Circular 2/2012 of the Bank of Spain modifying Circular 4/2004 on financial information standards and financial statement models

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Circular 2/2012, of February 29, of the Bank of Spain, modifying Circular 4/2004, of December 22, to credit institutions on standards for public and reserved financial information, and models for financial statements. (BOE of March 6) (Correction of errors BOE of March 14)

Royal Decree-Law 2/2012, of February 3, on the stabilization of the financial sector (hereinafter, the Royal Decree-Law), establishes in its Title I certain additional provisioning and capital requirements for those previously required by the regulations applicable to credit institutions in relation to assets linked to real estate activity. Since these measures, regarding the determination of impairment of said assets, have a complementary nature to the regulations contained in Circular 4/2004, of December 22, on standards for public and reserved financial information, and models for financial statements (hereinafter, Circular 4/2004), the sixth final provision of the Royal Decree-Law contains a mandate for the Bank of Spain to approve the modifications deemed appropriate to adapt Circular 4/2004 to the provisions of said Royal Decree-Law.

By virtue of said mandate, the compliance of which is the main objective of this Circular, a new Section V is introduced in Annex IX of Circular 4/2004, in which paragraphs 1 and 2 of Article 1 and Annex I of the Royal Decree-Law are reproduced, almost verbatim. The only exception is the provision contained in paragraph 1 of said Annex I, relating to the fact that real estate assets adjudicated or received in payment of debts by credit institutions and which have a balance sheet age of more than 36 months will have a coverage percentage of at least 40%. This has been considered appropriate to incorporate into the general treatment for said assets provided for in Section IV of the aforementioned Annex IX (the general treatment is also subject to some changes and clarifications) and not limit it to assets of that nature existing as of December 31, 2011.

Among the provisions incorporated into the aforementioned Section V, the requirement to constitute, on a one-time basis, a coverage of 7% of the outstanding balance as of December 31, 2011, of the total of financings related to land for real estate development and with real estate constructions or developments, which will be maintained indefinitely except for its use, without limitation and until its total exhaustion, in the precise amount for the constitution of the coverages that result necessary as a consequence of the subsequent reclassification of said financings as doubtful or substandard assets or of the adjudication or receipt of assets in payment of said debts. This provision, which is independent of the generic provision and, therefore, additional to it, cannot be counted as own funds, although it can be deducted from the values of exposures subject to weighting or limits.

The adaptation of Circular 4/2004 carried out is a faithful reflection of the Royal Decree-Law and its objectives, as well as of the aforementioned complementarity. Therefore, there should be no doubt that the coverages that result necessary in accordance with the provisions of the Royal Decree-Law and Annex IX of Circular 4/2004 according to the status of the financings as of December 31, 2011, cannot be reduced by their refinancing or by a reclassification to a risk category for which the regulations provide for a lower coverage percentage, except for the part in which there has been an effective recovery of the amounts owed. Similarly, except for sales that are carried out, the necessary coverages for assets adjudicated or received in payment of debts by the entity shall not be reduced because the entity has initiated or continued the real estate development of said assets, decisions that must be exceptional in nature since the priority must be the release –as quickly as possible– of the resources invested in them for the benefit of the typical activity of credit institutions.

Apart from this adaptation of Circular 4/2004 to what is provided in the Royal Decree-Law, although related to it in a certain way, the composition of the risk classes in which operations included in the normal risk category must be classified is modified (which are then taken into account when determining the generic credit risk coverage) to reflect the greater risk perceived in operations granted for the financing of land for real estate development or of real estate constructions or developments, even if they have real guarantees of said assets.

Finally, the Circular modifies the currently in force reserved statements and adds some new ones, and introduces in the Special Accounting Register of Mortgage Operations the necessary changes to support the new information required for supervisory purposes arising from the modifications incorporated into Annex IX of Circular 4/2004.

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 regulations:

First Regulation.

The following modifications are introduced in Annex IX of Circular 4/2004, of December 22, to credit institutions, on standards for public and reserved financial information, and models for financial statements (hereinafter, Circular 4/2004) [1]:

1. New wording is given to items (iii) and (v) of letter a) of paragraph 7, which shall read as follows:

«(iii) Medium-low risk. Comprises the following operations: financial leasing operations and risks that have some real guarantee different from those indicated in the risks listed in the previous points, provided that the estimated value of the assets leased in financial leasing and of the real guarantees fully covers the outstanding risk, and are not included in other risk classes.»

«(v) Medium-high risk. Comprises the following operations, unless they meet the criteria to classify them in the high-risk class: credits to individuals for the acquisition of durable consumer goods and other current goods and services, not related to a business activity, unless they are registered in the Register of Installment Sales of Movable Goods; risks granted for the financing of land for real estate development or of real estate constructions or developments, even if they have real guarantees of said assets; and risks with final obligors residing in countries included in groups 3 to 6 for country-risk purposes excluded from coverage of said risk, which are not included in other classes.»

