Circular 5/2008 of the Bank of Spain to Reciprocal Guarantee Societies on Minimum Own Funds and Other Mandatory Reporting

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Circular 5/2008, of October 31, of the Bank of Spain, to reciprocal guarantee societies, on minimum own funds and other mandatory reporting information (BOE of November 21) [ 1 ]

[1]

References to Circular 3/2008, of May 22, are to be understood as remaining in force, given that the effects of the repeal of Circular 3/2008 do not extend to the scope of reciprocal guarantee societies, in accordance with the repealing provision of Circular 2/2016, of February 2.

The first final provision of Royal Decree 216/2008, of February 15, on own funds of financial entities, modifies Royal Decree 2345/1996, of November 8, regarding administrative authorization rules and solvency requirements for reciprocal guarantee societies. It establishes the basic criteria on which the minimum own funds requirements applicable to reciprocal guarantee societies must be based.

The new regulation maintains as a model the equivalent requirements demanded, for credit risk, of credit institutions (Bank of Spain Circular 3/2008, of May 22, to credit institutions, on determination and control of minimum own funds), although, given the low complexity of the business of these societies, it simplifies them significantly; on the other hand, the Royal Decree has come to recognize, under certain conditions, that reinsurance is an instrument that reduces credit risk and, consequently, should lead to a reduction in the own funds requirements for commitments benefiting from general reinsurance or re-guarantee contracts concluded with public bodies or companies.

On the other hand, it subjects reciprocal guarantee societies, just like credit institutions, to compliance with own funds requirements for covering operational risk.

However, some of the specifics of the new requirements, and in particular those that may be demanded for covering credit or operational risk derived from commitments or investments not usual in their activity, are entrusted to the Bank of Spain, a mandate to whose compliance this Circular is directed. To the extent that these new requirements affect most of the rules of the previously valid Circular 10/1998, of November 27, to reciprocal guarantee societies, regarding information on minimum own funds and other mandatory reporting information, it has been decided to completely replace it with a new circular.

Thus, this Circular establishes the information that must be provided by reciprocal guarantee societies regarding the own funds ratio, their mandatory investments, and the limit on tangible fixed assets and shares and participations, regulated by Royal Decree 2345/1996, as amended by Royal Decree 216/2008, while reproducing some of its rules to facilitate compliance, and maintains, as established by said Royal Decree, the obligation to submit to the Bank of Spain, for registration, the corresponding current articles of association at any given time.

Consequently, taking into account what is established in the first final provision of Royal Decree 216/2008, which modifies Royal Decree 2345/1996, and in exercise of the authorization conferred on the Bank of Spain in paragraphs 1 and 3 of number 5 of the Order of February 12, 1998, on special rules for the preparation, documentation, and presentation of accounting information of reciprocal guarantee societies, and in accordance with what is established in Article 3 of Law 13/1994, of June 1, on the autonomy of the Bank of Spain, the Bank of Spain has ordered:

FIRST SECTION

MINIMUM OWN FUNDS REQUIREMENTS AND LIMITS TO CERTAIN RISKS

FIRST RULE.

General minimum own funds requirements and limits.

1. Reciprocal guarantee societies must maintain at all times computable own funds, as defined in RULE SECOND of this Circular, not lower than the sum of the following requirements:

a) For credit risk of their operations: 8% of the active risk of the credit guarantees they grant and 4% of the active risk of the remaining commitments, assurances, or bonds they grant. For these purposes, credit guarantees shall be understood as those having the nature of financial guarantee contracts, as well as those in which the reciprocal guarantee society indirectly assumes a credit risk equivalent to that of financial guarantees.

b) For operational risk of their operations: 15% of their net annual financial income.

c) Those necessary to cover credit or operational risk derived from commitments or investments not usual in their activity; for these purposes, reciprocal guarantee societies will apply the criteria established for credit institutions in Circular 3/2008, of May 22, on determination and control of minimum own funds (hereinafter, CBE 3/2008); and, in particular, regarding the operations mentioned below, the following criteria:

The risk weighting applicable to amounts paid to third parties on behalf of guaranteed members and to properties adjudicated in payment of debts, unless they have been allocated for own use, will be that required in rule sixteenth, letter j), of the aforementioned Circular 3/2008.

Tangible fixed assets, excluding the properties adjudicated in payment of debts mentioned in the previous point, the shares and participations in their portfolio, and any other risk asset, other than the securities and deposits mentioned in number 1 of Article 7 of Royal Decree 2345/1996 and cash in hand, will receive a risk weighting of 100%.

In the event that a reciprocal guarantee society assumes commitments or makes investments for which no express treatment is provided for in CBE 3/2008, it will consult with the Bank of Spain, which will resolve using, in any case, criteria analogous to those provided for in the aforementioned Circular.

