Circular 2/2014, of January 31, of the Bank of Spain, to credit institutions, on the exercise of various regulatory options contained in Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms, and amending Regulation (EU) No 648/2012. (BOE of 5 February 2014)

Royal Decree-Law 14/2013, of 29 November, on urgent measures to adapt Spanish law to European Union legislation on the supervision and solvency of financial entities (hereinafter, the RDL), has come to 1) carry out the most urgent adaptations of the Spanish legal order to the novelties derived from Directive 2013/36/EU of 26 June of the European Parliament and of the Council on access to the activity of credit institutions and investment firms and on 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 of Regulation (EU) No 575/2013 of 26 June 2013 of the European Parliament and of the Council on prudential requirements for credit institutions and investment firms, and amending Regulation (EU) No 648/2012, and 2) address other reforms of an urgent nature.

This RDL has only partially transposed Directive 2013/36/EU into Spanish law and has empowered the Bank of Spain, in its final provision fifth, to make use of the options attributed to national competent authorities in Regulation (EU) No 575/2013.

The object of this circular is to establish, in accordance with the conferred powers, which options that Regulation (EU) No 575/2013 attributes to national competent authorities must be complied with immediately, from the entry into force of the new solvency regulatory framework, by consolidatable groups of credit institutions and Spanish credit institutions, whether or not integrated into a consolidatable group, and to what extent.

To this end, in this circular, the Bank of Spain makes use of some of the permanent regulatory options provided for in Regulation (EU) No 575/2013, generally with the aim of allowing continuity in the treatment that Spanish legislation had previously given to certain issues prior to the entry into force of said Community law, the justification for which, in some cases, stems from the business model traditionally followed by Spanish entities. This does not exclude the future exercise of other options provided for competent authorities in Regulation (EU) No 575/2013, in many cases, mainly when they are options of a non-general nature, by direct application of Regulation (EU) No 575/2013, without the need for transcription in a Bank of Spain circular.

Likewise, in use of the aforementioned empowerment conferred, the Bank of Spain also determines in this circular the manner in which entities must comply with the transitional regulatory options provided for in Regulation (EU) No 575/2013.

As the objective of the Community regulator, regarding these latter, has been to facilitate, during a transitional period, a progressive and smooth adaptation to the new requirements derived from the introduction of the Basel III framework in the European Union, as a general rule, the Bank of Spain has opted to take the longest time periods permitted by Regulation (EU) No 575/2013 and the least demanding correction factors, for the purpose of fulfilling the intended purpose most effectively. However, in certain cases where Spanish legislation, particularly in Bank of Spain Circular 3/2008, of 22 May, on the determination and control of minimum own funds (hereinafter, CBE 3/2008), had been more demanding than that permitted by Regulation (EU) No 575/2013, this has been considered a floor, from which the option would be exercised.

Likewise, the treatment that entities must continue to apply to certain issues is specified, until the entry into force of the regulatory technical standards being drafted by the European Banking Authority.

Consequently, in use of the powers granted, the Governing 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 rules:

Rule first.

Scope of application and definitions. [ 1 ]

1. The provisions of this circular shall apply to the entities and groups referred to in paragraphs a) and b) below, provided that they are considered less significant according to Council Regulation (EU) No 1024/2013, which entrusts the European Central Bank with specific tasks regarding policies related to the prudential supervision of credit institutions, and are under the direct supervision of the Bank of Spain:

a) The consolidatable groups and subgroups of credit institutions, defined in Regulation (EU) No 575/2013 of 26 June 2013 of the European Parliament and of the Council on prudential requirements for credit institutions and investment firms, and amending Regulation (EU) No 648/2012, whose parent company is established in Spain and meets any of the definitions in paragraphs 28, 30 or 32 of Article 4.1 of Regulation (EU) No 575/2013.

b) Individual credit institutions incorporated in Spain, whether or not integrated into a consolidatable group of credit institutions.

The provisions of this circular shall also apply to branches in Spain of credit institutions with headquarters in non-EU countries.

