Circular 6/2012 of the Bank of Spain, amending Circular 4/2004 on financial information standards and financial statement models

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Circular No. 6/2012, of September 28, from the Bank of Spain, to credit institutions, amending Circular 4/2004, of December 22, on standards for public and reserved financial information, and models for financial statements. (BOE of October 2) (Correction of errors BOE of October 12)

Royal Decree-Law 18/2012, of May 11, on the cleanup and sale of real estate assets of the financial sector (hereinafter, the Royal Decree-Law), establishes in its Article 1 certain requirements for additional provisions compared to those previously required by the regulations applicable to credit institutions regarding certain assets linked to real estate activity. Since these measures, with respect to 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 seventh final provision of the aforementioned 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.

Thus, by virtue of said mandate, a new Section VI is introduced in Annex IX of Circular 4/2004, in which Article 1, paragraph 1, and the Annex of Royal Decree-Law 18/2012 are reproduced, with the necessary adaptations of their wording to the regulatory framework in which they are integrated.

Apart from this adaptation of Circular 4/2004 to the provisions of the Royal Decree-Law, this Circular also addresses the inclusion, among the regulations regarding information that credit institutions must disclose in their annual accounts, both individual and consolidated, of certain information related to refinancing and restructuring operations, as well as risk concentration both by sector and geographically. Both aspects have been the focus of interest in recent years by users of financial information, but also by European authorities, who have recommended to the Bank of Spain the inclusion of this information among that which credit institutions must disclose.

Likewise, the transparency requirements associated with the exposure of entities to the construction and real estate development sector (previously subject to the modification of Circular 4/2004 by Circular 5/2011, of November 30) are completed with information regarding assets adjudicated or received in payment of debts that are transferred to companies for the management of said assets.

Additionally, in a manner consistent with all these novelties, the Circular modifies the currently in force reserved statements and adds some new ones, and also introduces the necessary changes in the Special Accounting Register of Mortgage Operations to support both the new information necessary for supervisory purposes and that required to be disclosed in the annual accounts of credit institutions.

Finally, this Circular takes the opportunity to introduce some precise changes in the EMU statements, which are those that respond to the statistical requirements of the Economic and Monetary Union and constitute the basis for transmitting information of that nature to the European Central Bank.

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 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. The first paragraph of paragraph 5 of the fourth regulation is modified, which shall read as follows:

«5. Regardless of what is indicated in the previous paragraphs, credit institutions shall publish, at least for data as of June 30, at minimum, qualitative and quantitative information on the mortgage market, financing for construction, real estate development, and housing acquisition, and regarding assets received in payment of debts, corresponding to business in Spain referred to in the sixtieth regulation of this Circular, as well as information on refinancing, refinanced, and restructured operations regulated in paragraph 6 ter of the aforementioned regulation.»

2. The first paragraph of paragraph 4 of the fifth regulation is modified, which shall read as follows:

«4. Regardless of what is indicated in the previous paragraphs, credit institutions shall publish, at least for data as of June 30, at minimum, the corresponding qualitative and quantitative information for business in Spain, on financing for construction, real estate development, and housing acquisition carried out by the credit institutions of the group, as well as that regarding assets received in payment of debts by the group of credit institutions, referred to in the sixty-first regulation of this Circular, as well as information on refinancing, refinanced, and restructured operations regulated in paragraph 6 ter of the sixty-second regulation.»

3. Paragraphs 6 ter and 6 quáter are added to Section D.1), Credit Risk, of the sixtieth regulation, with the following wording:

«6 ter. The entity shall disclose the gross amount of refinancing, refinanced, and restructured operations -according to the definition contained in letter g) of paragraph 1 of Annex IX of this Circular-, with detail of their classification as special monitoring risk, substandard, or doubtful (distinguishing the part that has real collateral from that which does not), as well as their respective credit risk coverages, and broken down by the different counterparties and purposes provided for in statement T.10-1 (bis), Outstanding balances of refinancings and restructurings. The breakdown and presentation of the quantitative information to be published in the notes in accordance with the provisions of this paragraph shall be carried out according to the format of statement T.10-1 (bis), aforementioned, insofar as this information is concerned.