2. Paragraphs 32 and 35 are modified, which shall have the following wording:

«32. The value at which real estate assets adjudicated or received in payment of debts must be recognized, regardless of the legal form used, shall be the lower amount between:

a) the book value of the financial assets applied, that is, their amortized cost, taking into account the estimated impairment with the methodology of Section III of this Annex, and in any case a minimum of 10%, and

b) the market appraisal value of the asset received in its current state minus the estimated selling costs, which in no case will be less than 10% of said value.

The net amount of both concepts will be considered as the initial cost of the asset adjudicated or received in payment of debts.»

«35. For the purpose of determining subsequent minimum impairment, it will be taken into account that the balance sheet age of assets adjudicated or received in payment of debts is an unequivocal sign of impairment. Consequently, valuation corrections will be calculated in accordance with the methodology established in paragraph 32, although the 10% coverage percentage indicated in letter a) of said paragraph will become the one reflected in the following table, depending on the age of their incorporation into the balance sheet.

3. A new Section V is added, under the title "Treatment of real estate risk exposures existing as of December 31, 2011 (Royal Decree-Law 2/2012)", with the following content:

«37. In accordance with what is provided in Article 1 of Royal Decree-Law 2/2012, of February 3, on the stabilization of the financial sector, and without prejudice to what is provided in the preceding paragraphs of this Annex, to financings and assets adjudicated or received in payment of debts related to land for real estate development and with real estate constructions or developments, corresponding to business in Spain of credit institutions, both those existing as of December 31, 2011, and those resulting from the refinancing of the same at a later date, and which on said date had a classification other than normal risk, paragraphs 38 to 41 below will apply to estimate their impairment.

38. The coverages that, according to paragraphs 17 and 22 above, correspond to operations classified as doubtful intended for the financing of constructions or real estate developments of all types of assets, which are finished, in no case may be less than 25% of the amount of the outstanding risk.

39. The coverages that, according to paragraph 23 above, correspond to operations classified as substandard intended for the financing of constructions or real estate developments of all types of assets, which are finished, in no case may be less than 20% of the amount of the outstanding risk. This percentage will be 24% for those operations that do not have real guarantees.

40. The coverages that, according to paragraphs 17, 22, and 23 above, correspond to operations classified as doubtful or as substandard, intended for the financing of land for real estate development or of real estate constructions or developments of all types of assets, which are in progress, in no case may be less than the percentages indicated below:

41. The minimum coverage percentages referred to in Section IV of this Annex IX may not be less than the following:

a) Assets consisting of finished real estate constructions or developments, as well as housing, resulting from financings to households, which have not been the borrower's main residence

The percentage referred to in letter a) of paragraph 32 will be 25%, and the minimum coverage percentages depending on the age of their incorporation into the balance sheet referred to in paragraph 35 will be those collected in the following table:

b) Assets consisting of land for real estate development or real estate constructions or developments in progress, regardless of the age of their incorporation into the balance sheet:

42. On the total of the financings of the nature indicated in paragraph 37 above that were classified as normal risk as of December 31, 2011, a coverage of 7% of their outstanding balance on said date will be constituted, on a one-time basis. The amount of said coverage may be used by institutions exclusively for the constitution of the specific coverages that result necessary as a consequence of the subsequent reclassification as doubtful or substandard assets of any of said financings or of the adjudication or receipt of assets in payment of said debts.»

[1]

Texts incorporated in Circular 4/2004, of December 22.

Second Regulation.

The following modifications are introduced in regulations sixty-seventh, sixty-eighth, and sixty-ninth, and in Annexes IV, V, and X of Circular 4/2004: [2]

1. Regulations sixty-seventh and sixty-eighth are modified to introduce, in the tables contained in their respective paragraphs 1, two new statements, named T.17 financing related to real estate construction or development (business in Spain) and T.18 real estate assets adjudicated or received in payment of debts resulting from financing related to real estate construction or development and to households with a classification other than normal risk as of December 31, 2011 (business in Spain), both with quarterly frequency and a maximum submission deadline of the 20th of the following month, which are included in the Annex of this Circular and will form part of the aforementioned Annex IV.

2. Regulation sixty-ninth is modified to introduce in the table contained in its paragraph 1 two new statements, named C.19 financing related to real estate construction or development granted by credit institutions (business in Spain) and C.20 real estate assets adjudicated or received in payment of debts resulting from financing granted by credit institutions related to real estate construction or development and to households with a classification other than normal risk as of December 31, 2011 (business in Spain), both with quarterly frequency, which are included in the Annex of this Circular and will form part of the aforementioned Annex V.

