## EXECUTIVE SUMMARY

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### OVERVIEW
- Macroprudential oversight for banking is a shared responsibility between Banco de España (BdE) and the European Central Bank (ECB). BdE is the national competent and designated authority for exercising macroprudential powers under the Capital Requirements Regulation (CRR) and the Capital Requirements Directive (CRD) IV.
- The ECB possesses the “topping-up” power—the ability to apply more stringent measures under the CRR/CRD IV framework than those applied by national authorities.
- At the European level, the ESRB can recommend national authorities and European institutions to adopt measures to mitigate systemic risk on a “comply-or-explain” basis.
- Spain has not established a national macroprudential authority; systemic risk surveillance is carried out largely along sectoral lines by BdE, Dirección General de Seguros y Fondos de Pensiones (DGSyFP), and Comisión Nacional del Mercado de Valores (CNMV).
- Effective systemic risk oversight rests on:
  - robust surveillance to monitor, identify and assess systemic risk;
  - proactive use of macroprudential policy and other measures as necessary to mitigate financial stability threats;
  - continued efforts to close regulatory loopholes and data gaps.
- The framework needs clear mandates, governance structures, and accountability mechanisms to underpin “ability to act” and incentivize “willingness to act.”

### SYSTEMIC RISK SURVEILLANCE — Current Setup and Assessment
- EU-level arrangements and roles:
  - ESRB leads systemic risk surveillance and issues warnings and recommendations on a “comply-or-explain” basis.
  - European financial sector authorities (EBA, EIOPA, ESMA) carry out sectoral systemic risk surveillance.
  - ECB conducts financial stability surveillance with a holistic approach covering macrofinancial linkages, financial institutions, and financial markets.
- Spain — sectoral setup:
  - BdE: banking oversight, macrofinancial analysis, payment systems monitoring; functions mainly aligned with price stability.
  - CNMV: capital markets surveillance; started a “Securities Markets and Their Agents” section biannually in 2008; first Financial Stability Note in 2016.
  - DGSyFP: insurance and pensions surveillance.
  - Treasury (MoE): monitors macrofinancial developments, especially government debt market.
- Assessment and capacity gaps:
  - Technical capacity for systemic risk monitoring and assessment is generally strong across BdE, CNMV, DGSyFP.
  - BdE’s macrofinancial analysis could be deepened to better capture macrofinancial linkages and financial stability risks.
  - Recommended enhancements:
    - Improve the early warning system to identify macrofinancial vulnerabilities and gauge financial stress.
    - Perform macroprudential stress testing that better accounts for second-round effects, solvency-liquidity links, interbank contagion, and cross-sectoral interconnectedness.
    - Enhance capacity to carry out both solvency and liquidity stress tests for overseas subsidiary operations.
    - Conduct regular early warning exercises to increase focus on risks and ability to “connect the dots.”

### MACROPRUDENTIAL POLICY — Stance, Toolkit, and Conduct
- Current stance and measures:
  - Macroprudential policy stance appears broadly appropriate.
  - BdE has put in place a framework for calibrating capital buffers.
  - The countercyclical capital buffer (CCB) is currently at zero given that a new financial cycle upturn has not started, with still negative credit gap and weakly recovering house prices.
  - Recommendation: adopt a requirement to assess the sensitivity of borrowers’ debt servicing capacity, including against rising interest rates.
- Toolkit gaps and legal basis:
  - Toolkit primarily capital-related under CRR/CRD IV: countercyclical capital buffers, capital buffers for systemically important institutions, systemic risk buffers, sectoral capital requirements, Pillar 2 requirements, leverage ratio, LCR and NSFR (liquidity).
  - Article 458 (“flexibility package”) allows stricter prudential requirements on sectoral risk weights, liquidity measures, large exposures, interbank exposures, and public disclosure, but involves lengthy notification procedures.
  - National legal basis for borrower-based tools (outright or proportional LTV, DSTI, or DTI limits) has not been developed.
  - Recommendation: actively consider legal basis for imposing limits on LTV and DSTI ratios, and amortization periods; assign borrower-based tools for banking to BdE for efficient implementation.
- Historical and current operational notes:
  - Dynamic provisioning: phased out; dynamic provisioning requirement no longer existed as of [October 2016].
  - Since January 2016, BdE has set the CCB, which continues to be at zero.
  - BdE has designated six Spanish banks as other systemically important institutions (O-SIIs), one of which is a global systemically important institution (G-SII).
  - O-SIIs are subject to additional capital requirements in the range between 0.25 and 1 percent of risk-weighted assets, with a phased-in period until the beginning of 2019.
  - BdE uses a heat map of early warning indicators and a stress testing framework (“Forward-looking Exercise on Spanish Banks (FLESB)”) to guide calibration.

### FINANCIAL SYSTEM STRUCTURE AND KEY STATISTICS
- Key statistics (preserve numeric precision):
  - Banking system assets amounted to about 250 percent of GDP, which accounted for 68 percent of aggregated assets, as of end-2016.
  - Insurance companies, pension funds, and investment funds accounted for 17 percent of aggregated assets.
  - Shadow banking, based on the Financial Stability Board (FSB)’s economic function-based definition, amounted to around 25 percent of GDP as of end-2015.
  - Outstanding private sector debt securities issued domestically and internationally amounted to 63 percent of GDP as of end-2016.
  - Stock market capitalization stood at 61 percent of GDP as of end-2016.
  - The local bond market is dominated by government securities.
- Real estate and lending:
  - About 55 percent of bank lending in Spain is related to construction and real estate activities (13 percent) and residential mortgages (42 percent).
  - Home ownership, the share of construction and real estate services in overall economic activity, and the importance of housing wealth relative to total wealth are higher in Spain than in other European economies.
- International and intra-system exposures:
  - International Spanish banks’ international claims currently amount to about 45 percent of banking system assets, up from around 20 percent at end-2008.
  - Spain’s large negative net international investment position (IIP) implies exposure to shifts in global financial conditions and inward spillovers.
  - Financial institutions are connected through conglomerate structures, cross-sectoral claims, and common exposures; securitization and covered bond issuance are used mainly for funding rather than risk transfer.

### THEMATIC FINANCIAL STABILITY ISSUES
- Selected vulnerabilities and risks:
  - Banks’ holding of sizeable legacy assets could weigh on profitability and heighten credit risk; cleanup may be more challenging if the housing market recovers slowly or unevenly across regions.
  - Low bank profitability (exacerbated by prevalence of adjustable-rate mortgage contracts and declining lending activity) could force business-model changes, increase non-interest income focus, complicate legacy asset cleanup and capital raising.
  - Exposure to macrofinancial vulnerabilities via sovereign-banking linkages, a large negative net IIP, high public debt, and weak corporate and household balance sheets; adverse shocks could generate substantial credit and market losses.
  - Nonbanks, particularly insurers, are vulnerable to continuation of low interest rates and compressed risk premiums; some insurers face asset-liability mismatches and investment funds increased holdings of foreign assets raising inward spillover risks.
  - Cross-border interconnectedness is substantial due to two internationally-active banks operating diversified retail banking via standalone subsidiaries; resilience could be tested by deteriorating macrofinancial conditions in key host countries.