Likewise, with the same breakdown by counterparties and purpose indicated in the previous paragraph, the amount of operations that, subsequent to the refinancing or restructuring, have been classified as doubtful in the fiscal year shall be indicated.

Additionally, those entities that have authorized the use of internal models for the calculation of capital requirements for credit risk shall indicate, with the same breakdown by counterparties and purpose, the average probability of default of said sets of operations as of the date to which the financial statements refer.

On the other hand, the entity shall include a brief summary of its policy on refinancing and restructuring of operations, indicating what the main characteristics of the refinancing and restructuring measures used by the entity for different types of loans and credits are, as well as an explanation of the criteria used to assess the sustainability of the measures applied.

6 quáter. The entity shall disclose the book value of its total financing (with a detail of those that have real estate collateral and those that have other real collateral) granted to its clientele, broken down into Public Administrations, other financial institutions, non-financial companies, and individual entrepreneurs (distinguishing, based on their purpose, between construction and real estate development, civil construction, and other purposes; and, for the latter, between those granted to large companies, on the one hand, and to small and medium-sized enterprises and individual entrepreneurs, on the other), and other households and non-profit institutions serving households (distinguishing, based on their purpose, between housing, consumption, and other purposes). Additionally, the amount of all financing with real collateral shall be distributed, with the same breakdown of clientele, into the following tranches based on the percentage of the book value of the financing on the amount of the last appraisal or valuation of the available collateral (loan to value): less than or equal to 40%, greater than 40% and less than or equal to 60%, greater than 60% and less than or equal to 80%, greater than 80% and less than or equal to 100%, and greater than 100%. Furthermore, for the total financing to clientele, a memorandum shall be provided, with equal distribution, for refinancing, refinanced, and restructured operations.

The breakdown and presentation of the quantitative information to be published in the notes in accordance with the provisions of this paragraph shall be carried out according to the format of statement S.9, Distribution of credit to clientele by activity.»

4. A final paragraph is added to paragraph 16 of Section D.5), Risk Concentrations, of the sixtieth regulation, with the following wording:

«Without prejudice to the foregoing, the entity shall provide aggregated information on its risk concentration (including the book value of assets and the nominal amount of contingent risks), broken down by area of geographical operation and activity segment, distributing this between activity with credit institutions, Public Administrations (distinguishing between Central Administration and the rest), other financial institutions, non-financial companies, and individual entrepreneurs (distinguishing, based on their purpose, between construction and real estate development, civil construction, and other purposes; and, for the latter, between large companies, on the one hand, and small and medium-sized enterprises and individual entrepreneurs, on the other), and other households and non-profit institutions serving households (distinguishing, based on the purpose, between housing, consumption, and other purposes).

The breakdown and presentation of the quantitative information to be published in the notes in accordance with the provisions of this paragraph shall be carried out according to the format of statement S.10, Risk concentration by activity and geographical area, insofar as this information is concerned. To this end, geographical areas that, collectively, do not represent more than 10% of the total may be presented grouped, under a title sufficiently informative of the grouping performed.»

5. A final paragraph is added to paragraph 55 bis) of Section K), Non-current assets held for sale, of the sixtieth regulation, with the following wording:

«The aforementioned information shall be complemented with a description of the companies for the management of these assets that the entity has created or of which it is a participant (including the percentage of its participation in the capital of said companies), accompanied by the following information:

– Cumulative volume, up to the date of the annual accounts, of assets delivered to said companies (said volume shall be calculated considering the book value of such assets on the date of their delivery);

– book value –as of the date of the annual accounts– of financial assets received in exchange (distinguishing between debt and equity instruments);

– volume of assets delivered and of financial assets (distinguishing between debt and equity instruments) received in exchange in the fiscal year to which the annual accounts refer and the impact of such operations on the income statement of said fiscal year, and

– a description of the financing lines granted to them, indicating their purpose, amount, financial conditions, and accounting classification.»

