Circular 5/2016 of the Bank of Spain on the calculation method for deposit guarantee scheme contributions to be proportional to entities' risk profiles

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Circular 5/2016, of May 27, of the Bank of Spain, on the calculation method for contributions by entities adhering to the Deposit Guarantee Fund of Credit Institutions to be proportional to their risk profile. (BOE of June 1) (Error correction BOE June 7, 2016)

I

The Deposit Guarantee Fund of Credit Institutions (FGD) fulfills, in our financial system, the main function of protecting depositors against the consequences of the insolvency of a credit institution, while reinforcing the stability of the banking system.

The fulfillment of that function entails the need for the FGD to have sufficient financial resources. To this end, Directive 2014/49/EU of the European Parliament and of the Council of April 16, 2014, on deposit guarantee schemes (DGS), establishes that contributions to DGS must be made by their members at least once a year and shall be based on the amount of covered deposits and the degree of risk faced by the respective members of the DGS. In particular, in accordance with Article 13(2) of Directive 2014/49/EU, DGS may use their own methods to determine and calculate risk-based contributions. The calculation of contributions shall adequately take into account the risk profile of the adhering entities, taking into consideration indicators such as capital adequacy, asset quality, and liquidity.

In compliance with the mandate entrusted by Article 13(3) of Directive 2014/49/EU, the European Banking Authority (EBA) has published guidelines on methods for calculating contributions to DGS (EBA/GL/2015/10). These guidelines include the calculation formula, mandatory and optional risk categories and indicators, risk weights assigned to indicators, and other necessary elements. They also specify the objectives and principles that should guide the design of DGS contribution regimes.

In Spain, the transposition of Directive 2014/49/EU has been carried out, in part, through the modification introduced by Law 11/2015 of June 18, on the recovery and resolution of credit institutions and investment service companies, into Royal Decree-Law 16/2011 of October 14, creating the FGD. Article 6(1) of this royal decree-law establishes that, for the fulfillment of its functions, the deposit compartment of the FGD shall be funded, among other sources, by contributions and calls made by adhering entities. It adds, in Article 6(3), that the Management Commission of the FGD shall determine the amount of annual contributions by entities to the deposit guarantee compartment. This same paragraph entrusts the Bank of Spain with developing the necessary methods to ensure that contributions are proportional to the risk profile of the entities.

II

This circular regulates the method to be used to ensure that contributions by entities adhering to the FGD are proportional to their risk profile. To this end, the circular is essentially based on the criteria contained in the aforementioned EBA guidelines, having opted for the category method described in those guidelines.

The method starts with the identification of risk indicators to be considered, classified into five categories: capital, liquidity and funding, asset quality, business model and management model, and potential losses for the FGD. Each indicator is assigned a score based on the level of risk. From the weighting and aggregation of risk indicators, an aggregated risk indicator is obtained for each adhering entity, which essentially expresses its risk profile. Subsequently, the so-called "aggregated risk weighting" is obtained by scaling the aggregated risk indicator, which is incorporated into the calculation formula provided to determine the contribution each entity must make.

The circular also establishes rules by which the contributions of entities adhering to the FGD must be adjusted to take into account the economic cycle phase and the impact of procyclical contributions, in accordance with Article 6(3) of Royal Decree-Law 16/2011.

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 rules:

INDEX

Rule 1. Object and scope of application.

Rule 2. Risk categories and indicators.

Rule 3. Weighting of risk indicators.

Rule 4. Rules for the application of the method established in Annex 1.

Rule 5. Adjustment of annual contributions based on the economic cycle phase and the impact of procyclical contributions.

Rule 6. Information to be submitted to the FGD.

Final Provision. Entry into force and application.

Annex 1. Calculation method for contributions by entities adhering to the FGD to be proportional to their risk profile.

Annex 2. Information to be submitted to the FGD.

Normative references used in this Circular

Regulation (EU) No 575/2013

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.

Regulation (EU) No 1024/2013

Regulation (EU) No 1024/2013 of the Council of October 15, 2013, conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions.

Delegated Regulation (EU) No 2015/61

Delegated Regulation (EU) No 2015/61 of the Commission of October 10, 2014, supplementing Regulation (EU) No 575/2013 of the European Parliament and of the Council as regards the liquidity coverage ratio requirement for credit institutions.

Implementing Regulation (EU) No 680/2014

Implementing Regulation (EU) No 680/2014 of the Commission of April 16, 2014, establishing implementing technical standards with regard to reporting of information by institutions for supervisory purposes in accordance with Regulation (EU) No 575/2013 of the European Parliament and of the Council.