### RECOMMENDATIONS AND OPERATIONAL PROPOSALS
- Establish governance and coordination:
  - Establish a Systemic Risk Council to improve inter-agency coordination on financial stability matters; chair by the Governor of BdE and supported by a joint secretariat led by BdE.
  - Council membership: heads of BdE, CNMV, DGSyFP, and the General Secretary of the Treasury; FROB and FGD may participate on an as-needed basis.
  - Council powers: issue observations, warnings, and recommendations; meet at least quarterly (given need to calibrate the CCB every quarter); recommendations on a “comply-or-explain” basis and accountability to Parliament.
- Strengthen BdE’s role and mandate:
  - Give BdE a broader financial stability mandate.
  - Set up an internal financial stability committee within BdE and make the Financial Stability and Macroprudential Policy Department an anchor body to lead and coordinate systemic risk surveillance.
  - Strengthen the accountability framework so BdE and the Systemic Risk Council are accountable to Parliament; use revamped Financial Stability Report to cover entire financial system.
- Surveillance and analytical enhancements:
  - Enhance early warning system and conduct regular early warning exercises (suggested frequency: possibly twice a year) to assess overall financial stability, identify key risk factors, and set surveillance priorities.
  - Perform macroprudential stress testing that captures second-round effects, solvency-liquidity links, interbank contagion, cross-sectoral interconnectedness, and develops global scenarios for overseas operations.
  - Improve macrofinancial analysis of housing markets using loan-level LTV and DSTI data, sensitivity analysis to interest rates, and firm-level balance sheet monitoring (especially construction and real estate sectors).
  - Close data gaps: collect more granular data on interbank and cross-sectoral exposures, cross-holding of assets and liabilities by banks and nonbanks, ownership structures, and non-traditional banking activity.
- Toolkit expansion and legal changes:
  - Expand macroprudential toolkit to include borrower-based tools (LTV, DSTI, DTI limits), amortization requirements, and liquidity measures; assign rule-making and enforcement for banking borrower-based tools to BdE.
  - Clarify legal basis for inter-agency information sharing and broaden scope of coordination body (CESFI) so more granular data can be shared for systemic risk analysis.
- Inter-agency operational steps:
  - Create inter-agency technical working groups to agree on surveillance frameworks, co-develop analytical tools, and jointly conduct systemic risk monitoring and assessment; proposed topical working groups: macrofinancial risks and vulnerabilities; financial market developments; banking system; nonbanks and shadow banking; interconnectedness.
  - Interim approach: use technical working groups until the national macroprudential authority (Systemic Risk Council) is established; working groups could be created by memorandum of understanding.

### INSTITUTIONAL ARRANGEMENTS — Roles, Gaps, and Timelines
- Main recommendations and implementation responsibilities (from Table 1):
  - Establish a Systemic Risk Council for inter-agency coordination, with secretariat supported by BdE (MoE, BdE) — Short-term.
  - Expand the macroprudential toolkit to include borrower-based tools (MoE) — Short-term.
  - Enhance the systemic risk surveillance framework to comprehensively cover macrofinancial linkages, intra-system interconnectedness, and cross-border spillovers (BdE, CNMV, DGSyFP, Treasury) — Short-term.
  - Continue monitoring and closing data gaps; clarify legal basis enabling inter-agency information sharing (BdE, CNMV, DGSyFP) — Medium-term.
  - Other actions include giving BdE a broader financial stability mandate and accountability framework; conducting regular early warning exercises; establishing inter-agency technical working groups; increasing DGSyFP resources; and enhancing technical capacity for early warning, stress testing, and macrofinancial analysis.

### APPENDIX HIGHLIGHTS — Tools, Assessments and Procedures
- Availability of typical macroprudential tools for banks in Spain (Appendix III):
  - Tools dealing with broad-based credit risk:
    - Countercyclical capital buffer (CCB): available.
    - Leverage ratio: available (the 3 percent minimum requirement to become binding from 2018).
    - Dynamic/general provisioning requirement: no longer available as of [October 2016].
    - Limit on growth of overall credit: not available.
  - Household-sector credit risk tools:
    - Sectoral capital requirement: available (via higher risk weights, stricter lending criteria and higher LGD floors for real estate exposures).
    - Sectoral provisioning requirement, limits on growth of certain credit, limits on LTV/DSTI/DTI, amortization requirement: not available.
  - Corporate-sector credit risk tools:
    - Sectoral capital requirement: available.
    - Sectoral provisioning requirement, limits on growth of certain credit, limits on LTV or debt service coverage ratios: not available.
  - Liquidity risk tools:
    - Liquidity buffer requirement (LCR): available.
    - Stable funding requirement (NSFR legal basis in CRR): available.
    - Liquidity levy (Pillar II liquidity requirement): available.
    - Reserve requirement, limit on open foreign-exchange position, outright limit on foreign-currency funding: not available.
  - Structural risk tools:
    - Capital buffers for systemically important institutions: available.
    - Higher loss absorbency requirement (systemic risk buffers): available.
    - Limit on certain exposures (large exposures): available.
    - Structural limit on certain activities: not available.
- Assessment of BdE’s macroprudential oversight (Appendix IV):
  - Mixed compliance with ESRB recommendations: several items “Partially compliant” or “Materially non-compliant” (notably on central bank leading role and control over appropriate macroprudential instruments), but full operational independence and staff legal protection are assessed as “Fully compliant.”
- ECB and ESRB roles (Appendix V):
  - ECB: macroprudential mandate covers the banking sector in SSM countries and has “topping-up” power for CRR/CRD IV tools; requires notification ten working days in advance and can object within five working days.
  - ESRB: monitors and identifies systemic risk across the EU, issues non-binding warnings and recommendations on a “comply-or-explain” basis; plays a coordination role and issues opinions on Article 458 measures.

*Source: EXECUTIVE SUMMARY of IMF Spain Financial Sector Assessment (cr17336).*

### EXECUTIVE SUMMARY ___________________________________________________________________________ 5

### EXECUTIVE SUMMARY

### OVERVIEW
- Macroprudential oversight for banking is a shared responsibility between Banco de España (BdE) and the European Central Bank (ECB). BdE is the national competent and designated authority for exercising macroprudential powers under the Capital Requirements Regulation (CRR) and the Capital Requirements Directive (CRD) IV.
- The ECB possesses the “topping-up” power—the ability to apply more stringent measures under the CRR/CRD IV framework than those applied by national authorities.
- At the European level, the ESRB can recommend national authorities and European institutions to adopt measures to mitigate systemic risk on a “comply-or-explain” basis.
- Spain has not established a national macroprudential authority; systemic risk surveillance is carried out largely along sectoral lines by BdE, Dirección General de Seguros y Fondos de Pensiones (DGSyFP), and Comisión Nacional del Mercado de Valores (CNMV).
- Effective systemic risk oversight rests on (i) robust surveillance to monitor, identify and assess systemic risk, (ii) proactive use of macroprudential policy and other measures as necessary to mitigate financial stability threats, and (iii) continued efforts to close regulatory loopholes and data gaps. The framework needs clear mandates, governance structures, and accountability mechanisms to underpin “ability to act” and incentivize “willingness to act.”

### SYSTEMIC RISK SURVEILLANCE — Current Setup and Assessment
- At the EU level:
  - The ESRB leads systemic risk surveillance for the EU financial system and can issue warnings and recommendations on a “comply-or-explain” basis.
  - The European financial sector authorities—the EBA, the EIOPA and the ESMA—carry out systemic risk surveillance of their respective sectors.
  - The ECB conducts financial stability surveillance with a holistic approach covering macrofinancial linkages, financial institutions, and financial markets.
- In Spain:
  - Systemic risk monitoring and assessment are largely sectoral: BdE (banking), DGSyFP (insurance and pensions), CNMV (capital markets).
  - BdE conducts macrofinancial analysis, monitors financial market developments, and oversees payment systems, but these functions are mainly to fulfill its price stability objective; attention to financial stability is generally beyond the current scope.
  - The Treasury (part of the Ministry of Economy, Industry and Competitiveness—MoE) monitors macrofinancial developments, especially those related to the government debt market.
- Key publications and chronology:
  - BdE’s Financial Stability Report: published biannually since 2002, primarily covering banks.
  - CNMV: started publishing a section on “Securities Markets and Their Agents” biannually in its quarterly Bulletin in 2008; first Financial Stability Note published in 2016.
- Assessment of surveillance capacity:
  - Technical capacity for systemic risk monitoring and assessment is generally strong; BdE, CNMV, and DGSyFP contribute effectively to EU-wide surveillance led by the ESRB.
  - BdE’s macrofinancial analysis could be deepened to improve understanding of macrofinancial linkages and financial stability risks.
  - Enhancements recommended:
    - Improve the early warning system to identify macrofinancial vulnerabilities and gauge financial stress.
    - Perform macroprudential stress testing that better accounts for second-round effects, solvency-liquidity links, interbank contagion, and cross-sectoral interconnectedness.
    - Enhance capacity to carry out both solvency and liquidity stress tests for overseas subsidiary operations.
    - Conduct regular early warning exercises to increase focus on risks and ability to “connect the dots.”

