Circular 3/2017 of the Bank of Spain, of 24 October, amending Circular 2/2014

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Circular 3/2017, of 24 October, of the Bank of Spain, amending Circular 2/2014, of 31 January (BOE of 2 November)

Royal Decree-Law 14/2013, of 29 November, on urgent measures to adapt Spanish law to European Union regulations on the supervision and solvency of financial entities, made the most urgent adaptations of the Spanish legal system 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 from 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.

In this context, said royal decree-law 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.

In accordance with this empowerment, the Bank of Spain exercised some of the permanent and transitional options contained in Regulation (EU) No 575/2013, through Circular 2/2014, of 31 January, 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.

The transposition into the Spanish legal system of Directive 2013/36/EU was completed with Law 10/2014, of 26 June, on the organization, supervision and solvency of credit institutions; Royal Decree 84/2015, of 13 February, developing Law 10/2014, of 26 June, on the organization, supervision and solvency of credit institutions; and Bank of Spain Circular 2/2016, of 2 February, to credit institutions, on supervision and solvency, which completes the adaptation of the Spanish legal system to Directive 2013/36/EU and Regulation (EU) No 575/2013.

Circular 2/2014 entered into force before the launch, in November 2014, of the Single Supervisory Mechanism. Since then, the European Central Bank (hereinafter, ECB) has been the competent authority to exercise certain supervisory functions on entities defined as significant by Council Regulation (EU) No 1024/2013 of 15 October 2013, which entrusts the European Central Bank with specific tasks regarding policies related to the prudential supervision of credit institutions.

Consequently, the ECB may make use of the permanent and transitional options that Regulation (EU) No 575/2013 attributes to the competent authority, albeit only with respect to significant entities. The Bank of Spain retains the power to exercise these options in relation to less significant entities.

In exercise of that power, the ECB approved Regulation (EU) 2016/445 of the European Central Bank of 14 March 2016 on the exercise of the options and discretions offered by Union law (ECB/2016/4), in which the decisions of this authority regarding the aforementioned options are reflected.

Likewise, the ECB, in exercising its competence to issue to national competent authorities guidelines for the exercise of supervisory functions and for the adoption of decisions in this matter, has approved Guideline (EU) 2017/697 of the European Central Bank of 4 April 2017 on the exercise by national competent authorities of the options and discretions offered by Union law with respect to less significant entities (ECB/2017/9).

The exercise of these options and discretions by the ECB with respect to significant entities and the guidelines issued regarding their exercise by national competent authorities for less significant entities differ in some cases from those adopted by the Bank of Spain through Circular 2/2014.

In view of the attribution of competences over significant entities to the ECB through Regulation 1024/2013, and of the aforementioned guidance, it is appropriate to modify certain aspects of Circular 2/2014. First, its scope of application must be restricted to less significant entities. Second, the content of the circular must be adjusted to the guidelines issued by the ECB. Finally, the rules regarding transitional options that were applicable until 2017 have been removed.

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

Single Provision.

Modifications of Circular 2/2014, of 31 January.

The following modifications are introduced in the Circular of the Bank of Spain 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 [1]:

1. The first provision is replaced by the following text:

«1. The provisions of this circular shall apply to the entities and groups referred to in paragraphs a) and b) below, provided 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) 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-member states of the European Union, provided they have not been exempted from compliance with Parts Three, Four and Seven of Regulation (EU) No 575/2013 in application of Rule 4 of Bank of Spain Circular 2/2016, of 2 February, to credit institutions, on supervision and solvency, which completes the adaptation of the Spanish legal system to Directive 2013/36/EU and Regulation (EU) No 575/2013.

2. Notwithstanding the provisions of the previous paragraph, the seventeenth provision 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-member states of the European Union referred to in the first paragraph of this provision.

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 rules into Spanish law.»

4. A new third bis provision is added, with the following wording:

«Third bis Provision. Liquidity outflows in products related to off-balance sheet commercial financing items.

In accordance with Article 420.2 of Regulation (EU) No 575/2013 and Article 23.2 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, in the periodic assessment that credit institutions must carry out of the probability and potential volume of liquidity outflows of Article 23.1 of said delegated regulation, an exit rate of 5% shall be assumed for products related to off-balance sheet commercial financing items.

