Circular 3/2019 of the Bank of Spain defining the materiality threshold for past-due credit obligations

I. GENERAL PROVISIONS
BANK OF SPAIN
15683 Circular 3/2019, of October 22, of the Bank of Spain, exercising the power conferred by Regulation (EU) 575/2013 to define the materiality threshold for past-due credit obligations.

Title II of Part Three of 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 [hereinafter, "Regulation (EU) No 575/2013"] regulates the own funds requirements for credit risk that credit institutions must meet.

The calculation of those requirements entails that institutions determine the amount of risk-weighted exposures, either by applying the standardised approach or, if permitted by competent authorities, by the internal ratings-based approach. Among those exposures are, in particular, exposures in default.

Article 178(1) of Regulation (EU) No 575/2013 specifies the circumstances under which a debtor is considered to be in default with respect to its credit obligations to the institution, the parent undertaking, or any of its subsidiaries, namely: i) the existence of doubts as to the debtor's ability to pay its credit obligations in full, without the institution resorting to actions such as the enforcement of collateral, or ii) the debtor being past due on any material credit obligation for more than 90 days [material in the English version of Regulation (EU) No 575/2013].

Article 178(1) further states that, for retail exposures, institutions may apply the aforementioned definition of default at the level of an individual credit facility, rather than in relation to the total obligations of a borrower.

The same Article 178, paragraph 2(d), empowers competent authorities to define a minimum amount with which to assess the materiality of a past-due credit obligation. In setting this threshold, competent authorities must comply with the conditions specified by the European Commission in Delegated Regulation (EU) No 2018/171 of 19 October 2017 supplementing Regulation (EU) No 575/2013 as regards regulatory technical standards on the materiality threshold for past-due credit obligations.

The European Central Bank adopted Regulation (EU) No 2018/1845 on 21 November 2018 on the exercise of the power conferred by Article 178(2)(d) of Regulation (EU) No 575/2013 to define the materiality threshold for past-due obligations. The provisions of this regulation apply exclusively to significant institutions under the direct supervision of the European Central Bank. This results from the powers conferred by Regulation (EU) No 1024/2013 of 15 October 2013, which entrusts the European Central Bank with specific tasks concerning policies relating to the prudential supervision of credit institutions [hereinafter, "Regulation (EU) No 1024/2013"].

However, there are currently no provisions regarding the definition of the materiality threshold applicable to less significant Spanish credit institutions under the direct supervision of the Bank of Spain. The legal framework described above is therefore incomplete, and it is therefore necessary for the Bank of Spain to adopt a circular to that effect.

In accordance with the foregoing, this circular complies with the principles of necessity and effectiveness required by Article 129(1) of Law 39/2015 of 1 October on the Common Administrative Procedure of Public Administrations. It also adheres to the principles of proportionality, legal certainty, transparency, and efficiency established in the aforementioned law, as it imposes no additional obligations and contains only the essential content to achieve the identified purpose, aiming to guarantee a homogeneous application of prudential requirements regarding the calculation of credit risk for less significant credit institutions, while simultaneously improving the comparability of own funds requirements.

Additionally, and in order to safeguard the legitimate expectations of supervised credit institutions, both institutions applying the standardised approach and those applying the internal ratings-based approach must have an appropriate transitional period. Therefore, credit institutions must apply, no later than 31 December 2020, the materiality threshold for past-due credit obligations established in this circular, and must notify the Bank of Spain, before 31 December 2019, of the exact date on which they will begin to apply it.

Consequently, in exercise of the powers conferred, the Governing Council of the Bank of Spain, upon proposal of the Executive Committee and in agreement with the Council of State, has approved this circular, which contains the following provisions:

Rule 1. Purpose.
The purpose of this circular is to exercise the power conferred by Article 178(2)(d) of Regulation (EU) No 575/2013 on competent authorities to define the materiality threshold for past-due credit obligations.

Rule 2. Scope of application.

1. The provisions of this circular shall apply to the institutions and groups referred to in paragraphs (a) and (b) below, provided they are considered less significant according to Regulation (EU) No 1024/2013:
   (a) Consolidatable groups and subgroups of credit institutions, as defined in Regulation (EU) No 575/2013, whose parent undertaking 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.
2. The provisions of this circular shall also apply to branches in Spain of credit institutions with headquarters in non-EU countries, provided they have not been exempted from complying with Parts Three, Four, and Seven of Regulation (EU) No 575/2013 in application of Rule 4 of Circular 2/2016 of 2 February of the Bank of Spain to credit institutions on supervision and solvency, which completes the adaptation of the Spanish legal order to Directive 2013/36/EU and Regulation (EU) No 575/2013.

Rule 3. Definitions.
For the purposes of this circular, the definitions in Article 4 of Regulation (EU) No 575/2013 and Article 2 of Regulation (EU) No 1024/2013 shall apply.

Rule 4. Materiality threshold for past-due credit obligations referred to in Article 178(2)(d) of Regulation (EU) No 575/2013.

1. For the purposes of Article 178(2)(d) of Regulation (EU) No 575/2013, credit institutions shall assess the materiality of past-due credit obligations with reference to the following threshold, which consists of two components:
   (a) A limit expressed as the sum of all amounts of past-due credit obligations that the debtor holds with the credit institution, its parent undertaking, or any of its subsidiaries (hereinafter, "the past-due credit obligation"), equal to:
   (i) 100 euros, or the equivalent of that amount in the relevant national currency, for retail exposures; (ii) 500 euros, or the equivalent of that amount in the relevant national currency, for exposures other than retail.
   (b) A limit expressed as the amount of the past-due credit obligation in relation to the total amount of exposures to that debtor on the balance sheet of the credit institution, its parent undertaking, or any of its subsidiaries, excluding equity exposures, equal to 1%.
2. For credit institutions that, in the case of retail exposures, apply the definition of default in Article 178(1), first paragraph, points (a) and (b) of Regulation (EU) No 575/2013 at the level of an individual facility, the threshold in paragraph 1 shall apply at the level of the individual facility granted to the debtor by the credit institution, its parent undertaking, or any of its subsidiaries.
3. A default shall be considered to have occurred when both limits in paragraph 1, points (a) and (b), are exceeded for 90 consecutive days.

SINGLE FINAL PROVISION. Entry into force and date of application of the materiality threshold.

1. This circular shall enter into force on the twentieth day following its publication in the "Boletín Oficial del Estado".
2. Credit institutions shall apply, no later than 31 December 2020, the materiality threshold for past-due credit obligations established in this circular, and must notify the Bank of Spain, before 31 December 2019, of the exact date on which they will begin to apply it.

Madrid, 22 October 2019.–The Governor of the Bank of Spain, Pablo Hernández de Cos.