Additionally, exclusively for the purpose of ensuring that the supervisory requirements or powers established in this circular are applied appropriately on a consolidated or sub-consolidated basis, the terms "entity", "parent entity of a Member State", "parent entity of the EU" and "parent undertaking" shall also include the companies provided for in letters a), b) and c) of Article 1 bis of Law 10/2014. [ 2 ]

2. Notwithstanding the provisions of the previous paragraph, the seventeenth rule of this circular shall apply to all groups and entities, significant or less significant, indicated in letters a) and b) above, as well as to branches in Spain of credit institutions with headquarters in non-EU countries referred to in the first paragraph of this rule.

3. The terms and concepts used in this circular shall be understood in accordance with the definitions collected in Regulation (EU) No 575/2013 and in Directive 36/2013/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and on 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 their transposition into Spanish law.

[1]

Drafted according to Circular 3/2017, of 24 October, single article.

[2]

Paragraph 1 drafted according to Circular 3/2022, of 30 March, of the Bank of Spain, amending Circular 2/2016, of 2 February, to credit institutions, on supervision and solvency, which completes the adaptation of Spanish law to Directive 2013/36/EU and to Regulation (EU) No 575/2013; Circular 2/2014, of 31 January, to credit institutions, on the exercise of various regulatory options contained in Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms, and amending Regulation (EU) No 648/2012; and Circular 5/2012, of 27 June, to credit institutions and payment service providers, on transparency of banking services and liability in granting loans. (BOE of 6 April 2022), second rule.

CHAPTER 1

General Issues

Rule second.

Treatment of certain holdings.

1. In the case of holdings of own-instrument instruments of an entity in the financial sector in which entities have a significant investment, the Bank of Spain, in accordance with Article 49.1 of Regulation (EU) No 575/2013, may authorize entities not to deduct such holdings from their own funds, in which case they shall subject them to weighting for the purpose of calculating own funds requirements as indicated in Article 49.4 of Regulation (EU) No 575/2013.

2. In the case of qualifying holdings in non-financial entities, in accordance with Article 89.3 of Regulation (EU) No 575/2013, and in accordance with the provisions therein on the treatment of qualifying holdings in non-financial entities, entities must apply the treatment provided for in letter a), that is, apply the 1,250% weighting established therein.

Rule third.

Treatment of certain exposures. [ 3 ]

[3]

Repealed by Circular 3/2022, of 30 March, of the Bank of Spain, amending Circular 2/2016, of 2 February, to credit institutions, on supervision and solvency, which completes the adaptation of Spanish law to Directive 2013/36/EU and to Regulation (EU) No 575/2013; Circular 2/2014, of 31 January, to credit institutions, on the exercise of various regulatory options contained in Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms, and amending Regulation (EU) No 648/2012; and Circular 5/2012, of 27 June, to credit institutions and payment service providers, on transparency of banking services and liability in granting loans. (BOE of 6 April 2022), second rule.

Rule third bis.

Liquidity outflows in products related to off-balance sheet items of commercial financing. [ 4 ]

[4]

Repealed by Circular 3/2022, of 30 March, of the Bank of Spain, amending Circular 2/2016, of 2 February, to credit institutions, on supervision and solvency, which completes the adaptation of Spanish law to Directive 2013/36/EU and to Regulation (EU) No 575/2013; Circular 2/2014, of 31 January, to credit institutions, on the exercise of various regulatory options contained in Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms, and amending Regulation (EU) No 648/2012; and Circular 5/2012, of 27 June, to credit institutions and payment service providers, on transparency of banking services and liability in granting loans. (BOE of 6 April 2022), second rule.

Rule third ter.

Outflows of stable retail deposits. [ 5 ]

For the purposes of Article 24.4 of Delegated Regulation (EU) No 2015/61 of the Commission of 10 October 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, credit institutions shall multiply by 3% the amount of stable retail deposits covered by a deposit guarantee scheme, provided that the European Commission has given prior authorization in accordance with Article 24.5 of said regulation, certifying compliance with the conditions established in said Article 24.4.

[5]

Drafted according to Circular 3/2022, of 30 March, of the Bank of Spain, amending Circular 2/2016, of 2 February, to credit institutions, on supervision and solvency, which completes the adaptation of Spanish law to Directive 2013/36/EU and to Regulation (EU) No 575/2013; Circular 2/2014, of 31 January, to credit institutions, on the exercise of various regulatory options contained in Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms, and amending Regulation (EU) No 648/2012; and Circular 5/2012, of 27 June, to credit institutions and payment service providers, on transparency of banking services and liability in granting loans. (BOE of 6 April 2022), second rule.

