Royal Decree 1041/2021 amending the Deposit Guarantee Scheme and Bank Recovery and Resolution frameworks

I. GENERAL PROVISIONS
MINISTRY OF ECONOMIC AFFAIRS
AND DIGITAL TRANSFORMATION
19307 Royal Decree 1041/2021, of November 23, amending Royal Decree 2606/1996, of December 20, on deposit guarantee funds of credit institutions; and Royal Decree 1012/2015, of November 6, which develops Law 11/2015, of June 18, on the recovery and resolution of credit institutions and investment firms, and which amends Royal Decree 2606/1996, of December 20, on deposit guarantee funds of credit institutions.

I
In response to the financial crisis that erupted in 2007-2008 and the procyclical mechanisms that contributed to triggering it and aggravated its effects, the Basel Committee on Banking Supervision (BCBS) published a new global framework with new rules on banks' capital adequacy (Basel III Agreement).

These new international standards were incorporated into the European Union's legal order through Directive 2013/36/EU of the European Parliament and of the Council of June 26, 2013, on the access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (Capital Requirements Directive) and 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, amending Regulation (EU) No 648/2012 (Capital Requirements Regulation), which would be complemented by the resolution framework, composed of Directive 2014/59/EU of May 15, establishing a framework for the recovery and resolution of credit institutions and investment firms, amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012 of the European Parliament and of the Council (Bank Recovery and Resolution Directive), Regulation (EU) No 806/2014 of July 15, 2014, establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the context of a Single Resolution Mechanism and a Single Resolution Fund, and amending Regulation (EU) No 1093/2010 (Bank Recovery and Resolution Regulation).

II
The financial crisis affected the Eurozone particularly, where banking risk and sovereign risk have been closely correlated. Although this relationship is partly due to the exposure of financial entities to public debt securities, the main difficulty stemmed from the perception of an implicit government guarantee for bank deposits. This perceived implicit government guarantee incentivized entities to take on risks given the expectation that, in a situation of difficulty, the sector would receive financial support from the public sector. This dynamic acquired greater magnitude the larger the size of the entity, as the number of depositors affected in the event of the entity's bankruptcy would be greater.

OFFICIAL STATE GAZETTE
No. 281 Wednesday, November 24, 2021 Sec. I. Page 143911 cve: BOE-A-2021-19307 Verifiable at https://www.boe.es

As a result of the international consensus forged in the wake of the 2008 global financial crisis, G20 members agreed that it was necessary to establish mechanisms to address difficulties that financial entities might experience, avoiding any impact on taxpayers' resources, while preserving the stability of the international financial system. As a consequence of these efforts, the Financial Stability Board (FSB) approved in 2015 the Total Loss-Absorbing Capacity (TLAC) requirement for the capitalization of entities, which weights entities' assets according to their risk and requires that at least 18 percent of said assets be covered by capital and subordinated debt—debt that can be converted into capital if the entity is in difficulty. However, the TLAC standard applies only to those financial entities that have global systemic importance, leaving the regime for other entities to the national regulator. In the case of the European Union, there was a danger of regulatory arbitrage and differences in treatment among entities, as distinct regulation for large entities was added to each Member State's regulation. Therefore, within the Union, it was decided to create a community equivalent of TLAC applicable to all entities in the common space: the Minimum Requirement for own funds and Eligible Liabilities (MREL). This set of common rules within the European Union, which delimits the necessary capacity to absorb losses in a manner common to all Member States, constitutes one of the indispensable pieces in the construction of the Banking Union.