6. Paragraph 5 bis is added to Section A), Consolidated Financial Statements, of the sixty-first regulation, with the following wording:

«5 bis. The breakdown and presentation of the quantitative information on the distribution of credit to clientele by activity referred to in paragraph 6 quáter of the sixtieth regulation shall be carried out according to the format of statement C.21, Distribution of credit to clientele by activity.»

7. Paragraph 12 of Section F), Risk Concentrations, of the sixty-first regulation is modified, which shall read as follows:

«12 The breakdown and presentation of the quantitative information on risk concentration with clientele by activity and geographical area referred to in paragraph 16 of the sixtieth regulation shall be carried out according to the format of statement C.22, Risk concentration by activity and geographical area. To this end, geographical areas that, collectively, do not represent more than 10% of the total may be presented grouped, under a title sufficiently informative of the grouping performed.

The information referred to in paragraph 16 bis of the sixtieth regulation shall include, at minimum, in an aggregated manner, the activity of credit institutions corresponding to their business in Spain. Its breakdown and presentation shall be carried out according to the format of statement C.17, Information on financing carried out by credit institutions for construction, real estate development, and housing acquisition, insofar as that information is concerned.»

8. Statements S.9, Distribution of credit to clientele by activity, and S.10, Risk concentration by activity and geographical area, both with semi-annual periodicity and a maximum submission deadline at the end of the following month, are added to the table in paragraph 1 of the sixty-seventh and sixty-eighth regulations.

9. Statements C.21, Distribution of credit to clientele by activity, and C.22, Risk concentration by activity and geographical area, both with semi-annual periodicity, are added to the table in paragraph 1 of the sixty-ninth regulation. Likewise, in the aforementioned regulation, paragraph 8 becomes paragraph 9, and paragraph 8 is added, with the following text:

«8. The information in statements C.21 and C.22 refers to the activity that the entity must reflect in its public balance sheet.»

Second Regulation.

The following modifications are introduced in Annex IX of Circular 4/2004:

1. Letter g) of paragraph 1 is modified, which shall read as follows:

«g) Have a policy on refinancing, restructuring, renewal, or renegotiation of operations that addresses the requirements they must meet for this purpose and that, in addition to the requirement to perform an updated analysis of the economic and financial situation of borrowers and guarantors, their ability to pay the operations with the new financial conditions, as well as the effectiveness of the collateral provided (new and original) and the credit classification of the operations for accounting purposes, includes aspects such as the minimum experience with the borrower that must be had, the existence of a sufficiently extensive compliance history or, in its absence, an amortization amount of the principal lent that is equivalent, as well as the establishment of a limit to the frequency of modification of the conditions of the operations in a sufficiently broad period of time.

For the purposes of this Annex, the following shall be considered:

– Refinancing operation: operation that, regardless of its holder or collateral, is granted or used for economic or legal reasons related to financial difficulties –current or foreseeable– of the holder (or holders) to cancel one or more operations granted, by the entity itself or by other entities of its group, to the holder (or holders) or to other companies in its economic group, or by which said operations are brought up to date in payments, in order to facilitate the payment of their debt (principal and interest) by the holders of the cancelled or refinanced operations because they cannot, or it is expected that they will not be able to, comply in time and form with their conditions.

– Refinanced operation: operation that is brought up to date in payments, totally or partially, as a result of a refinancing operation carried out by the entity itself or another entity of its economic group.

– Restructured operation: operation in which, for economic or legal reasons related to financial difficulties, current or foreseeable, of the holder (or holders), its financial conditions are modified in order to facilitate the payment of the debt (principal and interest) because the holder cannot, or it is expected that he will not be able to, comply in time and form with said conditions, even if such modification was provided for in the contract. In any case, operations in which a haircut is made or assets are received to reduce the debt, or in which their conditions are modified to extend their maturity date, vary the amortization schedule to reduce the amount of installments in the short term or decrease their frequency, or establish or extend the grace period for principal, interest, or both, are considered restructured, unless it can be proven that the conditions are modified for reasons other than the financial difficulties of the holders and are analogous to those applied in the market on the date of their modification to operations granted to customers with a similar risk profile.