Law 11/2015

Law 11/2015 of June 18, on the recovery and resolution of credit institutions and investment service companies.

Royal Decree-Law 16/2011

Royal Decree-Law 16/2011 of October 14, creating the Deposit Guarantee Fund of Credit Institutions.

Royal Decree 2606/1996

Royal Decree 2606/1996 of December 20, on deposit guarantee funds of credit institutions.

Circular 4/2017

Circular 4/2017 of November 27, of the Bank of Spain, to credit institutions, on public and reserved financial information standards, and financial statement models. [ 1 ]

Law 10/2014

Law 10/2014 of June 26, on the organization, supervision, and solvency of credit institutions. [ 1 ]

Circular 8/2015

Circular 8/2015 of December 18, of the Bank of Spain, to entities and branches attached to the Deposit Guarantee Fund of Credit Institutions, on information to determine the bases for calculating contributions to the Deposit Guarantee Fund of Credit Institutions. [ 1 ]

[1]

Drafted reference according to Circular 1/2018 of January 31, first rule.

Rule 1.

Object and scope of application.

1. This circular shall apply to the calculation of contributions to the deposit guarantee compartment of the FGD that must be made by adhering entities, in accordance with letters a) and b) of Article 6(1) of Royal Decree-Law 16/2011.

2. Once its amount is determined taking into account guaranteed deposits, the contribution of each adhering entity to the FGD shall be adjusted by an aggregated risk weighting attributed to each entity, in order to ensure that the contribution is proportional to its risk profile.

3. The aggregated risk weighting shall be obtained by applying the method established in Annex 1 of this circular, based on the information referred to in Annex 2.

4. The aggregated risk weighting resulting for each adhering entity shall be incorporated into the formula included in phase 6 of Annex 1, to determine the contribution of said entity. That contribution shall be modulated, as provided in phases 7 and 8 of Annex 1, based on its participation as a member in a SIP provided for in Article 113(7) of Regulation (EU) No 575/2013, which has constituted an ex ante fund guaranteeing that the SIP has funds directly available to it for the purposes provided for in letter e) of Article 6(3) of Royal Decree-Law 16/2011. [ 2 ]

[2]

Paragraph 4 drafted according to Circular 1/2018 of January 31, first rule.

Rule 2.

Risk categories and indicators.

The method established in Annex 1 shall be used taking into account the rules established in Rule 4 and shall be based on the following risk categories and indicators:

1. Capital category: aims to reflect the level of loss absorption capacity of each adhering entity.

1.1 Leverage ratio: is the ratio referred to in Article 429 of Regulation (EU) No 575/2013.

1.2 Common Equity Tier 1 ratio: is the ratio referred to in Article 92(2)(a) of Regulation (EU) No 575/2013.

2. Liquidity and funding category: measures the entity's ability to meet its short-term and long-term obligations as they fall due, without adversely affecting its financial position.

2.1 Liquidity coverage ratio: is the ratio referred to in Article 4 of Delegated Regulation (EU) No 2015/61.

2.2 Net stable funding ratio: is the ratio used to assess compliance with the obligation to maintain a variety of stable funding instruments, in accordance with Article 413 of Regulation (EU) No 575/2013.

3. Asset quality category: serves to show the extent to which the entity is likely to incur losses due to credit risk.

3.1 Doubtful debt instruments ratio: is the quotient between, on the one hand, the gross book value (without deducting the accumulated impairment amount) of doubtful debt instruments other than i) financial assets held for trading, ii) financial assets not held for trading valued mandatorily at fair value through profit or loss, and iii) financial assets designated at fair value through profit or loss; and, on the other hand, the gross book value of debt instruments other than i) financial assets held for trading, ii) financial assets not held for trading valued mandatorily at fair value through profit or loss, and iii) financial assets designated at fair value through profit or loss, in accordance with the criteria established in Circular 4/2017.

3.2 Doubtful debt instruments coverage ratio: is the quotient between, on the one hand, the accumulated impairment amount of doubtful debt instruments other than i) financial assets held for trading, ii) financial assets not held for trading valued mandatorily at fair value through profit or loss, and iii) financial assets designated at fair value through profit or loss; and, on the other hand, the gross book value of doubtful debt instruments other than i) financial assets held for trading, ii) financial assets not held for trading valued mandatorily at fair value through profit or loss, and iii) financial assets designated at fair value through profit or loss, in accordance with the criteria established in Circular 4/2017.