Rule third quater.

Level 2B assets in the case of entities that cannot possess interest-bearing assets. [ 6 ]

Credit institutions that, in accordance with their statutes, for reasons of religious practice, cannot possess interest-bearing assets may include debt securities representing corporate debt as Level 2B liquid assets, in accordance with all requirements established in Article 12.1.b of Delegated Regulation (EU) No 2015/61.

The Bank of Spain may periodically review this treatment and allow an exemption from the requirements of Articles 12.1.b.(ii) and 12.1.b.(iii) of Delegated Regulation (EU) 2015/61, when the conditions established in Article 12.3 of Delegated Regulation (EU) 2015/61 are met.

[6]

Drafted according to Circular 3/2022, of 30 March, of the Bank of Spain, amending Circular 2/2016, of 2 February, to credit institutions, on supervision and solvency, which completes the adaptation of Spanish law to Directive 2013/36/EU and to Regulation (EU) No 575/2013; Circular 2/2014, of 31 January, to credit institutions, on the exercise of various regulatory options contained in Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms, and amending Regulation (EU) No 648/2012; and Circular 5/2012, of 27 June, to credit institutions and payment service providers, on transparency of banking services and liability in granting loans. (BOE of 6 April 2022), second rule.

Rule third quinquies.

Exception in the case of a general failure of a system. [ 7 ]

In the event that the Bank of Spain determines, through a public declaration, that a general failure has occurred in the sense of Article 380 of Regulation (EU) No 575/2013, credit institutions shall be exempt from the own funds requirements calculated in accordance with Articles 378 and 379 of Regulation (EU) No 575/2013, until the Bank of Spain considers that the situation has been rectified. In this case, the fact that a counterparty does not settle a transaction shall not be considered a default for credit risk purposes. In analyzing whether a general failure has occurred, the Bank of Spain will take into consideration the criterion of the European Central Bank regarding this matter.

[7]

Incorporated by Circular 3/2017, of 24 October, single rule.

Rule Third sexies.

Default of a debtor. [ 8 ]

Credit institutions shall apply the "overdue for more than 90 days" criterion to the categories of exposures specified in Article 178.1.b of Regulation (EU) No 575/2013.

[8]

Incorporated by Circular 3/2022, of 30 March, second rule.

Rule Third septies.

Calculation of the amount of required stable funding. [ 9 ]

In accordance with Articles 428 septdecies.10 and 428 bis octodecies.10 of Regulation (EU) No 575/2013, the required stable funding factors that credit institutions must apply to off-balance sheet exposures not covered in Chapter 4 of Title IV of Part Six of Regulation (EU) No 575/2013 must be the exit rates related to other products and services specified in Article 23 of Delegated Regulation (EU) No 2015/61.

[9]

Incorporated by Circular 3/2022, of 30 March, second rule.

Rule Third octies.

Residual maturity of an asset. [ 10 ]

In accordance with Articles 428 octodecies.2 and 428 bis novodecies.2 of Regulation (EU) No 575/2013, credit institutions shall treat assets that have been segregated in accordance with Article 11.3 of Regulation (EU) No 648/2012 according to the underlying exposure of these. However, if entities cannot freely dispose of such assets, they must treat them as encumbered assets during the period corresponding to the term of the liabilities to the entities' customers to which that segregation requirement is linked.

[10]

Incorporated by Circular 3/2022, of 30 March, second rule.

Rule Third nonies.

Level 2B assets. [ 11 ]

The following indices shall be considered major stock indices, for the purpose of determining shares that may be qualified as Level 2B assets in accordance with Article 12.1.c).i) of Delegated Regulation (EU) No 2015/61:

(i) The indices listed in Annex 1 of Commission Implementing Regulation (EU) 2016/1646.

(ii) Any major stock index, not included in point (i), in a Member State or in a third country, identified as such for the purposes of this point by the competent authority of the Member State or by the relevant public authority of the third country.

(iii) Any major stock index, not included in points (i) or (ii), composed of shares of the main companies in the country in question.

[11]

Incorporated by Circular 3/2022, of 30 March, second rule.

Rule Third decies.

