## EXECUTIVE SUMMARY ## Source details **Canonical URL:** [EXECUTIVE SUMMARY](https://www.imf.org/-/media/files/publications/cr/2017/cr17345.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2017/cr17345.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2017/cr17345.pdf.json) --- ### INTRODUCTION - Banking regulation and supervision of Spanish banks has improved considerably since the 2012 FSAP. - Drivers of progress: - Authorities’ commitment to implement measures agreed at the time of the 2012 program for restructuring and recapitalization of the banking system. - National transposition and implementation of European Union (EU) directives and regulations. - Establishment in 2014 of the Single Supervisory Mechanism (SSM), to which Banco de España (BdE) participates as a national competent authority (NCA). - Spain’s participation in the SSM reinforced post-crisis supervisory progress by enabling: - More insightful peer comparison and supervisory analysis of significant Spanish banks. - The SSM’s structured methodologies and procedures, emphasizing governance, internal controls, and senior-level dialogue with banks. - BdE’s role within the SSM: - Demonstrated strong commitment; many experienced staff move to the ECB for senior roles. - Participation in Joint Supervisory Teams (JSTs) and direct supervision of Less Significant Institutions (LSIs). - Maintains a solid supervisory tradition: off-site reviews, intensive onsite inspections, and emphasis on asset classification and provisioning. ### MAIN FINDINGS - Institutional and independence issues - Residual national powers remain (example: authorization of bank mergers falls under the Ministry of Economy, Industry and Competitiveness (MdE) with mandatory opinions from BdE and others). - Recommendation that merger decision-making ensure prudential and supervisory concerns are not subordinated to non-economic considerations. - BdE could be granted broader autonomy—through appropriate legislative mandate—on updating prudential regulations in areas not yet harmonized at the EU or SSM level, compatible with the Spanish constitutional framework. - National legislation should grant BdE full and unencumbered operational independence with respect to its supervisory function, in line with its independence as a central bank. - Appeals against BdE decisions are currently decided by the MdE; this has potential for government interference. - Credit risk, asset classification, and provisioning - Actions to address misclassification and under-provisioning have shown very good progress, but vigilance must remain. - Reviews of onsite inspection and SREP reports show NPL levels remain high. - Supervisory vigilance should continue on assessment of forborne loan classification and collateral valuations, and by increasing bank boards' attention to these areas. - Promotion of supervisory tools based on appraisers’ valuation is recommended to support en masse offsite supervisory analysis of credit risk. - Circular 4/2016, Annex IX (October 2016) revises asset classification and provisioning (four grades; internal methods allowed; alternative specific percentages when robust internal methods are not available). - Corporate governance and related-party issues - Governance practices improved since 2012, with SSM increasing focus on governance and internal controls. - Governance remains a work in progress, particularly for LSIs: suitability of board members and their knowledge and skills (internal audit and IT matters) need improvement. - Related-party requirements need to be extended to all significant stakeholders and their interests. - Supervision of LSIs - LSIs are subject to a lighter touch with limited direct interaction with BdE; no mandatory meetings are envisaged in minimum engagement levels (MEL) for LSIs under simplified monitoring. - Proportionality may be justified for smaller, less complex banks, but prudential and oversight vigilance must be maintained. - BdE’s decision to contain the gap between on-site inspection cycles (traditionally no longer than three years; possibility to extend to four) is seen as positive. - Reporting obligations and emerging risks - No general obligation exists for banks to communicate material changes or adverse developments to supervisors; legal requirements exist only for certain circumstances (e.g., acquisitions or own funds deficits). - With rising non-traditional risks (fintech, conduct, cyber), swift communication with supervisors is paramount. - An SSM initiative requiring banks to inform