### MACROPRUDENTIAL POLICY — Stance, Toolkit, and Conduct
- Current policy stance:
  - The macroprudential policy stance appears broadly appropriate.
  - BdE has put in place a framework for calibrating capital buffers.
  - The countercyclical capital buffer (CCB) is currently at zero given that a new financial cycle upturn has not started, with still negative credit gap and weakly recovering house prices.
  - Recommendation: adopt a requirement to assess the sensitivity of borrowers’ debt servicing capacity, including against rising interest rates.
- Toolkit gaps and recommendations:
  - The existing macroprudential toolkit would benefit from expansion, particularly to include more effective tools to address risks associated with real estate exposures.
  - Legal basis for imposing limits on loan-to-value (LTV) and debt service-to-income (DSTI) ratios, as well as amortization periods, should be actively considered.
  - Borrower-based tools for banking should be assigned to BdE to ensure efficient implementation.
  - The crisis highlighted that monetary conditions appropriate for the euro area as a whole proved too expansionary for Spain; strong credit growth fueled real estate market bubbles, underscoring the need for national macroprudential action.

### INSTITUTIONAL ARRANGEMENTS — Roles, Gaps, and Recommendations
- Need for a national Systemic Risk Council:
  - A Systemic Risk Council should be set up to improve inter-agency coordination on financial stability matters, including systemic risk surveillance and prudential policies.
  - The Council would bring together core agencies—BdE, CNMV, DGSyFP, and the Treasury—to foster coordination and serve as the national macroprudential authority advocated by the ESRB.
  - While not possessing regulatory powers in its own right, the Council could be given a legislative mandate for maintaining overall financial stability and authority to issue statements—ranging from observations, to warnings and recommendations—on emerging threats and remedial actions.
  - The Council should be chaired by the Governor of BdE and supported by a joint secretariat led by BdE.
- Strengthening BdE’s role:
  - BdE is well-placed to play an anchor role in macroprudential oversight given its comparative expertise in macrofinancial analysis.
  - Institutional upgrades needed:
    - Give BdE a broader financial stability mandate.
    - Set up an internal financial stability committee within BdE to foster integrated systemic risk surveillance and policy decision-making.
    - Strengthen the overall accountability framework to ensure willingness to act.
    - BdE, together with the Systemic Risk Council, should be accountable to Parliament for safeguarding financial stability, including submission of a revamped Financial Stability Report broadened to cover the entire financial system.

### Table of Key Recommendations and Implementation Responsibilities (from Table 1)
- Main recommendations:
  - Establish a Systemic Risk Council for inter-agency coordination on systemic risk surveillance and prudential policies, with secretariat supported by BdE (MoE, BdE) — Short-term.
  - Expand the macroprudential toolkit to include borrower-based tools (MoE) — Short-term.
  - Enhance the systemic risk surveillance framework to comprehensively cover macrofinancial linkages, intra-system interconnectedness, and cross-border spillovers (BdE, CNMV, DGSyFP, Treasury) — Short-term.
  - Continue monitoring and closing data gaps as needed; and clarify the legal basis enabling inter-agency information sharing for systemic risk surveillance (BdE, CNMV, DGSyFP) — Medium-term.
- Other recommendations:
  - Give BdE a broader financial stability mandate, along with a more robust accountability framework; and modify the mandate of CNMV and DGSyFP to better support their macroprudential oversight function (MoE) — Short-term.
  - Conduct early warning exercises regularly; and establish inter-agency technical working groups to co-develop necessary analytical tools and jointly conduct systemic risk monitoring and assessment (BdE, CNMV, DGSyFP, Treasury) — Short-term.
  - Use Financial Stability Report to communicate more effectively about systemic risk with the public (BdE) — Short-term.
  - Strengthen BdE’s internal organization to better support its financial stability function, including creating an internal financial stability committee; and develop an integrated financial stability surveillance framework that incorporates macrofinancial analysis and monitoring of financial markets and payment systems (BdE) — Short-term.
  - Consider how to make policymaking at BdE benefit from external views (BdE, MoE) — Short-term.
  - Develop an analytical framework to guide the implementation of prudential tools to deal with system risk stemming from market activity (CNMV) — Short-term.
  - Increase DGSyFP’s resources for conducting systemic risk surveillance (DGSyFP, MoE) — Short-term.
  - Enhance the technical capacity, particularly in the areas of early warning system, macroprudential stress testing, and macrofinancial analysis (BdE, CNMV) — Medium-term.

*Source: EXECUTIVE SUMMARY of IMF Spain Financial Sector Assessment (cr17336).*

### 8.      Spain’s financial system remains largely bank-dominated (Figure 1 and Table 2). For

### 8.      Spain’s financial system remains largely bank-dominated (Figure 1 and Table 2). For

### Financial system structure and key statistics
- Banking system assets amounted to about 250 percent of GDP, which accounted for 68 percent of aggregated assets, as of end-2016.
- Insurance companies, pension funds, and investment funds accounted for 17 percent of aggregated assets.
- Shadow banking, based on the Financial Stability Board (FSB)’s economic function-based definition, amounted to around 25 percent of GDP as of end-2015.
- Outstanding private sector debt securities issued domestically and internationally amounted to 63 percent of GDP as of end-2016.
- Stock market capitalization stood at 61 percent of GDP as of end-2016.
- The local bond market is dominated by government securities.

### Real estate exposure and macrofinancial linkages
- About 55 percent of bank lending in Spain is related to construction and real estate activities (13 percent) and residential mortgages (42 percent).
- Home ownership, the share of construction and real estate services in overall economic activity, and the importance of housing wealth relative to total wealth are higher in Spain than in other European economies.
- The past crisis illustrated that a real estate boom can produce significant macro imbalances, housing market bubbles, and an excessive buildup in leverage and indebtedness across sectors.

### International exposures and net IIP vulnerability
- International Spanish banks’ international claims currently amount to about 45 percent of banking system assets, up from around 20 percent at end-2008.
- The international banking model increases diversification benefits but also raises dependence on overseas profits influenced by macrofinancial developments in key host countries.
- Spain’s large negative net international investment position (IIP) implies continued exposure to shifts in global financial conditions and inward spillovers.

### Intra-system interconnectedness
- Financial institutions are connected through conglomerate structures, cross-sectoral claims, and common exposures.
- Covered bond issuance and securitization activity are mostly for funding rather than risk transfer; securitized loans are largely kept on banks’ balance sheets.
- Asset portfolios of insurers and investment funds are independently managed, with no special consideration to own groups.
- Product cross-selling is prevalent and could bring market conduct and reputational risks.
- Cross-sectoral interconnectedness has reduced since the crisis but could evolve rapidly based on incentives.

### Assessment of systemic risk surveillance capacity
- Authorities (BdE, CNMV, and DGSyFP) have strong technical capacity and have contributed to EU-wide surveillance led by the ESRB and European financial sector authorities.
- BdE’s Financial Stability Report reflects analytical sophistication; CNMV published a risk dashboard to improve systemic risk monitoring.
- BdE has developed a heat map and a stress testing framework for banks, known as the “Forward-looking Exercise on Spanish Banks (FLESB).”
- Current macrofinancial analysis at BdE tends to be focused on macroeconomic implications rather than financial stability risk assessment.
- There are no mechanisms that integrate findings from BdE, CNMV, and DGSyFP into a comprehensive system-wide financial stability view.
- Cross-sectoral interconnectedness receives inadequate attention because it lies outside any single agency’s responsibilities.

