (EU) No 575/2013, in proportion to the contribution each of those entities must make to the FGD according to the method provided for in phases 1 to 6 of this Annex 1».

Seven. The following modifications are introduced in Annex 2:

i) Two sections, A) and B), are created. Section A) begins in the first paragraph of Annex 2 and extends to the end of the enumeration. Section B) begins in the first paragraph after the enumeration and extends to letter d) which is incorporated in the subsequent section v).

ii) Numbers 5, 6, and 7 of the section enumerated as A) pursuant to the previous section i) are drafted as follows:

«5. Gross book value of debt instruments other than financial assets held for trading, financial assets not held for trading valued mandatorily at fair value through profit or loss, and financial assets designated at fair value through profit or loss».

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