supervisors of any cyber incident is now in place for SIs; transposition of the Directive on Networks and Information Systems will make CERT reporting mandatory for critical infrastructures before May 2018. - Recommendation: introduce a general obligation in legislation for banks to communicate material changes and adverse developments. - Consumer protection and conduct risks - Retail orientation of Spanish banks makes consumer protection and market conduct significant supervisory focus areas; these risks could spill over into the prudential realm. - Incidents involving placement of preference shares, floor clauses, and mortgage fees create financial, prudential, and reputational risks. - Recent legal reforms foster consumer protection; ECB and BdE closely monitor banks’ preparedness for impacts of ‘floor clause’ liabilities. - Credit cooperative sector (LSI subsector) - Sector remains fragmented and is long overdue for fundamental reform. - Challenges: relatively higher operating costs, limited opportunities to change business models, and special ownership structure. - Main reform goal: increase resilience via higher mutualization of losses and/or ability to raise capital in the market. - Government initiative to incentivize higher mutualization of losses is welcome; if industry-driven reform fails, authorities should consider compulsory schemes. - Performance and financial statistics (end-December 2016 unless otherwise stated): - NPLs in cooperative sector: 8.7 percent (6.1 percent for all banks). - NPLs at end-December 2015: 10.2 percent (6.6 percent for all banks). - Residential mortgages NPLs: 5.4 percent. - All other loans NPLs: 11.7 percent (down from 14.5 percent in 2015). - Foreclosed assets: EUR 5.0 billion (EUR 79.3 billion for all banks). - Coverage ratio (bad debt provisions to total NPLs): 55.2 percent at end-December 2016 (down from 60.4 percent). - Net income 2016: EUR 457 million (EUR 443 million in 2015). - Return on equity 2016: 4.3 percent (4.4 percent for all banks). - Total capital: EUR 15 billion of which 94 percent was in the form of Tier 1. - Regulatory capital as a percentage of risk weighted assets: 15.1 percent (14.8 percent for all banks); 2015: 14.2 percent (14.5 percent for all banks). ### SUPERVISORY FRAMEWORK, SSM, AND BdE ORGANIZATION - SSM mandate and ECB role - Objective: contribute to the safety and soundness of the European banking system and the stability of the financial system within the union and each member state, and ensure effective and consistent supervision across the EA. - ECB responsibilities: establish common approach, directly supervise Significant Institutions (SIs), oversight for LSIs, provide views on draft material supervisory decisions on certain LSIs. - Supervisory Board (SB) proposes draft decisions for adoption by the Governing Council (GC) under a non-objection procedure (maximum 10 days). - Joint Supervisory Teams (JSTs) and DGs - JSTs led by an ECB Coordinator; composed of ECB and NCA staff; ECB responsible for size and composition. - ECB DGs: DG-MS1 and DG-MS2 (JSTs), DG-MS3 (oversight of LSIs), DG-MS4 (horizontal functions). - Definition note: Banks with total assets above EUR 500 million may be designated HPLSIs according to RAS score and impact criteria. - BdE adaptation and internal organization - Some 80 BdE staff moved to ECB supervisory roles (including senior positions). - Internal reorganization to mirror ECB: “Inspección I”, “Inspección II”, “Inspección III”, “Inspección IV”, Planning and Analysis, and a unit for technical coordination with the SSM. - Collaboration between ECB and BdE considered productive and functioning well. - BdE powers and residual limitations - Governing legislation: Law 13/1994 (LABE), Law 10/2014 (LOSS), Circular 2/2014, Royal Decree 84/2015 and Circular 2/2016 implementing CRD IV/CRR. - BdE is the sole NCA for prudential regulation and supervision of depository institutions in Spain, but MdE retains responsibility for authorizing mergers and some CC.AA. retain corporate governance powers over cooperatives. - BdE lacks a general effective power to promulgate prudential rules directly by law; often relies on Circulars and delegated powers. - Accounting powers: Circular 4/2004 (art. 84 LOSS) confers standard-setting powers on BdE; divergence with IFRS noted for goodwill amortization (linear amortization vs. IFRS deterioration test). - Sanctioning powers transferred to BdE and ECB where applicable; Article 89 of Law 10/2014 establishes BdE’s sanctioning powers