### Data, analytical gaps, and capacity needs
- Data collection is organized along sectoral lines; necessary supervisory information is collected and shared among authorities.
- BdE has extensive macrofinancial data; CNMV can monitor real-time market developments.
- Gaps remain: granular data for systemic risk analysis, regular data on interbank and cross-sectoral exposures, complete information on cross-holding of assets and liabilities by banks and nonbanks, ownership structure of key financial assets, and nature of non-traditional banking activity.
- Additional data collection is desirable to improve monitoring of banks’ liquidity risk and capacity to stress test banks’ overseas operations.
- In line with the ESRB’s recommendation, BdE is taking an ambitious project on operationalizing detailed information on the real estate market.
- Further capacity development is recommended to embrace a more macrofinancial approach and to better understand interactions between vulnerabilities, risk factors, and transmission/amplification channels.

### Thematic financial stability issues (selected)
- Banks’ holding of sizeable legacy assets could weigh on profitability and heighten credit risk; reduction of legacy assets could be more challenging if the housing market recovers slowly or unevenly across regions.
- Banks’ low profitability (exacerbated by prevalence of adjustable-rate mortgage contracts and declining lending activity) could force business-model changes, push banks towards increasing non-interest income, and complicate legacy asset cleanup and capital raising.
- Banks remain exposed to macrofinancial vulnerabilities through sovereign-banking linkages, a large negative net IIP, high public debt, and weak corporate and household balance sheets; adverse shocks could generate substantial credit and market losses.
- Nonbanks, particularly insurance companies, are vulnerable to the continuation of low interest rates and compressed risk premiums; some insurers face asset-liability mismatches and investment funds have increased holdings of foreign assets in search for yield, raising inward cross-border spillover risks.
- Intra-system interconnectedness is reinforced by capital market use for financing and risk management; securitization is used primarily for funding and covered bonds for market and ECB funding, and some banking groups operate universal banking models creating shadow banking activity within banking groups.
- Cross-border interconnectedness is substantial due to two internationally-active banks operating diversified retail banking via standalone subsidiaries; resilience could be tested by deteriorating macrofinancial conditions in key host countries.

### Recommendations and operational proposals
- The systemic risk surveillance framework should cover all important sources of systemic risks, with special attention to:
  - Real estate boom-bust cycles, requiring rigorous macrofinancial analysis of housing market dynamics, household and corporate balance sheets, credit cycles, and macro imbalances.
  - Inward spillovers through financial channels, monitoring sensitivity to global financial conditions given the large negative net IIP and overseas exposures of international banks.
  - Intra-system interconnectedness, requiring significant inter-agency efforts to monitor common exposures, cross-sectoral linkages, and market-based risk transmission.
- Conduct regular early warning exercises (suggested frequency: possibly twice a year) to assess overall financial stability, identify key risk factors, and set priorities for systemic risk surveillance.
  - Outputs could include a financial stability map depicting the evolution of multifaceted risks and vulnerabilities, and a risk assessment matrix listing key risk factors with assessed likelihood and impact.
  - The exercise should be guided by an early warning system that flags macrofinancial vulnerabilities or current financial stress, incorporate risk analysis from working groups, and focus on “connecting the dots” to capture macrofinancial linkages and interconnectedness.

*SPAIN — INTERNATIONAL MONETARY FUND*

### 19.      An inter-agency mechanism should be put in place to form a common view regarding

### 19.      An inter-agency mechanism should be put in place to form a common view regarding

### Inter-agency mechanism and interim arrangements
- Create inter-agency technical working groups led by relevant competent agencies to:
  - agree on surveillance frameworks,
  - co-develop necessary analytical tools,
  - jointly conduct systemic risk monitoring and assessment.
- Proposed topical working groups: (i) macrofinancial risks and vulnerabilities, (ii) financial market developments, (iii) banking system, (iv) nonbanks and shadow banking, and (v) interconnectedness.
- Interim approach: use technical working groups until the national macroprudential authority (still to be established) provides a platform to integrate systemic risk surveillance performed by individual agencies.
- Working groups could be created by a memorandum of understanding.

### Role and reorientation within BdE and other agencies
- BdE likely to bear a lion share of surveillance responsibility given:
  - comparative advantage in macrofinancial perspectives,
  - banking oversight responsibility.
- Within BdE:
  - A more integrated approach for conducting systemic risk monitoring and assessment is desirable, potentially led by the Directorate General Financial Stability, Regulation and Resolution (already in charge of macroprudential oversight).
  - Analytical focus of existing macrofinancial analysis should be re-oriented towards financial stability.
- Outside BdE:
  - Additional resources needed to expand DGSyFP’s technical capacity for systemic risk surveillance.
  - Scope for cooperation between BdE and CNMV in macroeconomic analysis and market monitoring.

### Technical capacity priorities for systemic risk monitoring and assessment
- Key priorities include:
  - Early warning system:
    - Two main parts: (a) identify macrofinancial vulnerabilities that could lead to a crisis in the next few years; (b) gauge the current stage of financial stress.
    - BdE’s analytical framework for calibrating the macroprudential policy stance (particularly, the CCB) provides a good starting point.
    - Framework could be expanded to capture:
      - (i) financial soundness of corporates, households, and the government,
      - (ii) macro imbalances and inwards spillovers,
      - (iii) leverage and liquidity of banks and nonbanks, as well as shadow banking activity.
    - BdE’s systemic risk indicator and CNMV’s financial market stress indicator already gauge current financial stress; additional indicators could capture joint stress of financial institutions.
    - Byproducts: inputs for a risk dashboard and a financial stability map.
  - Macroprudential stress testing:
    - Regular stress testing to identify systemic risk and assess resilience; supervisory actions need not be adopted automatically based on results.
    - Improvement needed in monitoring banks’ liquidity risk and medium-term funding challenges.
    - Extensions recommended to account for second-round effects, solvency-liquidity links, interbank contagion, and cross-sectoral interconnectedness.
    - Macrofinancial scenarios require a macro model that can generate global scenarios consistently for all key host countries given significant international banking operations.
    - Refine solvency stress testing for overseas subsidiary operations and conduct regular liquidity stress testing of major overseas subsidiaries that independently tap wholesale and/or foreign-currency funding.
  - Macrofinancial analysis:
    - Mortgage lending monitoring is critical as it forms the largest portfolio of banks’ lending.
    - Recommended analyses:
      - assess whether house prices are aligned with fundamentals to detect bubbles;
      - analyze loan-level information on loan-to-value (LTV) and debt service-to-income (DSTI), including sensitivity analysis with respect to household income, interest rates, and house prices for macroprudential calibration;
      - analyze firm-level balance sheets to monitor financially vulnerable companies (excessive leverage, low debt serving capacity, weak profitability), especially in construction and real estate sectors.

### Data gaps and information sharing
- Close data gaps and enhance inter-agency information sharing for systemic risk surveillance:
  - Broaden scope of existing coordination body (Comité de Estabilidad Financiera, CESFI) so more granular data can be shared for systemic risk analysis.
  - Ensure inter-agency working groups have access to necessary data.
  - Make fuller use of existing granular loan-level information and firm-level financial statements to identify vulnerabilities in household, corporate sectors, and mortgage lending.
  - Note: household-level detailed information is also available through the triennial Survey of Household Finances.

### Financial Stability Report as a communication tool
- Recommendations to make the Financial Stability Report a more effective instrument to warn the public about systemic risk:
  - Present (i) key macrofinancial vulnerabilities that could support a buildup of systemic risk, (ii) important risk factors, domestic and external, including their likelihood and interactions with vulnerabilities, and (iii) impact of identified risk factors if materialized, particularly on financial system resilience.
  - Include a brief discussion of policy actions to mitigate systemic risk.
  - Focus on system-wide trends but highlight within-system differences when pockets of weaknesses have systemic implications.