4. Business model and management model category: reflects, on the one hand, the quality of the entity's corporate governance and internal controls, taking into account the risk related to the entity's current business model and strategic plans; and, on the other hand, the entity's participation as a member in a SIP provided for in Article 113(7) of Regulation (EU) No 575/2013.

4.1 Risk-weighted assets to total assets ratio: is the quotient between, on the one hand, the total amount of risk exposure referred to in Article 92(3) of Regulation (EU) No 575/2013 and, on the other hand, the total assets of the reserved balance sheet referred to in Circular 4/2017.

4.2 Return on assets ratio: is the quotient between, on the one hand, the result of the year obtained by the entity and, on the other hand, the total assets of the reserved balance sheet referred to in Circular 4/2017.

4.3 Participation of the entity as a member in a SIP provided for in Article 113(7) of Regulation (EU) No 575/2013: reflects the fact that the entity is a member of a SIP provided for in the aforementioned regulation that has constituted an ex ante fund guaranteeing that the SIP has funds directly available to it for the purposes provided for in letter e) of Article 6(3) of Royal Decree-Law 16/2011. [ 3 ]

5. Potential losses category for the FGD: reflects the risk of losses for the FGD in the event of the unsoundness of an adhering entity.

5.1 Unencumbered assets ratio: is the quotient between, on the one hand, unencumbered assets, as recorded in Annex XVII of Implementing Regulation (EU) No 680/2014 and, on the other hand, guaranteed deposits referred to in Article 6(3) of Royal Decree-Law 16/2011 and Article 4(1) of Royal Decree 2606/1996.

5.2 Own funds and eligible liabilities ratio: is the quotient between, on the one hand, the amount of own funds referred to in Article 4(1) point 118 of Regulation (EU) No 575/2013, and eligible liabilities referred to in Article 41 of Law 11/2015, minus the minimum volume of own funds and eligible liabilities required of the entity in accordance with Article 44 of Law 11/2015, and, on the other hand, the total assets of the reserved balance sheet referred to in Circular 4/201. [ 3 ]

[3]

Paragraphs 3.1, 3.2, 4, 4.1, 4.2, 4.3, which are added, and 5.2 drafted according to Circular 1/2018 of January 31, first rule.

Rule 3.

Weighting of risk indicators. [ 4 ]

Risk indicators shall receive the following weights:

a) Leverage ratio: 10.5 %.

b) Common Equity Tier 1 ratio: 10.5 %.

c) Liquidity coverage ratio: 10 %.

d) Net stable funding ratio: 10 %.

e) Doubtful debt instruments ratio: 13 %.

f) Doubtful debt instruments coverage ratio: 5 %.

g) Risk-weighted assets to total assets ratio: 6.5 %.

h) Return on assets ratio: 6.5 %.

i) Participation of the entity as a member in a SIP provided for in Article 113(7) of Regulation (EU) No 575/2013: 8 %.

j) Unencumbered assets ratio: 13 %.

k) Own funds and eligible liabilities ratio: 7 %.

[4]

Drafted according to Circular 1/2018 of January 31, first rule.

Rule 4.

Rules for the application of the method established in Annex 1.

1. The values of the risk indicators referred to in Annex 1 shall be calculated on an individual basis for each adhering entity.

1 bis. As an exception to the provisions of the previous paragraph, credit institutions that, as of December 31 of the year immediately preceding the one to which the contribution corresponds, belong to a SIP provided for in the additional provision fifth of Law 10/2014, shall be subject globally to the risk weighting determined for the central entity and the members in a consolidated manner, and therefore the value of their risk indicators shall be calculated at the consolidated level. [ 5 ]

2. As an exception to the provisions of paragraph 1, when an exemption has been granted to an adhering entity in accordance with Articles 8 and 21 of Regulation (EU) No 575/2013, the risk indicators indicated in letters c) and d) of Rule 3 shall be assigned the value calculated for the single liquidity sub-group of which it is part.

3. As an exception to the provisions of paragraph 1, when an adhering entity has been exempted from the application of individual prudential requirements, in accordance with Article 7 of Regulation (EU) No 575/2013, or from the application of the minimum requirement for own funds and eligible liabilities, in accordance with Article 44(6) of Law 11/2015, the risk indicators indicated in letters a), b), g) and k) of Rule 3 shall be assigned the corresponding indicator value of the consolidatable group of which it is part. [ 5 ]

4. When an indicator is not available on an individual basis due to the eventual existence of other exemptions other than those referred to in the previous paragraphs, the value of the indicator at the consolidated level shall be used as an approximation.