scope. - Resources and staffing - Theoretical headcount for Directorate General for supervision about 500; current understaffing about 20 people. - Recruitment increased from 12–15 inspectors per year to around 25; around 100 analysts hired on fixed-term contracts in last two years. - Traditional recruitment process spans approximately six months plus a 10-month ‘master’ course; time-to-productivity ~18 months. - Ethics Code and cooling-off rules in place (various cooling-off periods depending on role, e.g., one year for managers/officers involved in supervisory tasks of a bank in previous six months). ### SUPERVISORY TOOLS, DATA, AND INSPECTIONS - Central credit register (CIR) - Mandatory reporting by banks of all transactions; monthly data including detailed collateral information and breakdowns. - Supports en masse supervisory analysis and comparison of classification across banks. - Valuations Analysis Tool for appraisal companies - Developed to guarantee consistency of collateral valuations; identifies outliers, ranks appraisal companies, cross-references banks requesting appraisals; leaving pilot phase and being improved. - Inspections on credit risk - BdE onsite focus: accounting review, asset classification, collateral valuations, provisioning. - Typical process includes dataset review, sample credit file analysis, recommendations on classification and provisioning shortfalls. - Role of Credit Quality Reviews (CQRs) and transaction testing emphasized. - Observed heterogeneity in SSM onsite inspections; ECB working to refine SSM manual and produce common methodology for credit file analysis. ### CAPITAL, MODELS, AND TRIM - Capital quality and adequacy - Average Tier 1 and Total capital ratios at end 2016: 13.1 and 14.8 percent, respectively (EU average: 15.5 and 18.5). - DTAs phase-in per CRR can be extended until 2024; ECB opted to bring end of phase-in to 2019 for SIs and expressed orientation to align LSIs to 2019. - Spanish 2013 Corporate Income Tax amendment created deferred tax credits (DTCs) for certain DTAs with specific reversal/exchange rules. - Gap between transitional and fully-loaded CET1 ratios average 1.5 percent among Spanish SIs (range 0 to 4 percent). - Internal models and TRIM - Seven SIs and two subsidiaries use approved IRB models for some asset classes. - TRIM launched late 2015 to verify IRB and market risk models and harmonize interpretations; 2017 includes around 100 bank-specific missions and further missions scheduled for 2018. - TRIM aims to reduce unwarranted variability in model outputs and improve comparability. ### RISK CATEGORIES AND SUPERVISORY PRIORITIES - Credit concentration - Banks required to have a concise definition covering exposures to counterparties, groups of connected counterparties, sectors, geographic concentrations, commodities/currencies, and large indirect credit exposures. - Interest Rate Risk (IRRBB) - Monitored as part of RAS; supervisors check EV change under a 200 bps shock against an outlier rule (EV decline > 20 percent of regulatory capital). - ECB 2017 supervisory stress test on IRRBB covers 112 SIs and six scenarios including +/- 200 bps shocks. - Liquidity and funding - Supervisors assess liquidity under normal and stressed conditions; metrics include LCR, loan-to-deposit ratio, share of wholesale funding, survival period. - FLESB tool used to cross check LSI liquidity stress tests; BdE invites LSIs to conduct periodic liquidity stress tests using in-house FLESB. - Spanish banks rely substantially on wholesale and ECB funding; TLTROII uptake ~25 percent of total. - Corporate governance and related parties - CRD IV transposition and EBA Guidelines strengthened governance expectations; persistent weaknesses remain (particularly in cooperatives) including board skill gaps, weak internal audit, inadequate documentation. - Related-party rules apply to directors/senior management; extension to major shareholders and their interests recommended. ### ENFORCEMENT, SANCTIONS, AND AML/CFT - Enforcement and sanctioning powers - BdE can issue requirements and recommendations; has broad corrective and sanctioning powers for LSIs; ECB competent for pecuniary sanctions on SIs since November 2014. - Fining regime (introduced 2014) for legal persons includes fines based on gains, percent of turnover (0,5 percent to 10 percent), or between EUR 100,000 and EUR 10 million; fines up to EUR 5 million for responsible directors/executives. - In past three years BdE imposed one fine of EUR 150,000 for a consumer protection