3. The statements T.10-3 credit risk coverage and T.10-8 real estate assets and capital instruments adjudicated or received in payment of debts of Annex IV are replaced by those of the same number and title included in the Annex of this Circular.

4. The statements C.6-3 credit risk coverage and C.6-7 real estate assets and capital instruments adjudicated or received in payment of debts of Annex V are replaced by those of the same number and title included in the Annex of this Circular.

5. In statements T.10-5 and C.6-5, first and second parts, both named generic coverage of credit risk by client insolvency, the item "Of which: Financing of land for real estate development or of real estate constructions or developments" is added below the item "Of which: For acquisition of goods and services" in the line "Medium-high risk".

6. The following modifications are introduced in the Special Accounting Register of Mortgage Operations of Annex X, Special accounting registers of mortgage activity:

a) In the section "Operation Data", the dimension "Classification of credit by provinces" is included next to the dimension "Currency".

b) The content of the section "Purpose of the operation" is replaced by the following:

«Purpose of the operation

– Purpose

• Legal and natural persons that allocate it to their business activity (financing of real estate construction or development: protected housing; financing of real estate construction or development: other first-residence housing; financing of real estate construction or development: other housing; financing of real estate construction or development: offices, shops, and multipurpose warehouses; financing of real estate construction or development: other real estate; financing of real estate construction or development: general activity; financing of land for real estate development: predominantly residential use; financing of land for real estate development: other uses; financing of civil works construction; financing of real estate assets for own use; financing of real estate assets for lease to third parties; financing of land; financing of real estate assets for other purposes; financing of mergers and acquisitions of shareholdings in companies; financing of agricultural and livestock activities; financing of assets adjudicated or received in payment of debts; financing of other non-current assets; financing of working capital; financing of exports; financing of imports; other purposes).

• Other households [consumption: acquisition of durable consumer goods; consumption: acquisition of other current goods and services; housing: first acquisition of main residence (protected housing); housing: first acquisition of main residence (free housing); housing: other acquisitions of main residences; housing: acquisition of housing for lease to third parties; housing: other acquisitions; housing: rehabilitation; other purposes: acquisition of land; other purposes: acquisition of garages and storage units not associated with the acquisition of housing; other purposes: acquisition of securities; other purposes: debt consolidation; other purposes: other].

– Status of real estate construction or development (finished; under construction: work in progress; under construction: work stopped).

– Number of planned housing units (for financing of real estate construction or development, including financing of land for predominantly residential use).»

c) In the section "Mortgage Guarantee", the dimensions "Type of real guarantee" and "Status of assets" are replaced by the following:

– "Type of real guarantee (housing main residence of borrower, housing of households not main residence, garages and storage units of housing main residence of borrower, garages and storage units of housing not main residence, housing and buildings for first-residence residential use, housing and buildings for second-residence residential use, multipurpose offices, multipurpose office buildings, multipurpose commercial premises, multipurpose commercial buildings, multipurpose warehouses, non-multipurpose office buildings, non-multipurpose commercial premises, non-multipurpose commercial buildings, non-multipurpose warehouses, hotels, garage buildings, other non-multipurpose real estate, exploited rural estates, consolidated urban land, non-consolidated urban land, delimited/sectorized/programmed developable land, non-delimited/non-sectorized/non-programmed developable land, non-developable or rural land valued with urban planning expectations, other land, other material assets)."

– "Status of assets (finished; under construction: work in progress; under construction: work stopped)."

[2]

Texts incorporated in Circular 4/2004, of December 22.

First Transitional Provision.

The first statements T.17, T.18, C.19, and C.20 that institutions must submit will be those corresponding to the situation as of December 31, 2011, which will be sent no later than the deadline for submitting statements corresponding to March 31, 2012.

Until the statements corresponding to September 30, 2012, inclusive, estimates may be made for the data of the statements cited in the previous paragraph, as well as for those incorporated in statements T.10 and C.6, while the update of the individualized accounting records of assets and operations cannot be completed. If estimates are made, the data that have been estimated will be communicated in writing to the Bank of Spain. As soon as the update of the accounting records is concluded, the statements for which estimates had been sent will be resubmitted to the Bank of Spain with the definitive data.

Second Transitional Provision.

The modifications in Annex X, Special accounting registers of mortgage activity, must be incorporated no later than December 31, 2012.

First Final Provision. Application.

In accordance with what is provided in paragraph 6 of regulation eighth of Circular 4/2004, the modifications introduced by this Circular in the criteria for determining the coverages necessary for risks will be applied prospectively, and their initial effect will form part of the result of the 2012 fiscal year. This is understood without prejudice to what is established in paragraph 1 of Article 2 of Royal Decree-Law 2/2012, cited above.

Second Final Provision. Entry into force.

This Circular will enter into force the day after its publication in the "Official State Gazette".

ANNEX C-2-2012.PDF (140 KB)

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