2. Reciprocal guarantee societies must establish internal procedures, proportionate to the nature, scale, and complexity of their activities, for the control and management of risks inherent to their activity, ensuring that the risks assumed, the nature of the operations contracted, or sectoral or other concentration do not undermine the adequate coverage of their risks. If the Bank of Spain appreciates significant deficiencies, after hearing the interested party, it may demand a remediation plan and, until its effective implementation and as long as the noted deficiencies persist, it may demand the maintenance of additional own funds, up to a maximum of 25% of those required as a minimum.

3. Reciprocal guarantee societies must also comply with the limits on risk concentration, and on tangible fixed assets and shares and participations, established in rules third and fourth.

4. For the purposes of what is provided in letter a) of paragraph 1:

i) Assets, the active risk of bonds and guarantees, and commitments shall be valued at their book value; therefore, net of their value adjustments or specific provisions. However, the technical provision fund that has been counted as own funds shall not be deducted in any case from the book value.

ii) Assets, the active risk of bonds and guarantees, and commitments that benefit from reinsurance or re-guarantee contracts concluded with reinsurance societies, insurers, or public entities, which reduce the credit risk of the reciprocal guarantee societies, will enjoy the reduction factor determined by the Bank of Spain, which shall not exceed 0.5, after verifying: the specific clauses of the contracts and the nature of the guarantee received; the counterparty and the indirect risk assumed; the characteristics of the operations benefiting from the risk reduction; and the requirements and incentives on risk management and control.

To this effect, reciprocal guarantee societies, the professional association representing them, or the reinsurers themselves may present the appropriate documentation to the Bank of Spain, with a proposal for the reduction coefficient to be applied and the reasons justifying its application. After three months from its complete submission without the appropriate resolution having been notified, the requested reduction coefficient proposal shall be deemed approved.

5. For the purposes of what is provided in letter b) of paragraph 1:

i) Net annual financial income shall be calculated as the average of those corresponding to the last three complete financial years, when they are positive. If the net financial income of one or more of the last years is negative or null, the following shall be done: if it is one, the average of the other two years shall be calculated; if it is two years, the average of the year with positive net financial income and of the estimated income for the following financial year, if positive, according to the business forecasts of the society, shall be calculated; if it is three years, the same criterion as for newly created societies shall be applied.

In particular, in the case of newly created societies that do not have representative data of net financial income for three complete years, the estimated income for the following year according to the society's business forecasts shall be taken as net financial income. Likewise, in the case of significant business absorptions or transfers, net financial income shall be adjusted to take into account the effects of such operations on operational risk, keeping the justifying documentation of such adjustments available to the Bank of Spain.

ii) Net annual financial income shall be considered the sum of the total of their financial income, the commissions of guarantees of all kinds they grant, the income from service provision or any other source, and the results of financial instruments net of all financial expenses and commissions ceded or paid for reinsurance or any other cause recorded in the income statement.

In addition, reciprocal guarantee societies must communicate to the Bank of Spain, as soon as they occur, gross losses from operational risk exceeding one hundred thousand euros or, if lower than that amount, 1% of their own funds, identifying, among other characteristics, the type of event involved. Likewise, they must keep an internal historical record of events that have generated losses exceeding said minimum limits, in which they will indicate the type of operational risk loss event, according to the classification established in rule hundredth of CBE 3/2008, and those other relevant characteristics that allow evaluating the amount and severity of said event. The society must maintain said record, along with the justifying documentation of its entries, available to the Bank of Spain.

SECOND RULE.

Composition of computable own funds.

1. For the purposes of compliance with the minimum solvency requirements applicable to reciprocal guarantee societies, their computable funds shall be composed of the elements listed in paragraph 2 of this rule, net of the deductions contemplated in paragraph 3 of the same.

2. The own funds of reciprocal guarantee societies shall comprise the following elements:

a) Subscribed and paid-up share capital.

b) Effective and express reserves, understood as those that meet the requirements established in paragraph 1.b) of rule eighth of CBE 3/2008.

Until the application of results takes place, reciprocal guarantee societies may incorporate into this element the part of the year's results they plan to apply to reserves, provided that the conditions established in the aforementioned paragraph 1.b) of rule eighth of CBE 3/2008 are met.

c) Reserves for regularization, updating, or revaluation of assets, subject to verification by the Bank of Spain of the correctness of their calculation and their compliance with accounting standards.

d) The technical provision fund that has not been applied to the coverage of specific credit risk of operations, at its book value.

3. From the own funds elements collected in the preceding paragraph of this rule, the following shall be deducted:

a) Negative results from previous years and the current year, as well as intangible assets integrated into their equity.

b) Other risks and assets that the society decides to deduct.

THIRD RULE.

Limits on large risks.

1. The value of all risks that a reciprocal guarantee society incurs with a single person or economic group shall not exceed 20% of its own funds. Reciprocal guarantee societies must observe the definition of large risks established for credit institutions in rule hundred and first of CBE 3/2008, and respect the aggregation and calculation rules established in rule hundred and second of said Circular.