– Renewal operation: operation formalized to replace another previously granted by the entity itself, without the borrower having, or it being expected that he may have in the future, financial difficulties; that is, the operation is formalized for reasons other than refinancing.

– Renegotiated operation: operation in which its financial conditions are modified without the borrower having, or it being expected that he may have in the future, financial difficulties; that is, when the conditions are modified for reasons other than restructuring.

In any case, to qualify an operation as a renewal or renegotiated one, the holders must have the capacity to obtain in the market, on the date of the renewal or renegotiation, operations for an amount and with financial conditions analogous to those applied by the entity, and these must be adjusted to those granted on that date to customers with a similar risk profile.»

2. Letter e) is added in paragraph 2, with the following wording:

«e) The refinancing, restructuring, renewal, or renegotiation of operations are credit risk management instruments that must be used appropriately, without the use of said instruments distorting the timely recognition of default risk. Thus, with regard to the refinancing or restructuring of operations:

– Refinancing and restructuring policies must be focused on the recovery of all amounts due, which implies the need to immediately recognize amounts that, if any, are estimated to be unrecoverable. The use of refinancing or restructuring for other objectives, such as delaying the immediate recognition of losses, is contrary to good management practices.

– Refinancing and restructuring decisions must stem from an individualized analysis of the operation at an adequate level of the organization that is different from the one that originally granted it or, if it is the same, subject to review by a higher decision-making level or body. Decisions adopted must be reviewed periodically, in order to verify the adequate compliance with refinancing and restructuring policies.

– In the case of contribution of new collateral, its effectiveness must be taken into account, as contemplated in letter c) of the subsequent paragraph 7.

– The entity must have in its internal information system mechanisms that allow for adequate individualization and monitoring of refinancing, refinanced, and restructured operations.»

3. The last paragraph of letter a) of paragraph 7 is modified, which shall read as follows:

«Within this category, it will be necessary to identify operations that deserve special monitoring, understood as those that present weaknesses that, without requiring greater coverages than those established for normal risk operations, advise special monitoring by the entity. Among the operations that can be identified as under special monitoring will be included: until their extinction, refinancing, refinanced, or restructured operations, as well as those corresponding to customers declared in bankruptcy proceedings that have been reclassified from any of the doubtful categories by meeting the requirements indicated in them; and operations classified as normal from customers who have any operation classified as doubtful due to delinquency. Notwithstanding the above, refinancing, refinanced, or restructured operations shall cease to be identified as under special monitoring when it has been concluded, after an exhaustive review of their financial and asset situation, that it is not foreseeable that the holder may have financial difficulties and, therefore, will be able to comply with the payment of the debt (principal and interest) of all its operations at the entity in time and form, and, in addition, has paid the principal installments and accrued interest since the date on which the restructuring or refinancing operation was formalized and at least two years have passed since the same, and has reduced the principal of the operation by at least 20% and paid all amounts (principal and interest) that were unpaid at the time of the restructuring or refinancing operation.»

4. The sixth paragraph of letter c) of paragraph 7 is modified, which shall read as follows:

«The refinancing or restructuring of operations that are not up to date in payments does not interrupt their delinquency, nor will it result in their reclassification to one of the previous categories, unless there is reasonable certainty that the customer can meet their payment in the scheduled calendar or effective new collateral is provided, and, in both cases, at least the ordinary interest pending collection is received, without taking into account late interest.»

5. In the third paragraph of letter d) of paragraph 7, the expression «suspension of payments» is replaced by «bankruptcy»; and in that same paragraph, as well as in the second paragraph of paragraph 22, the expression «declared in creditor agreement» is replaced by «declared in bankruptcy proceedings».

6. A final paragraph is added to letter a) of paragraph 17, with the following content:

«When it concerns refinancing or refinanced operations, if they continue to be qualified as doubtful for not meeting the requirements for their reclassification to another category, the date for calculating the coverage percentage shall be considered that of the oldest overdue amount that has been refinanced and remains unpaid, regardless of the fact that, as a consequence of the refinancing, the operations do not have unpaid amounts.»

7. A new Section VI is added, under the title «Provisions related to Royal Decree-Law 18/2012», with the following content:

«1. Coverages