The Banking Union took its first steps in 2014, called upon to prevent a future crisis from triggering a sovereign debt crisis again, by addressing the absence of a shared risk-taking mechanism and establishing a uniform crisis management mechanism for financial entities at the Eurozone level. Currently, it consists of the Single Supervisory Mechanism (SSM), the Single Resolution Mechanism (SRM), and the single rulebook. The SSM, the first pillar of the Banking Union, became operational in November 2014. Supervision is carried out in an integrated manner by a supranational authority, the European Central Bank, and by national supervisory authorities. The SRM, the second pillar of the Banking Union, has been fully operational since January 2016. The SRM is composed of the Single Resolution Board (SRB), national resolution authorities, and the Single Resolution Fund (SRF). The SRB is responsible for the uniform application of the resolution regime, including resolution instruments and the use of the SRF. The SRF is a fund established at the supranational level, financed by progressive contributions over time, since January 2016, from entities subject to the resolution regime, which can be used for the resolution of said entities after other options, such as the internal recapitalization instrument, have been exhausted. The institutional structure composed of the SSM and the SRM is completed by a single rulebook on prudential requirements, the prevention and management of bankruptcies, and the protection of depositors.

III
The reform of the legislative framework applicable to credit institutions and investment firms that took place in 2013 and 2014, as well as the reform of the European banking architecture on supervision and crisis management, have constituted necessary steps to guarantee greater resilience of the financial system and advance the process of the Banking Union.

Nevertheless, in order to continue advancing in achieving both objectives, the European Commission presented in November 2016 a legislative package comprising modifications to the single rulebook and, in particular, to the Bank Recovery and Resolution Regulation and Directive, and to the Capital Requirements Regulation and Directive. The Commission thus fulfilled the commitment undertaken in its communication of November 24, 2015, "Towards the completion of the Banking Union," regarding the presentation of a legislative proposal that would allow the application of the TLAC standard in Union law before the 2019 deadline agreed upon internationally.

Thus, the Council of the Union and the European Parliament have approved the appropriate legal acts.

On the one hand, regarding the Bank Recovery and Resolution Regulation and Directive, Regulation (EU) 2019/877 of the European Parliament and of the Council of May 20, 2019, amending Regulation (EU) No 806/2014 as regards the loss absorption and recapitalization capacity of credit institutions and investment firms; and Directive (EU) 2019/879 of the European Parliament and of the Council of May 20, 2019, amending Directive 2014/59/EU as regards the loss absorption and recapitalization capacity of credit institutions and investment firms, as well as Directive 98/26/EC, were approved.

On the other hand, regarding the Capital Requirements Regulation and Directive, Regulation (EU) 2019/876 of the European Parliament and of the Council of May 20, 2019, amending Regulation (EU) No 575/2013 as regards the leverage ratio, the net stable funding ratio, own funds and eligible liabilities requirements, counterparty credit risk, market risk, exposures to central counterparties, exposures to collective investment undertakings, large exposures, and reporting and disclosure requirements, and Regulation (EU) No 648/2012; and Directive (EU) 2019/878 of the European Parliament and of the Council of May 20, 2019, amending Directive 2013/36/EU as regards exempted entities, holding companies, mixed financial holding companies, remuneration, supervisory powers and measures, and capital conservation measures, were approved.

The TLAC standard, applicable to entities of global systemic importance, is introduced into the Capital Requirements Regulation through Regulation (EU) 2019/876 of May 20, 2019, despite constituting a resolution instrument aimed at enshrining the "bail-in" principle—resolution system based on the internal recapitalization of entities—over the "bail-out"—resolution system based on the use of public funds.

Given that the TLAC standard and the MREL pursue the same objective of ensuring that entities established in the Union have sufficient loss absorption and recapitalization capacity, both requirements must be complementary elements of a common framework. This has required that the MREL framework present in the Bank Recovery and Resolution Directive be adapted through Directive (EU) 2019/879 of May 20, 2019.