### Conduct of macroprudential policy — experiences and legal/operational context
- Historical measures:
  - Spain applied dynamic provisioning since 2000; general provisions peaked in early 2007.
  - Dynamic provisioning was phased out: BdE Circular 4/2016 adopted in May 2016; the dynamic provisioning requirement no longer existed as of October 2016.
- Current macroprudential powers and implementation:
  - BdE is the national designated authority for macroprudential powers regarding banking under CRD IV.
  - Since January 2016, BdE has set the CCB, which continues to be at zero.
  - BdE has designated six Spanish banks as other systemically important institutions (O-SIIs), one of which is a global systemically important institution (G-SII).
  - O-SIIs are subject to additional capital requirements in the range between 0.25 and 1 percent of risk-weighted assets, with a phased-in period until the beginning of 2019.
  - BdE view: maximum capital buffer for O-SIIs should not exceed relevant buffers for the Spanish G-SII; structural tools should account for the overall stance of cyclical measures when credit growth remains anemic.
- CNMV and DGSyFP roles:
  - CNMV sets the macroprudential capital buffer requirement for investment firms; CNMV has not explicitly set the CCB for investment firms; no Spanish investment firms are O-SIIs.
  - CNMV can introduce short selling bans under exceptional circumstances; bans were imposed in 2011–12.
  - DGSyFP contributes to identification of global systemically important insurers under FSB coordination.
- Toolkit limitations and legal basis:
  - The macroprudential toolkit for banking is essentially based on the CRR/CRD IV framework (Law 10/2014 and Royal Decree 84/2015 transposed CRD IV).
  - Toolkit primarily capital-related: countercyclical capital buffers, capital buffers for systemically important institutions, systemic risk buffers, sectoral capital requirements (e.g., risk weights and minimum LGD floors), Pillar 2 requirements, and leverage ratio. Liquidity measures LCR and NSFR are incorporated in the CRR.
  - Article 458 (the “flexibility package”) allows stricter prudential requirements on sectoral risk weights, liquidity measures, large exposures, interbank exposures, and public disclosure.
  - National legal basis for borrower-based tools (outright or proportional LTV, DSTI, or DTI limits) has not been developed.
    - Law 2/1981 (as amended by Law 41/2007) prescribes mortgage loan requirements for covered bond collateral pools but does not appear to restrict banks’ ability to provide mortgage lending with LTV ratios above those limits.
    - For residential mortgage loans, the limit on LTV ratio is 80 percent, which could be increased to 95 percent if there are guarantees on credit risk provided by other financial institutions. For commercial real estate mortgage loans, the limit on LTV ratio is 60 percent.
- Nonbank macroprudential tools:
  - CNMV’s legal basis (Law 10/2014 preamble and Consolidated Text of the Securities Market Law article 196) enables countercyclical capital buffers, O-SII buffers, and systemic risk buffers for investment firms.
  - CNMV can impose liquidity requirements, leverage and exposure limits, and restrictions on redemption on investment funds, as well as short selling bans (subject to EU consultation procedures).
  - Insurance sector: assets/liabilities matching requirement existed prior to Solvency II.
- BdE operational framework highlights:
  - Financial Stability and Macroprudential Policy Department (Directorate General Financial Stability, Regulation and Resolution) carries out financial stability analysis and calibrates macroprudential stance.
  - Systemic risk surveillance responsibilities shared across Directorate Generals: Economics, Statistics and Research; General Operations, Markets and Payment Systems; and contributions from Directorate General Banking Supervision.
  - BdE has developed a heat map of early warning indicators to guide calibration of the CCB in Spain.
  - Five important third-country jurisdictions are identified for close monitoring due to sizeable exposures of Spanish international banks.
  - Decision-making: Directorate General Financial Stability, Regulation and Resolution proposes macroprudential policy to BdE’s Executive Commission for deliberation and decision-making; Executive Commission can adjust policy stance in accordance with Law 13/1994 without issuing a BdE Circular.
  - Communication: BdE publishes decisions on the CCB and capital buffers for G-SII and O-SIIs via press statements and produces a Financial Stability Report.
  - Coordination: policy coordination occurs at the weekly Executive Commission; daily Operations Meeting chaired by the Governor enables informal information exchange. Regular discussion on financial stability is not part of the Executive Commission and Governing Council agendas, in contrast to macrofinancial updates.
- European notification and consultation requirements:
  - National authorities must notify relevant European institutions of intentions to implement macroprudential measures under CRR/CRD IV.
  - The ECB must be notified ten days in advance of intended measures; the ECB can object within five days with stated reasons, which national authorities shall duly consider prior to proceeding. Similar consultation applies when the ECB decides to impose more stringent measures.

*Italic: Based on the supplied IMF country report content.*

### 32.      CNMV is developing a framework to operationalize its macroprudential oversight.

### 32.      CNMV is developing a framework to operationalize its macroprudential oversight.

### CNMV: current work and operational design
- CNMV has carried out a significant amount of systemic risk surveillance, with some measures being taken to address identified financial stability concerns.
- CRR/CRD IV macroprudential tools have not been employed, and a framework to calibrate these tools remains to be developed.
- Within CNMV, Directorate General Policy and International Affairs leads monitoring of macrofinancial developments and analysis of market activity.
- CNMV has developed:
  - a risk dashboard that captures macroeconomic, credit, market, and liquidity risks; and
  - a financial market stress indicator.
- Macroprudential decisions are expected to be made by CNMV’s Board, with the decision-making responsibility potentially delegable to CNMV’s Executive Committee.
- Recommendation (paragraph 42): CNMV should develop an analytical framework to guide the implementation of prudential tools to address systemic risk, including fuller use of regulatory information in addition to market data.

### DGSyFP contribution
- DGSyFP has had a limited contribution to macroprudential oversight so far.
- Main contributions: EU-wide systemic risk monitoring and assessment, including participation in the stress testing exercise carried out by EIOPA.
- The macroprudential policy framework for insurance does not yet exist in Spain nor at the European level.

### BdE: assessment of past macroprudential conduct
- In the post-crisis period, BdE has conducted macroprudential policy appropriately to deal with systemic risk in the cyclical dimension.
- BdE relies on a wide range of indicators in addition to the credit-to-GDP gap for calibrating the CCB, which has been set at zero since January 2016, consistent with the credit cycle and the situation of system-wide leverage and liquidity.
- BdE considers costs and benefits when implementing macroprudential measures.
- Use of capital buffers for O-SIIs should address structural aspects of systemic risk, including interconnectedness and contagion.
- Observation: Capital buffers for Spanish O-SIIs appear generally lower than their European counterparts with similar systemic importance (i.e., O-SII score based on size, interconnectedness, substitutability, and complexity). (See Figure 3: "CCB is set at zero in Spain given the large negative credit gap." and "O-SII buffers for Spanish banks are generally lower compared with banks with similar O-SII scores.")

### Gaps in the macroprudential toolkit and risks from real estate
- Misaligned incentives that contributed to households’ excessive indebtedness and a strong real estate sector boom have been removed:
  - Since 2013, tax incentives—deductibility of interest expenses in the personal income tax regime and benefits associated with capital gains from property sales—have been eliminated.
  - Regulatory and governance frameworks for saving banks have been revamped, removing the influence of Autonomous Communities on channeling banks’ financing to regional infrastructure development projects.
- The existing macroprudential toolkit may not be sufficient to handle systemic risk Spain will likely face.
- Spain lacks a number of instruments typically regarded as macroprudential tools for banks (see Appendix III in source for more details).
- Many European countries have developed legal bases for borrower-based tools (limits on LTV, DSTI, and LTI ratios) and liquidity measures (limits on noncore funding) in national legislation.
- Given real estate boom-bust cycles, more effective tools to manage systemic risk related to real estate exposures are essential.
- The lengthy notification procedure at the European level for use of the “flexibility package” might complicate timely national action.

