Circular 1/2022 of the Bank of Spain on liquidity, prudential rules and information obligations for credit institutions, amending Circulars 1/2009 and 3/2019

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Circular 1/2022, of January 24, of the Bank of Spain, to credit institutions, on liquidity, prudential rules and information obligations, and which amends 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 of overdue credit obligations. (BOE of February 3, 2022).

INDEX

Chapter 1. General provisions.

Rule 1. Scope of application.

Rule 2. Exemptions.

Chapter 2. Liquidity.

Section 1. Definitions.

Rule 3. Definitions.

Section 2. Liquidity buffer.

Rule 4. Liquidity coverage ratio.

Rule 5. Composition of the liquidity buffer.

Rule 6. General liquidity requirements for assets.

Rule 7. Operational management of liquid assets.

Rule 8. Valuation of liquid assets.

Rule 9. Secured financing transactions and real collateral swaps.

Rule 10. Non-compliance with the admissibility criteria for a liquid asset and alternative approaches in the treatment of liquidity.

Rule 11. Net liquidity outflows.

Rule 12. Minimum value of the liquidity buffer.

Section 3. Structure of funding sources.

Rule 13. Net stable funding ratio.

Rule 14. General rules for the calculation of the net stable funding ratio.

Rule 15. Available stable funding.

Rule 16. Required stable funding.

Chapter 3. Solvency obligations.

Rule 17. Annual internal capital adequacy assessment report.

Rule 18. Supervisory review and evaluation by the Bank of Spain.

Chapter 4. Information obligations to the Bank of Spain regarding solvency.

Rule 19. General provisions.

Rule 20. Periodic information to be reported on own funds, own fund requirements, large exposures, leverage and non-performing loans.

Rule 21. Periodic information to be reported on the own funds of hybrid credit institutions.

Rule 22. Periodic information to be reported on the liquidity buffer.

Rule 23. Periodic information to be reported on the structure of funding sources.

Rule 24. Periodic information to be reported on interest rate risk in the banking book.

Rule 25. Periodic information to be reported on remuneration.

Chapter 5. Authorization of credit institutions.

Rule 26. Guarantees required in the authorization of credit institutions 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. Amendment of Circular 1/2009.

Second Final Provision. Amendment of Circular 3/2019.

Third Final Provision. Entry into force.

Annexes.

Annex 1. Information on the own funds of hybrid credit institutions.

Annex 2. Information on the liquidity buffer and the structure of funding sources.

I

A) Background. Previous legal framework for credit institutions.

Credit institutions were considered, until the end of 2013, as credit entities, and as such they were governed, in matters 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, modifying Law 13/1985, of May 25, on investment coefficients, own funds and information obligations of financial intermediaries, and other norms of the financial system.

Credit institutions lost their status as credit entities 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 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 in 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.

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 institutions, 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) Legal regime currently applicable to credit institutions.

Title II of Law 5/2015, of April 27, on the promotion of business financing, established the new general legal regime for credit institutions.

The second additional provision of Law 5/2015 highlights the legislator's intention that credit institutions 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 institutions shall be governed by the provisions of said law and its implementing 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 institutions shall be Law 10/2014, of June 26, on the organization, supervision and solvency of credit institutions, and its implementing regulations, with the particularities provided for in regulations. In this sense, Article 39 of Law 10/2014 specifies that the solvency regulations of credit institutions (applicable, therefore, to credit institutions) are those provided for in Regulation (EU) No 575/2013, in that law and in its implementing provisions.

The same Article 12 of Law 5/2015 collects some particularities of the solvency regulations of credit institutions for credit institutions. 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 institutions that have the status of an SME in accordance with 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 institutions and amending 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 institutions provided for in Title II of Law 5/2015. With regard to the differences with the regulations for credit institutions, Article 3 of Royal Decree 309/2020 introduces additional particularities and clarifies the scope of the supplementary application of the legal regime of credit institutions to credit institutions.