IV
Based on all these considerations, this Royal Decree, of a modifying nature, is called upon to complete the transposition of Directive (EU) 2019/879 of May 20, 2019, into the Spanish legal order, for which the appropriate modifications are introduced into Royal Decree 1012/2015 of November 6, which develops Law 11/2015 of June 18 on the recovery and resolution of credit institutions and investment firms, and which amends Royal Decree 2606/1996 of December 20 on deposit guarantee funds of credit institutions. In particular, this Royal Decree makes use of the authorization granted by the legislator to develop certain provisions of Law 11/2015 of June 18, which, due to their eminently technical nature, are better suited to the exercise of the Government's regulatory power. Thus, this norm takes as a basis the generic obligations contained in Law 11/2015 of June 18, such as the obligation to comply with the MREL, and specifies, shapes, and determines them in accordance with Directive 2019/879, such as the method of calculating the MREL from the entity's liabilities and its combined buffer requirements.

Likewise, modifications are introduced into Royal Decree 2606/1996 of December 20 on deposit guarantee funds of credit institutions, in order to adapt its regime to what is provided for in Directive 2014/49/EU of the European Parliament and of the Council of April 16, 2014, on deposit guarantee schemes. Specifically, modifications are included to certain provisions related to the equity of the Deposit Guarantee Fund, the definition and scope of guaranteed deposits, the information to be provided by credit institutions, as well as stress tests.

V
This Royal Decree contains two articles, a transitional provision, a repealing provision, and two final provisions.

The first article amends Royal Decree 2606/1996 of December 20 on deposit guarantee funds of credit institutions.

First, modifications are introduced to grant greater flexibility to the Deposit Guarantee Fund of Credit Institutions regarding the method of calculation and approval of calls for contributions.

Second, the coverage of the Deposit Guarantee Fund for deposits made by credit institutions, securities companies and agencies, and portfolio management companies and financial advisory firms on behalf of their clients is guaranteed.

Third, the Deposit Guarantee Fund is granted the power to verify the correctness of the information on eligible and guaranteed deposits of each depositor, as well as the information used to determine the calculation base for contributions to the Deposit Guarantee Fund.

The second article amends Royal Decree 1012/2015 of November 6, which develops Law 11/2015 of June 18 on the recovery and resolution of credit institutions and investment firms, and which amends Royal Decree 2606/1996 of December 20 on deposit guarantee funds of credit institutions.

Generally, the Royal Decree is adapted to the new terminology employed by Directive (EU) 2019/879 of May 20, 2019. In this sense, the term "capital instruments" is replaced by "capital and eligible liabilities instruments," and, on certain occasions, the term "eligible liabilities" is replaced by "liabilities susceptible to internal recapitalization." Likewise, in line with the European harmonizing spirit, processes related to bank resolution shift from being a competence to being a faculty of resolution authorities, which requires the corresponding terminological change in Royal Decree 1012/2015 of November 6.

Chapter I is modified to ensure that an assessment of the entity's assets and liabilities by an independent expert designated by the FROB is carried out not only prior to the adoption of any resolution measure but also in the exercise of the powers to write down or convert relevant capital and eligible liabilities instruments.

Section 1 of Chapter III, relating to resolution planning, is modified.

On the one hand, it is determined which stress situations must necessarily be taken into account when identifying the resolution instruments and powers to be included in resolution plans.

On the other hand, it is established that entities must include in their resolution plans an estimate of the minimum requirement for own funds and eligible liabilities and, if applicable, their subordination requirement, along with a schedule providing a deadline for compliance, without prejudice to transitional periods that the preventive resolution authority may establish.

Likewise, modifications are introduced regarding the elements that must be included concerning group resolution plans, with special relevance to the specifics to be considered in the case of groups formed by more than one resolution group.

Section 2 of Chapter III, relating to resolvability assessment, is modified. Specifically, technical criteria are established for calculating the maximum distributable amount for the purposes of distribution restrictions in the event that an entity does not meet the combined buffer requirements for capital evaluated in conjunction with the MREL. Cooperation mechanisms between community resolution authorities are further reinforced, establishing clear protocols to carry out such assessment in the case of groups, allowing, in most cases, to obtain a joint consensus decision among the different supervisors.