### Policy leakage and cross-border considerations
- Potential policy leakages appear limited, but vigilant monitoring is important.
- Domestically, financing to corporates and households can be provided by credit institutions, credit financial intermediaries, and investment firms, with different regulatory requirements.
  - Footnote: Credit financial intermediaries are non-deposit-taking institutions whose main businesses involve consumer financing, as well as leasing and factoring activities. Currently, their total assets amount to about 4 percent of domestic banking system assets.
  - Footnote: Investment firms, in principle, could invest in securities issued by corporates using own accounts. However, investment firms mostly perform the function of brokers and dealers.
- The CCB for credit institutions (set by BdE and the ECB) could be different from the CCB for investment firms (set by CNMV).
- Cross-border policy leakages have been limited by the subsidiary model of Spanish international banks.
- The mandatory reciprocity of CCBs under the Basel III framework will help limit regulatory arbitrage.

### BdE operational framework: strengths and areas for enhancement
- BdE has put in place an adequate framework to operationalize macroprudential oversight under its remit, but the system has not been fully tested.
- Despite the lack of a well-specified mandate (objectives and functions), BdE’s implementation of macroprudential policy appears broadly in line with best international practice.
- BdE’s financial stability analysis has focused mainly on the banking system, partly due to lack of a broader financial stability mandate.
- Additional efforts are needed to expand macroprudential surveillance to cover macrofinancial linkages and intra-system interconnectedness.
- Recommendations to enhance BdE’s operational framework (paragraphs 39–41):
  - BdE should be given a broader financial stability mandate to raise prominence of financial stability surveillance and underpin BdE’s role in conducting systemic risk monitoring and assessment to support the proposed Systemic Risk Council.
  - Develop a more integrated approach for systemic risk surveillance, including macrofinancial analysis on financial soundness of corporates, households, and the sovereign, and on the real estate and mortgage markets, as well as monitoring of financial markets and payment systems; focus should include intra-system interconnectedness surrounding the banking system.
  - Make the Financial Stability and Macroprudential Policy Department an anchor body to lead and coordinate systemic risk surveillance within BdE; its staff could co-produce surveillance output with other Directorate Generals, and an efficiency assessment of the organizational arrangement could be undertaken over time.
  - Establish an internal financial stability committee within BdE, potentially chaired by the Governor and comprising all relevant Directorate Generals, to discuss financial stability issues, contemplate policy options, and advise BdE’s policymaking body on macroprudential measures.
  - Decision-making could benefit from external views: regular updates on financial stability issues could be part of Governing Council and Executive Commission agendas; consider amending Law 13/1994 so macroprudential policy decisions under BdE’s remit are deliberated at the Governing Council, enabling BdE to account for views of CNMV and the Treasury when performing macroprudential oversight. (Note: views of the insurance authority should also be recognized; DGSyFP’s current placement within the MoE is not conducive for representation in BdE’s Governing Council.)

### Institutional arrangement: current setup and assessment
- EU framework context:
  - The macroprudential policy framework in the EU is shaped by CRR and CRD IV, prescribing the macroprudential toolkit.
  - EBA and ESRB have developed methodological guidelines for systemic risk monitoring, calibration of macroprudential tools, and identification of O-SIIs; ESRB issued recommendations on setting up a national macroprudential authority.
- Spain’s situation:
  - Banking is dominant; BdE exercises macroprudential powers regarding banking under CRR/CRD IV as the national competent and designated authority.
  - CNMV has broadly similar macroprudential powers regarding investment firms.
  - Spain has not set up a national macroprudential authority and thus lacks a body responsible for overseeing financial stability for the entire system.
- The macroprudential policy framework envisages shared responsibilities between national authorities and European institutions, with national authorities bearing primary responsibility. Key features include:
  - ESRB as the main coordination platform with EBA, EIOPA, and ESMA input; ESRB can make "comply-or-explain" recommendations to national authorities and European bodies.
  - ECB as bank supervisor in the banking union with “topping-up” power; use of macroprudential tools is subject to notification and consultation with the ECB.
  - The “flexibility package” under article 458 of the CRR involves an extensive notification process and tacit approval by the European Council.
  - National authorities retain primary responsibility and can develop additional macroprudential tools not prescribed in CRR/CRD IV in national legislation.
- CESFI (coordination body) details:
  - Established in 2006 to promote inter-agency collaboration on financial stability and crisis management.
  - Chaired by the State Secretary for Economy and Business support of the MoE; comprises the Vice Governor of BdE, the Vice Chair of CNMV, and the Director General of DGSyFP.
  - Supposed to meet at least twice a year and as needed, but there have been no meetings since 2013.
  - Key functions: exchange information among agencies on financial stability matters; strengthen crisis preparedness including contingency plans, crisis simulation and stress testing exercises; coordinate management of a financial crisis with potentially systemic impact.
- Assessment (paragraph 46):
  - Current institutional arrangement enables BdE to conduct macroprudential policy adequately for banks but should be strengthened to better detect and mitigate systemic risk across the system.
  - Challenges:
    - Ability to act: constrained by inadequate macroprudential toolkit and potential constraints on information sharing.
    - Willingness to act: should be bolstered by strengthening BdE’s financial stability mandate and establishing appropriate governance and accountability.
    - Inter-agency coordination: needs enhancement to overcome lack of system-wide perspective.
  - Ability to act (paragraph 47): Lack of effective macroprudential tools, particularly for real estate risks, is a major challenge.
    - Spain should develop a legal basis for applying additional macroprudential tools in national legislation.
    - Advantage for rule-making power to be assigned to relevant sectoral authorities—tools involving banking activity (e.g., limits on LTV, DSTI and DTI) should be given to BdE.
    - Ultimate policymaking for certain tools could be assigned to a different body better informed to make such decisions.

*Source: IMF staff assessment in the referenced PDF chapter.*

### 48.      The potential constraint on sharing information to perform systemic risk assessment

### 48.      The potential constraint on sharing information to perform systemic risk assessment

### Information-sharing constraint and legal framework
- The current legal framework underpins information sharing between the competent authorities essential for fulfilling the assigned functions.
- No agencies are explicitly tasked with the systemic risk surveillance responsibility, and the scope of such surveillance is not well-defined.
- Recommendation: Clarify the existing legal basis so that necessary data can be shared in carrying out systemic risk monitoring and analysis, in addition to performing well-understood assigned duties such as conglomerate supervision.
- Recommendation: Extend the information sharing arrangement to the proposed Systemic Risk Council and its secretariat.

### Willingness to act and BdE mandate (paragraphs 49–51)
- BdE should be given a broader financial stability mandate to underpin its macroprudential oversight function.
- Rationale:
  - Macroprudential policy should be aimed at mitigating systemic risk to safeguard financial stability.
  - A broader financial stability mandate would reorient BdE’s focus to carry out macrofinancial analysis to guide the calibration of macroprudential policy (currently primarily for supporting the macroeconomic policy agenda).
  - A clear mandate is important given BdE’s multiple responsibilities (prudential and conduct oversight for banks) that may give rise to conflicts of interest.
- Caveat: The mandate should be assigned together with a more robust accountability framework.
- CNMV and DGSyFP mandate changes:
  - CNMV’s main objective: ensure transparency of activities and protection of investors in the securities market; supervise market activity, conduct market surveillance, promote disclosure.
  - DGSyFP’s main objective: supervise insurance companies to protect rights of policyholders, insured persons and beneficiaries and to promote the development of insurance business.
  - Recommendation: When performing supervisory functions, DGSyFP should also give some consideration to financial stability.

### Inter-agency coordination and institutional architecture (paragraphs 52–53)
- Financial sector oversight in Spain is largely sectoral and divided among three agencies:
  - BdE: responsibility for the banking sector.
  - DGSyFP: oversees insurance and pension fund business.
  - CNMV: capital markets regulator.
- Each agency has wide-ranging responsibilities from prudential and conduct oversight to consumer protection and accounting rules; supervisory agencies also share some resolution responsibilities with FROB.
- An inter-agency coordination platform exists in the form of CESFI, but no meetings have been held in the post-crisis period.
- Spain has not yet established a macroprudential authority to bring a system-wide perspective to monitoring, assessment and mitigation of systemic risk, notwithstanding the ESRB recommendation in November 2011.
- Monitoring and assessment of systemic risk continue to be carried out largely along sectoral lines by BdE, CNMV and DGSyFP.
- There is no overarching framework that integrates analyses and formulates policy actions to address emerging systemic threats in Spain.