5. When information on an indicator is not available for legal reasons or due to the applicable supervisory regime, that indicator shall not be used. The weight attributed to that indicator shall be added to the weight of the other available indicator corresponding to the same risk category, or, in the case where the risk category has at least two other indicators available, its weight shall be distributed equally among the weights of the remaining indicators corresponding to the same risk category.

The indicator regarding the entity's participation as a member in a SIP provided for in Article 113(7) of Regulation (EU) No 575/2013 shall also not be used when no adhering entity to the FGD belongs to a SIP of the aforementioned type. In such a case, the weight attributed to that indicator shall be distributed equally among the weights of the other two indicators corresponding to the same risk category, or, in the case where that risk category has only one indicator available, its weight shall be added to the weight of the available indicator. [ 5 ]

6. When the value of any indicator is not available in a category for legal reasons or due to the applicable supervisory regime, a reasonable approximation of the value of one of the indicators in that category shall be used. That indicator shall be assigned a weight equal to the sum of the weights attributed to the two indicators in that category. When the unavailability of the two indicators affects the entire set of adhering entities, the indicator used as a reasonable approximation shall be decided by agreement of the Bank of Spain.

7. In the case of branches of credit institutions with headquarters in a non-EU Member State, when for legal reasons or due to the applicable supervisory regime only four or fewer indicators are available, the calculation methodology provided for in Annex 1 shall not be applied. In this case, the contributions of the branches shall be calculated as the product of the contribution rate of the entire set of adhering entities (TC) and the amount of guaranteed deposits, according to the definitions included in phase 6 of Annex 1. These branches shall not be considered, for any purpose, in the calculations of Annex 1.

8. In the calculations provided for in Annex 1, the average value of the indicators on the two reference dates mentioned in Rule 6 shall be taken. In the event that the indicator value is only available on one of the dates, this value shall be used.

The provisions of this paragraph shall not apply to the risk indicator consisting of the entity's participation as a member in a SIP provided for in Article 113(7) of Regulation (EU) No 575/2013. For this indicator, the value corresponding to December 31 of the immediately preceding year shall be taken. [ 5 ]

9. When, by applying the calculation rules provided for in Annex 1, the same value of an indicator results for several entities, in the event that these cannot be classified into the same risk interval, the entities with the greater amount of guaranteed deposits shall be assigned to the higher risk interval.

The provisions of this paragraph shall not apply to the risk indicator consisting of the entity's participation as a member in a SIP provided for in Article 113(7) of Regulation (EU) No 575/2013. For this indicator, entities not integrated into a SIP shall be assigned to the first risk interval, while entities that are integrated shall be assigned to the second risk interval. [ 5 ]

[5]

Paragraph 1 bis, which is added, and paragraphs 2, 3, and 5, as well as the second paragraph of paragraphs 8 and 9, drafted according to Circular 1/2018 of January 31, first rule.

Rule 5.

Adjustment of annual contributions based on the economic cycle phase and the impact of procyclical contributions.

In accordance with Article 6(3)(d) of Royal Decree-Law 16/2011, the FGD may adjust, upwards or downwards, the contribution target, according to the following factors:

a) The applicable countercyclical buffer percentage, and

b) The eventual impact of procyclical contributions on the liquidity and solvency of entities.

The factor indicated in paragraph a) shall be considered for these purposes with the following limitations:

Rule 6.

Information to be submitted to the FGD.

The Bank of Spain, when competent in accordance with Regulation (EU) No 1024/2013, shall submit to the FGD the information referred to in Annex 2 no later than May 31 of each year. This information shall be provided as of the reference dates of December 31 of the immediately preceding year and December 31 of the preceding year.

Final Provision. Entry into force and application.

This circular shall enter into force the day following its publication in the "Official State Gazette".

The method developed in this circular shall be used for the first time in the calculation of contributions by adhering entities corresponding to the 2016 economic year.

ANNEX 1

Calculation method for contributions by entities adhering to the FGD to be proportional to their risk profile

To apply the method in the calculation of a specific contribution, the following eight phases shall be applied [ 6 ] :

Phase 1. Classification of adhering entities into risk intervals

1. With regard to each risk indicator, entities shall be distributed into the different risk intervals established for each indicator, in accordance with paragraph 4 below.

The provisions of the previous paragraph shall not apply to credit institutions that belong to a SIP provided for in the additional provision fifth of Law 10/2014. In this case, to carry out the classification referred to in this paragraph, only the central entity of the SIP shall be taken into account, which shall be the one distributed into the different risk intervals established for each indicator, in accordance with paragraph 4 below. To this end, the