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 obligations regarding solvency and liquidity of credit institutions. To this end, Title II of Royal Decree 309/2020 collects the different obligations provided for by the legislator.

Regarding liquidity requirements, Article 30 of Royal Decree 309/2020 stipulates that credit institutions 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 institutions 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 harm or put at risk their financial situation.

Article 31 of Royal Decree 309/2020 contains the information obligations regarding solvency of credit institutions, 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 with regard to reporting of information for supervisory purposes by institutions, and repealing Commission Implementing Regulation (EU) 680/2014, and Commission Implementing Regulation (EU) 2021/453 of March 15, 2021, laying down implementing technical standards with regard to specific reporting requirements for market risk – which have replaced Commission Implementing Regulation (EU) 680/2014 of April 16, 2014, laying down implementing technical standards with regard to reporting of information for supervisory purposes by institutions, in accordance with Regulation (EU) No 575/2013 of the European Parliament and of the Council – for credit institutions.

Likewise, said article requires credit institutions 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 what is provided 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 from 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 institutions 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 institutions must carry out the annual internal capital adequacy assessment report and the Bank of Spain the supervisory review and evaluation.

D) Justification for the development of the various matters in the Bank of Spain Circular.

a) Liquidity requirements.

Credit institutions do not receive deposits or repayable funds from the public, and their activity of maturity transformation and liquidity transformation is more limited than that of credit institutions. Likewise, it has been taken into account that credit institutions 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 institutions currently do not have access to the permanent facilities nor to the 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 institution can meet net liquidity outflows in the defined period is more restricted than that available to credit institutions.

With the aim 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 regulations for credit institutions.

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 their 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 the content, the components that make up the liquidity requirements incorporate adaptation and proportionality criteria, taking into consideration the idiosyncrasy and nature of credit institutions, 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 for in Part Six of Regulation (EU) No 575/2013 will not apply to credit institutions.

With regard to the liquidity buffer, the circular maintains, in its Rule 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 per liquidity category, which have been adapted to the nature of the operations of credit institutions. 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 Rule 12, that the buffer cannot be less than 10% of gross outflows in general (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 credit institution's activities 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 institution. Finally, the reduction of the minimum buffer value through the increase in the computability of inflows does not leave the liquidity profile of credit institutions unprotected, since the inflow and outflow indices established by the circular reflect demanding hypotheses of severe financial instability.

The circular maintains, in its Rule 11, the treatment contemplated in Article 23 of Delegated Regulation (EU) 2015/61 by which credit institutions, 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 on the basis of 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 Rule 11, of the real forecast of operating expenses associated with the activity of the credit institution 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 institutions, so they are assigned an outflow index of 100%.

The circular also considers the relevance that, for credit institutions, has the financing provided by other entities or companies of the group or multigroup to which they belong. Thus, in Rule 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 Rule 8, the valuation criteria for the assets comprising the liquidity buffer are established, with the necessary 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 given 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 with 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 institutions, the Bank of Spain is empowered to set a lower frequency of submission than that provided for, set thresholds based on certain relevant variables, establish that certain templates that entities do not use in the calculation of their own fund requirements are not submitted, or any other that is considered irrelevant, or that they do not complete those elements that do not apply to them, and establish requirements for information on interest rate risk in the banking book and on remuneration adapted or simplified.

In development of this empowerment, the circular establishes information obligations for credit institutions similar to those of credit institutions – maintaining the formats of the statements of Commission Implementing Regulation (EU) 2021/451 and Commission Implementing Regulation (EU) 2021/453 – but simplified, and, in consideration of the principle of proportionality, in line with the size and nature of the operations carried out by this type of entity.

Generally, credit institutions must submit the statements of Commission Implementing Regulation (EU) 2021/451 and Commission Implementing Regulation (EU) 2021/453 equivalent to those established by their previous regulations, avoiding incorporating new information. With regard to new requirements for credit institutions