Exemptions from large exposures. [ 12 ]

In accordance with Article 400.2 of Regulation (EU) No 575/2013, entities may fully exclude from compliance with their large exposure limits the exposures referred to in letters (k) and (l) of said article.

[12]

Incorporated by Circular 3/2022, of 30 March, second rule.

CHAPTER 2

Exercise by the Bank of Spain of transitional regulatory options provided for in Regulation (EU) No 575/2013

Section one.

Own funds requirements

Rule fourth.

Own funds requirements. [ 13 ]

[13]

Repealed by Circular 3/2017, of 24 October, single rule.

Section two.

Prudential adjustments and filters

Rule fifth.

Fair value gains and losses. [ 14 ]

[14]

Repealed by Circular 3/2017, of 24 October, single rule.

Rule sixth.

Fair value gains and losses, arising from derivative liabilities, resulting from own credit risk. [ 15 ]

[15]

Repealed by Circular 3/2017, of 24 October, single rule.

Section three.

Deductions in Common Equity Tier 1 elements

Rule seventh.

Maintenance of the level of deduction of certain elements during the transitional period. [ 16 ]

[16]

Repealed by Circular 3/2017, of 24 October, single rule.

Rule seventh bis.

Deduction of intangible assets. [ 17 ]

[17]

Repealed by Circular 3/2017, of 24 October, single rule.

Rule eighth.

Deduction of negative amounts resulting from the calculation of expected loss amounts during the transitional period. [ 18 ]

[18]

Repealed by Circular 3/2017, of 24 October, single rule.

Rule ninth.

Deduction of defined benefit pension fund assets during the transitional period. [ 19 ]

[19]

Repealed by Circular 3/2017, of 24 October, single rule.

Rule ninth bis.

Transitional recognition in Common Equity Tier 1 capital of the higher value of assets and liabilities of defined benefit pension funds or plans, net of associated obligations, due to modifications in International Accounting Standard 19. [ 20 ]

[20]

Repealed by Circular 3/2022, of 30 March, of the Bank of Spain, amending Circular 2/2016, of 2 February, to credit institutions, on supervision and solvency, which completes the adaptation of Spanish law to Directive 2013/36/EU and to Regulation (EU) No 575/2013; Circular 2/2014, of 31 January, to credit institutions, on the exercise of various regulatory options contained in Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms, and amending Regulation (EU) No 648/2012; and Circular 5/2012, of 27 June, to credit institutions and payment service providers, on transparency of banking services and liability in granting loans. (BOE of 6 April 2022), third rule.

Rule tenth.

Deduction, during the transitional period, of holdings of Common Equity Tier 1 instruments of entities in the financial sector when the entity does not have a significant investment in an entity in the financial sector. [ 21 ]

[21]

Repealed by Circular 3/2017, of 24 October, single rule.

Rule eleventh.

Treatment during the transitional period of deferred tax asset deductions. [ 22 ]

1. For the purposes of the deduction provided for in Article 469.1(c) of Regulation (EU) No 575/2013, between 1 January 2018 and 31 December 2023, entities that fall under any of the cases i) to iii) below shall deduct from Common Equity Tier 1 capital elements the applicable percentage indicated in paragraph 1 of the fourteenth rule of the corresponding amount of deferred tax assets that depend on future earnings and existed prior to 1 January 2014 and that, after applying what is established in Articles 470 and 469.2 of Regulation (EU) No 575/2013, result in a deduction:

i) Entities that, as of 14 April 2017, were subject to a restructuring plan approved by the European Commission.

ii) Entities subject to a restructuring plan approved by the European Commission before 14 April 2017 that are acquired or merged with other entities, provided that, after the acquisition or merger, said restructuring plan remains in force and without modifications regarding the prudential treatment of deferred tax assets. In this case, the treatment provided for in this paragraph shall apply to the acquiring or resulting entity to the same extent it would have applied to the acquired entity.

iii) In the event that the Bank of Spain determines that there has been an unexpected and material increase in the impact of deductions corresponding to deferred tax assets that depend on future earnings and existed prior to 1 January 2014.

2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [ 23 ]

3. The undeducted residual amounts resulting from the application of the previous paragraph shall not be deducted from own funds and shall receive a risk weighting of 0%. [ 24 ]

[22]

Drafted according to Circular 3/2017, of 24 October, single rule.

[23]

Paragraph 2 repealed by Circular 3/2022