2. For the purposes of paragraph 1 of this RULE, the exceptions to the limits collected in rule hundred and third of CBE 3/2008 shall be taken into account, as well as the regime for attribution of risks established in rule hundred and fourth of the aforementioned Circular, in the case of the existence of risks guaranteed by guarantees other than the contracts referred to in paragraph 4.ii) of the first rule of this Circular.

3. The limits on risk concentration established in this rule shall be calculated in relation to computable own funds, as defined in the second rule, before proceeding to the deduction established in letter b) of paragraph 3 of the aforementioned rule.

SECOND SECTION

LIMIT ON TANGIBLE FIXED ASSETS AND SHARES AND PARTICIPATIONS, AND OBLIGATIONS TO INVEST OWN FUNDS

FOURTH RULE.

Limit on tangible fixed assets and shares and participations.

1. The sum of tangible fixed assets and shares and participations shall not exceed 25% of the own funds of a reciprocal guarantee society, as defined in the second rule, before proceeding to the deduction established in letter b) of paragraph 3 of the aforementioned rule.

2. Tangible fixed assets shall include tangible fixed assets, real estate investments, and properties adjudicated or acquired in payment of debts not included in the above categories.

3. Notwithstanding the above, in tangible fixed assets, for the purposes of this rule, properties adjudicated or acquired in payment of debts, not intended for own use, shall not be included during the three years following their acquisition. After that date, the part of the assets acquired in payment of debts corresponding to reinsurance societies shall also not be included.

4. Shares and participations shall include equity instruments of group companies, multi-group, associated, and other related parties, as well as of other companies.

5. For the calculation of this limit, assets shall be counted at their book value, eliminating, in the case of equity instruments classified as available for sale, the adjustments for their valuation at fair value charged to equity.

FIFTH RULE.

Investment of own funds.

1. The own funds of reciprocal guarantee societies shall be invested, in a minimum proportion of 75%, in public debt securities issued by the State or Autonomous Communities, in fixed-income securities traded on organized secondary markets, or in deposits at credit institutions.

2. The investment obligation established in the previous paragraph shall be calculated in relation to own funds calculated in accordance with what is established in the second rule of this circular, before proceeding to the deduction established in letter b) of paragraph 3 of the aforementioned rule and after making the following deductions:

a) Amounts paid to third parties on behalf of guaranteed members, net of their specific provisions.

b) During the three years following their acquisition, the value of properties adjudicated or acquired in payment of debts, not intended for own use.

After that date, the part of the assets acquired in payment of debts corresponding to reinsurance societies shall also be deducted.

3. For the purposes of compliance with the investment obligation of reciprocal guarantee societies, assets shall be counted at their book value, eliminating, in the case of financial instruments classified as available for sale, the adjustments for their valuation at fair value charged to equity.

THIRD SECTION

COMPLIANCE WITH INFORMATION OBLIGATIONS

SIXTH RULE.

Information to be provided.

1. Reciprocal guarantee societies are obliged to present the statements whose models are collected in the annex of this Circular, which are:

The statements shall be sent semi-annually, referring to June 30 and December 31, to the Financial Information and Risk Central Department of the Bank of Spain, duly completed according to the instructions they incorporate, before August 15 and February 15, respectively. However, the Bank of Spain may require specific entities, considering their particular circumstances, the quarterly submission of the statements.

The statements shall refer to the final day of the natural semester to which they correspond.

2. The submission of statements to the Bank of Spain must be made via electronic transmission, in accordance with the technical specifications communicated for this purpose. In any case, statement R.1 must be sent electronically signed by the president, chief executive officer, or general director. Said statement must be sent, in any case, within the maximum deadline established in this rule. However, and without prejudice to that submission obligation, the electronic signature of the statements may be performed within the 15 natural days following the expiration of said maximum deadline.

Exceptionally, and only for duly justified causes, the Financial Information and Risk Central Department may authorize the presentation of all or some of the statements on magnetic media or on forms prepared by the Bank of Spain, which shall be delivered dated, stamped, and countersigned on all pages, and signed by a person with sufficient power of the sending society, except when it concerns statement R.1, which must be signed by one of the persons indicated in the previous paragraph.

ADDITIONAL PROVISION. Registration of statutory modifications.

The regime provided for in rule first of Circular 7/1993, of April 27, to credit institutions, on the Special Register of Articles of Association, shall apply to reciprocal guarantee societies regarding the registration of modifications in the articles of association of credit institutions.

FINAL PROVISION ONLY. ENTRY INTO FORCE.

This Circular shall enter into force the day following its publication in the Official State Bulletin, being applicable to statements referring to December 31, 2008.

REPEALING PROVISION

This Circular repeals Circular 10/1998, of November 27, to reciprocal guarantee societies, regarding information on minimum own funds and other mandatory reporting information.

ANNEX

ANNEX-C-5-2008.PDF (58 KB)

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