### Key recommendations — Establish a Systemic Risk Council (paragraph 54)
- Purpose: Establish a Systemic Risk Council to underpin the overarching framework for maintaining financial stability; ideally set up in legislation to enhance inter-agency coordination on systemic risk surveillance and prudential policies.
- Mandate:
  - Ultimate objective: safeguard the stability of the entire financial system.
  - Role: act as the macroprudential authority, responsible for monitoring and assessing systemic risk and mitigating the financial system’s exposure to emerging risks and enhancing resilience to shocks.
- Membership:
  - Core membership: heads of BdE, CNMV, and DGSyFP, plus the General Secretary of the Treasury.
  - Participation of the Treasury is important due to possible need for legislative change.
  - Once established, FROB and FGD may participate on an as-needed basis, subject to governance arrangements.
- Structure:
  - Chair: BdE Governor (member of the General Board of the ESRB, with full voting rights).
  - Secretariat: could be housed at BdE to leverage analytical capacity; other member agencies should participate; secretariat should coopt experts as needed and directly report to the Council.
- Powers:
  - The Council would not have regulatory powers in its own right but would be authorized to issue statements ranging from observations, to warnings, and, where appropriate, to recommendations.
  - Statements should summarize the main discussion of Council meetings, which should take place regularly.
  - Definitions:
    - Observation: Council’s assessment that the risk of unfavorable systemic developments may be rising.
    - Warning: Council’s identification of a clear buildup of systemic risk that should be mitigated.
    - Recommendation: Council’s proposal to financial sector authorities and/or government bodies for policy action that could counter identified systemic risk.
  - Meeting frequency: Given the need to calibrate the CCB every quarter, there is a merit for the Council to meet at least once in each quarter. Additional meetings can be held as needed.
- Accountability:
  - The Council should be held accountable to Parliament, including submission of its flagship report.
  - Over time, this report could become a single authoritative commentary on financial stability in Spain, signed off by all participating members.
  - Recommendations should be made on a “comply-or-explain” basis: the recommendations must be implemented (comply) or the relevant party must explain why they are not being implemented (explain). This mechanism bolsters accountability while preserving agency autonomy.

### Mandates, powers and data sharing (paragraph 55)
- Amend the mandate of individual financial oversight authorities to support macroprudential oversight under the leadership of the Systemic Risk Council.
- As the European macroprudential policy framework evolves, Spain may need to designate relevant agencies (BdE, CNMV, DGSyFP) to exercise additional powers.
- Objective for additional functions: safeguard financial stability.
- Additional macroprudential tools (national legislation or European framework) should be given to relevant sectoral oversight authorities to ensure effective enforcement and communication.
- Repeat recommendation: Clarify the existing legal basis so that necessary data can be shared among relevant agencies to perform systemic risk monitoring and analysis.

### Operational recommendations from Appendix I (overview of monitoring and assessment)
- Macrofinancial analysis (BdE, MoE, CNMV):
  - Extend corporate sector assessment using the debt-at-risk approach and monitor large corporates whose defaults may affect financial stability.
  - Extend household sector assessment using the debt-at-risk approach and utilize loan-level information to monitor multiple-loans borrowers.
  - Utilize loan-level information to monitor mortgage lending risks (high LTV, DSTI, or LTI).
  - Further analyze mortgage-related debt burden with respect to household income, interest rates, and house prices; extend house price monitoring to the regional level.
  - Use market-based information to infer market perception about sovereign financial soundness and analyze banking-sovereign linkages, including fiscal contingencies associated with the financial system.
  - Develop and adjust a heat map to guide calibration of the macroprudential policy stance (particularly, the CCB); ensure indicators capture intensity rather than instability.
  - Augment analysis of Spanish banks’ overseas operations and develop capacity to design global scenarios for stress testing.
- Monitoring of financial market developments (BdE, CNMV, Treasury):
  - Develop a systemic risk indicator (BdE) and a financial market stress indicator (CNMV).
  - Analyze market activity in detail (equity, fixed-income, key market participants) and analyze government bond market activity.
  - Use regulatory information in addition to market data; analyze how CNMV’s prudential tools could mitigate market-related systemic risk.
- Assessment and stress testing (BdE, DGSyFP, CNMV):
  - Conduct macroprudential stress tests to guide policy.
  - Strengthen stress testing frameworks to incorporate second-round effects, solvency-liquidity links, interbank contagion, and cross-sectoral interconnectedness.
  - Increase sophistication of stress testing for overseas subsidiary operations and refine liquidity stress testing, including necessary data collection.
  - Develop stress testing capacity for insurers and for investment firms/funds to assess operational and liquidity risks and to validate bottom-up results.
- Interconnectedness and joint stress analysis:
  - Continue regular monitoring of cross-sectoral claims and common exposures; identify key contagion channels.
  - Use supervisory insight to better understand risk transmissions within financial conglomerates.
  - Develop the CoVAR model and a framework for analyzing joint stress of financial institutions.
- Holistic views and early warning:
  - Expand a partial early warning system to capture corporate, household, and government financial soundness; macro imbalances and inward spillovers; leverage and liquidity of banks and nonbanks; and shadow banking activity.
  - Develop a comprehensive financial stability map, heat map, and a risk assessment matrix.

### Macroprudential toolkit (Appendix II) — legal bases and notification procedures
- Tools for credit institutions under responsibility of BdE and the ECB; for CRR tools under article 458, BdE is the competent authority until creation of the national macroprudential authority (Royal Decree 84/2015: first transitional provision).
- Examples of tools and legal references:
  - Countercyclical capital buffer (CCB): CRD: 130,135-140; Law 10/2014: 45.
  - Capital buffers for G-SIIs: CRD: 131; Law 10/2014: 46.
  - Capital buffers for O-SIIs: CRD: 131; Law 10/2014: 46.
  - Systemic risk buffers: CRD: 133-134; Law 10/2014: 47.
  - Pillar 2 liquidity requirements: CRD: 105; Law 10/2014: 42.
  - CRR: 458 “flexibility package”.
- Notification and comment procedures:
  - For systemic risk buffers up to 3 percent, notify the EBA, the EC, the ESRB, and other member states one month in advance.
  - For buffers between 3 and 5 percent, need an affirmative recommendation from the EC; if the EC recommendation is negative, can proceed after providing a justification to the EC.
  - Regarding notification to the ECB: notify the ECB ten working days in advance; if the ECB objects, it shall state its reasons within five working days; the member state shall duly consider the ECB’s reasons prior to implementing the measure. The ECB can exercise “topping-up” powers.
- Tools for certain investment firms are under CNMV responsibility (Law 24/1988: 196 as referenced), with similar procedural arrangements where applicable and notes where specific tools are not applicable (e.g., investment firms banned from holding real estate exposures).