Entities shall communicate to the Bank of Spain the corresponding liquidity outflows, in accordance with Commission Implementing Regulation (EU) No 680/2014, establishing implementing technical standards in relation to the reporting of information for supervisory purposes by entities.»

3. A new third ter provision is added, with the following wording:

«Third ter Provision. Outflows of stable retail deposits.

For the purposes of Article 24.4 of Delegated Regulation (EU) No 2015/61, 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 the aforementioned Article 24.4.»

4. A new third quater provision is added, with the following wording:

«Third quater Provision. Level 2B assets in the case of entities that cannot possess interest-bearing assets.

Credit institutions that, according to their statutes, cannot, for reasons of religious practice, 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 said requirements in accordance with Article 12.3 of Delegated Regulation (EU) 2015/61.»

5. A new third quinquies provision is added, with the following wording:

«Third quinquies Provision. Exception in the case of a general failure of a system.

In the event that the Bank of Spain determines, through a public declaration, that a general failure has occurred within the meaning of Article 380 of Regulation (EU) No 575/2013, credit institutions shall be exempted 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 shall take into consideration the criterion of the European Central Bank regarding this matter.»

6. The fourth, fifth, sixth, seventh, seventh bis, eighth and ninth provisions are suppressed.

7. A new ninth bis provision is added, with the following wording:

«Ninth bis Provision. Transitional recognition in ordinary Level 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.

In accordance with Article 473.1 of Regulation (EU) No 575/2013, between 1 January 2018 and 31 December 2018, entities may add to their ordinary Level 1 capital the amount applicable in accordance with said article, multiplied by a factor of 0.2.»

8. The tenth provision is suppressed.

9. The eleventh provision is replaced by the following text:

«Eleventh Provision. Treatment during the transitional period of deductions of deferred tax assets.

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 the elements of ordinary Level 1 capital the applicable percentage indicated in paragraph 1 of the fourteenth provision of the amount corresponding to deferred tax assets dependent on future profits that existed prior to 1 January 2014 and that, after applying the provisions of Articles 470 and 469.2 of Regulation (EU) No 575/2013, result to be deducted:

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 merge with other entities, provided that, after the acquisition or merger, said restructuring plan remains in force and unchanged 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 dependent on future profits that existed prior to 1 January 2014.

2. When the previous paragraph 1 does not apply, and 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 2018, entities shall deduct from the elements of ordinary Level 1 capital the applicable percentage indicated in paragraph 2 of the fourteenth provision of the amount corresponding to deferred tax assets dependent on future profits that existed prior to 1 January 2014 and that, after applying the provisions of Articles 470 and 469.2 of Regulation (EU) No 575/2013, result to be deducted.

3. The residual amounts not deducted resulting from the application of the preceding paragraphs shall not be deducted from own funds and shall receive a risk weight of 0%.»

4. The first paragraph of paragraph 1 of the twelfth provision is replaced by the following text:

«1. In accordance with Article 471 of Regulation (EU) No 575/2013, between 1 January 2014 and 31 December 2018, the Bank of Spain may authorize entities, upon motivated request, not to deduct holdings in the capital of insurance companies, reinsurance companies and insurance holding companies, provided the following requirements are met:»

11. Paragraph 3 of the twelfth provision is suppressed.

12. The thirteenth provision is suppressed.

13. The fourteenth provision is replaced by the following text:

«1. The applicable percentage for the purposes of paragraph 1 of the eleventh provision shall be:

a) 40% during the period from 1 January 2018 to 31 December 2018;

b) 50% during the period from 1 January 2019 to 31 December 2019;

c) 60% during the period from 1 January 2020 to 31 December 2020;

d) 70% during the period from 1 January 2021 to 31 December 2021;

e) 80% during the period from 1 January 2022 to 31 December 2022;

f) 90% during the period from 1 January 2023 to 31 December 2023.

2. The applicable percentage for the purposes of paragraph 2 of the eleventh provision shall be 80% during the period from 1 January 2018 to 31 December 2018.»

3. The fifteenth, eighteenth and nineteenth provisions are suppressed.

[1]

Texts incorporated into Circular 2/2014, of 31 January.

Final Provision. Entry into force.

This circular shall enter into force on 1 January 2018.

Notwithstanding the above, the third ter provision, introduced by paragraph three of the single provision of this circular, shall enter into force on 1 January 2019.

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