In Chapter VI, the requirements for collaboration and information exchange with resolution authorities are elaborated upon regarding notification and consultation requirements in the application of consolidated issuance of eligible instruments to meet the MREL.

In Chapter VIII, the regime and operational dynamics of European colleges of resolution authorities are modified, ensuring both a global approach in their resolution strategies and adequate coordination between the colleges and the different Spanish resolution authorities.

A new Chapter X is created to introduce the new framework for determining the minimum requirement for own funds and eligible liabilities. This new chapter is divided into four sections.

In Section 1, certain technical aspects related to the determination of the MREL are introduced. In this sense, the criteria to be observed when determining said requirement are introduced, which, in order to adapt it to its intrinsic risk to the financial system, will differ depending on the type of entity in question. Likewise, relevant elements and amounts that the preventive resolution authority must take into account when determining the MREL are introduced.

This section also collects the conditions that must be met for certain liabilities, among others, those corresponding to debt instruments with implicit derivatives, to be used to comply with the MREL.

In Section 2, criteria are established for determining the subordination requirement, understood as the minimum proportion of the MREL that must be met with own funds, with eligible subordinated instruments, or with issued liabilities. This requirement is also subject to specifics depending on the type of entity involved.

In Section 3, the authorization conferred by the legislator is used to determine the form and scope of application of this requirement, distinguishing between resolution entities and entities that are not resolution entities, with special attention paid to the possible organizational complexity of the latter, thereby ensuring a clear delimitation in the resolution plane between the subsidiary and its parent company. Due to the intrinsic characteristics of their activity and their inherent contribution to reducing the systemic risk of the international financial system, central bodies and their permanently affiliated credit institutions are exempted from complying with this requirement.

In Section 4, the procedure to be followed by the preventive resolution authority for the determination of the requirement is regulated, as well as obligations regarding information, publicity, and notification to the European Banking Authority.

In this section, on the one hand, the powers or measures that the competent supervisor or competent resolution authorities may use in the event of an entity's non-compliance with the requirement are established, requiring the use of at least one of those specified in the articles; on the other hand, the deadlines for compliance with the requirement regarding entities that have been subject to the application of resolution instruments or powers to write down or convert relevant capital and eligible liabilities instruments, which must be set by the preventive resolution authority, are established.

A new third transitional provision is introduced, which provides for the preventive resolution authority to set a transitional period for the compliance of the MREL, whose deadline for full compliance with the requirement will be January 1, 2024, and which must include an intermediate objective to be met by entities on January 1, 2022.

The repealing provision establishes the repeal of norms of equal or lower rank that oppose this Royal Decree.

The first final provision collects the declaration of incorporation of European Union Law.

The second final provision establishes the entry into force of this Royal Decree.

VI
The Project has a regulatory nature and finds its general authorization in Articles 97 of the Constitution and 22 of Law 50/1997, of November 27, on the Government. The Royal Decree is issued pursuant to the following specific authorizations. The authorization of the first article, which amends Royal Decree 2606/1996 of December 20 on deposit guarantee funds of credit institutions, is found in the final first provision of Royal Decree-Law 16/2011 of October 14, which creates the Deposit Guarantee Fund of Credit Institutions, which authorizes the Government to issue the necessary measures for the development and expansion of said royal decree-law. The authorization of the second article, which amends Royal Decree 1012/2015 of November 6, which develops Law 11/2015 of June 18 on the recovery and resolution of credit institutions and investment firms, and which amends Royal Decree 2606/1996 of December 20 on deposit guarantee funds of credit institutions, is found in the final sixteenth provision of Law 11/2015 of June 18, which empowers the Government to issue any provisions necessary for the development and execution of the law.

This Royal Decree is contained in the Annual Normative Plan of the General State Administration for 2021 as the development of the Law for the transposition of Directive 2019/878.

Likewise, the norm adapts to the principles of necessity, effectiveness, proportionality, legal certainty, transparency, and efficiency, to which the exercise of regulatory power must be subject pursuant to Article 129