*IMF staff summary of cr17336 - 48.      The potential constraint on sharing information to perform systemic risk assessment*

### Appendix III. Availability of Typical Macroprudential Tools for

### Appendix III. Availability of Typical Macroprudential Tools for Banks in Spain

### Tools dealing with broad-based credit risk
- Countercyclical capital buffer (CCB): √
- Leverage ratio: √
  - The 3 percent minimum requirement to become binding from 2018
- Dynamic/general provisioning requirement: ઌ
  - No longer available as of [October 2016]
- Limit on growth of overall credit: ઌ

### Tools dealing with credit risk from the household sector
- Sectoral capital requirement: √
  - In the form of higher risk weights, stricter lending criteria and higher LGD floors for real estate exposures
- Sectoral provisioning requirement: ઌ
- Limit on growth of certain credit: ઌ
- Limit on LTV, DSTI, or DTI ratios: ઌ
- Amortization requirement: ઌ

### Tools dealing with credit risk from the corporate sector
- Sectoral capital requirement: √
  - In the form of higher risk weights, stricter lending criteria and higher LGD floors for real estate exposures
- Sectoral provisioning requirement: ઌ
- Limit on growth of certain credit: ઌ
- Limit on LTV or debt service coverage ratios: ઌ

### Tools dealing with liquidity risk
- Liquidity buffer requirement: √
  - In the form of the liquidity coverage ratio (LCR) requirement
  - To ensure adequate holding of liquid assets to cover potential funding outflows
- Stable funding requirement: √
  - The legal basis for the net stable funding ratio (NSFR) requirement already provided by the CRR
  - To ensure adequate use of stable liabilities to fund illiquid assets (e.g., limit on loan-to-deposit ratio)
- Liquidity levy: √
  - Potentially, in the form of Pillar II liquidity requirement
  - To reduce reliance on non-core funding (potentially differentiated by maturity, currency and source)
- Reserve requirement: ઌ
  - To reduce reliance on some funding types such as nonresident or foreign-currency funding
- Limit on open foreign-exchange position: ઌ
  - To contain foreign exchange risk
- Outright limit on foreign-currency funding: ઌ
  - To reduce reliance on certain foreign-currency funding

### Tools dealing with structural risk
- Capital buffers for systemically important institutions: √
  - Existing capital buffers for both G-SII and O-SIIs
- Higher loss absorbency requirement: √
  - In the form of systemic risk buffers
- Limit on certain exposures: √
  - In the form of limit on large exposures
  - To limit concentration risk, which may involve large exposures of a particular lender
- Structural limit on certain activities: ઌ

*Source: cr17336 - Appendix III. Availability of Typical Macroprudential Tools for Banks in Spain*

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### Appendix IV. Assessment of BdE’s Macroprudential Oversight Framework Based on the ESRB Recommendations

- Scope: Assessment specific to BdE’s macroprudential oversight remit as the national designated and competent authority for exercising powers related to the CRR/CRD IV.

- Summary of criteria and assessments:
  - A.1. A broad definition of macroprudential objectives encompassing both structural and cyclical elements is adopted.
    - ESRB assessment: Partially compliant
    - FSAP assessment: Although a formal definition has not been adopted, the conduct of macroprudential policy is appropriately tackling cyclical and structural elements of systemic risk.
  - A.2. Macroprudential policy is initiated by the macroprudential authority or follows up ESRB recommendations.
    - ESRB assessment: Partially compliant
    - FSAP assessment: BdE has implemented some macroprudential measures and actively adopted ESRB recommendations.
  - B.1. A single macroprudential authority is designated and a clear decision-making process is established.
    - ESRB assessment: Partially compliant
    - FSAP assessment: BdE is the national designated and competent authority regarding banking in Spain, with the ECB possessing the “topping-up” power.
  - B.2. Coordination mechanisms among relevant national bodies having a material impact on financial stability is established.
    - ESRB assessment: Inaction insufficiently explained
    - FSAP assessment: A national macroprudential authority, which would help anchor inter-agency coordination, has not been established.
  - B.3. The central bank plays a leading role in macroprudential policy.
    - ESRB assessment: Materially non-compliant
    - FSAP assessment: BdE is the national designated and competent authority.
  - B.4. The macroprudential authority cooperates with authorities in other countries, particularly the ESRB.
    - ESRB assessment: Non-compliant
    - FSAP assessment: BdE actively participates in the ESRB.
  - C.1. The Macroprudential authority is entrusted with a detailed minimum list of tasks.
    - ESRB assessment: Partially compliant
    - FSAP assessment: The institutional framework has not been fully developed. BdE does not have an explicit financial stability objective.
  - C.2. The macroprudential authority has timely access to all relevant national data and information, including from micro-supervisory authorities, and can share such material.
    - ESRB assessment: Partially compliant
    - FSAP assessment: BdE, as the bank supervisor, has full access to supervisory data of banks.
  - C.3. The macroprudential authority participates directly or indirectly in the identification of systemically important financial institutions.
    - ESRB assessment: Partially compliant
    - FSAP assessment: BdE has designated six O-SIIs.
  - C.4. The macroprudential authority has control over appropriate macroprudential instruments.
    - ESRB assessment: Materially non-compliant
    - FSAP assessment: BdE has all macroprudential tools in the CRR/CRD IV. The legal basis for the use of borrower-based tools has not been developed.
  - D.1. Macroprudential decisions and policy strategies should be widely publicized.
    - ESRB assessment: Materially non-compliant
    - FSAP assessment: BdE has published all macroprudential policy decisions.
  - D.2. The macroprudential authority has the power to make public and private statements on systemic risks.
    - ESRB assessment: Partially compliant
    - FSAP assessment: BdE’s Financial Stability Report could be used to more proactively express financial stability concerns.
  - D.3. The macroprudential authority is ultimately accountable to the legislature.
    - ESRB assessment: Partially compliant
    - FSAP assessment: BdE is not accountable to the legislature regarding its systemic risk oversight.
  - D.4. The macroprudential authority and its staff are legally protected when acting in good faith.
    - ESRB assessment: Fully compliant
  - E.1. The macroprudential authority is operationally independent, particularly with respect to political bodies.
    - ESRB assessment: Fully compliant
  - E.2. Financial arrangements do not jeopardize the conduct of macroprudential policy.
    - ESRB assessment: Fully compliant

*Source: cr17336 - Appendix IV. Assessment of BdE’s Macroprudential Oversight Framework Based on the ESRB Recommendations*

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### Appendix V. Functions and Powers of the ECB and the ESRB Regarding Macroprudential Oversight

- Mandate scope:
  - ECB: Macroprudential mandate covers the banking sector in countries that participate in the SSM.
  - ESRB: Scope comprises the financial system as a whole, including financial markets and nonbanks, for the entire EU.

- Powers and interactions:
  - The ECB has the “topping-up” power over the set of macroprudential tools available in the CRR/CRD IV; the ESRB can only make recommendations.
  - For SSM countries:
    - Competency for macroprudential policy regarding banking is shared between national authorities and the ECB.
    - The SSM Regulation confers to the ECB specific powers over macroprudential tools for banks under the CRR/CRD IV.
    - For tools such as the CCB, the ECB must be notified in advance and can apply more stringent measures than those applied by national authorities (“topping-up” power).
    - The ECB can relax the more stringent measures set by it, but cannot impose less stringent requirements than those set nationally.
    - For macroprudential tools not part of the CRR/CRD IV (e.g., limits to LTV, DSTI, or LTI ratios), the ECB can suggest national authorities implement these measures, and national authorities are obliged to fully inform the ECB about the use of macroprudential tools developed in national legislation.
  - ECB internal governance (summary):
    - The Governing Council is the ultimate decision-making body.
    - The Governing Council decides on macroprudential measures based on a proposal by the Supervisory Board.
    - The Supervisory Board formulates decisions based on the initiative and analytical input of the Financial Stability Committee and the Macroprudential Coordination Group.
    - The Financial Stability Committee brings together high-level representatives of national authorities to establish a common ground in macroprudential policy across the SSM countries.
  - ESRB:
    - Tasked with monitoring and identifying systemic risk in the EU financial system, but has no direct powers to impose specific measures.
    - Can issue non-binding warnings and recommendations on a “comply-or-explain” basis to: the EU as a whole; one or more Member States; and one or more of the European and/or national supervisory agencies, including the ECB in its supervisory role.
    - According to the CRR, the ESRB would be required to issue opinions on specific measures in the “flexibility package” (under article 458) upon a notification by national authorities; such specific measures would be ultimately subject to approval from the European Council.
  - Cooperation:
    - The ECB cooperates closely with the ESRB by coordinating the macroprudential agenda and work plans, aiming to ensure spillovers across sectors and between SSM and non-SSM countries are duly considered.
    - The ECB also provides administrative and logistics support to the ESRB Secretariat.

*Source: cr17336 - Appendix V. Functions and Powers of the ECB and the ESRB Regarding Macroprudential Oversight*

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_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17336.pdf_