infringement in a credit cooperative; no monetary fines for prudential rule infringements reported. - Administrative appeals - MdE is the appeals body for administrative appeals against BdE decisions, including sanctions and negative authorizations. - AML/CFT - Commission for the Prevention of Money Laundering chaired by Deputy Minister of Finance; SEPBLAC acts as FIU and executive service. - BdE and SEPBLAC coordinate; BdE may carry out AML/CFT inspections per MoU (2013). - Onsite AML/CFT inspections counts: - BdE (SIs only): 12 in 2013, 6 in 2014, 4 in 2015, 2 in 2016; four inspections planned for 2017 (some involving LSIs). - SEPBLAC (SIs and LSIs): 4 in 2013, 23 in 2014, 22 in 2015, 13 in 2016. - FATF 2014 assessment: Spain largely compliant with most recommendations; strengths include strong FIU and coordination; weaknesses mainly outside banking sector. ### BOX: Banks’ Mortgage Floor Clauses — assessment and supervisory actions - Background and legal developments: - 2013 Spanish Supreme Court ruled against some floor clauses (no retroactivity); December 2016 ECJ ruled limitation on retroactivity incompatible with EU law. - January 2017 Royal Decree-Law established out-of-court settlement procedure for customer claims. - Supervisory and accounting treatment: - Banks must provision against potential redress based on best estimate under IFRS and national GAAPs. - JSTs and BdE collected detailed information, requested worst case and best estimates, engaged auditors, monitored quarterly evolution of claims. - BdE analysis concluded that in the worst scenario only two LSIs would fail to comply with their overall requirement (Pillar 1 + Pillar 2 + CCB buffer) as of December 2016. - Transposition of the EU Mortgage Credit Directive and Spanish provisions will enhance mortgage contract transparency and pre-contractual disclosures. ### KEY RECOMMENDATIONS (selection and timing) - Main recommendations (numbered as in source) 1. Ensure that in the decision-making process on mergers, concerns of prudential nature are not subordinated to others of non-economic nature. — MT MdE 2. Compatible with the Spanish constitutional framework, grant the BdE autonomy in updating prudential regulations in areas not yet harmonized at EU or SSM level. — MT MdE 3. Reinforce the requirement for banks to apply strict and accurate assessments when classifying loans, valuing collateral, and creating provisions (in line with the new provisions of Circular 4/2004, Annex IX), as well as ensuring that forborne loans terms are not too generous. — NT ECB, BdE 4. Maintain and reinforce the monitoring of banks to ensure that they provision adequately against potential liabilities in litigation cases including mortgage ‘floor clause’ liabilities and fees incurred by mortgage customers at the commencement of the loan. — NT ECB, BdE 5. Intensify the drive to improve corporate governance practices in banks, particularly in the LSIs and the credit cooperatives, as well as addressing weaknesses in the internal audit function. — NT ECB, BdE 6. Require the LSIs to conduct periodic liquidity stress tests using the in-house liquidity stress test tool (FLESB) to cross check the results. — NT BdE 7. Introduce a general obligation for banks to notify the supervisory authority, in advance, of all material changes in their activities, structure, and overall conditions. — MT MdE 8. Reduce the heterogeneity of onsite practices at different levels: methodology, implementation, resourcing (more missions headed by ECB staff and comprising staff from different NCAs). — NT ECB 9. Extend related-party requirements on directors and senior management to cover major shareholders and significant interests held by such shareholders. — NT BdE 10. Increase the number of AML/CFT inspections of banks particularly for the LSIs. — NT BdE, SEPBLAC - Additional recommendations (selection) 11. Streamline the recruitment process for inspectors, make it more flexible, and reduce the time needed for new hires to become operational. — NT BdE 12. Further develop a pro-active stance on the potential prudential impact of conduct risk and consumer protection issues. — NT ECB, BdE 13. Amend legislation to replace the MdE as the appeals body by an independent tribunal, on matters of appeal against BdE decisions. — MT MdE 14. Make more use of monetary fines as part of the sanctioning regime for credit institutions. — NT BdE 15. Further the use of tools based on the analysis of appraisers’ valuation for supervisory credit risk analysis. — MT ECB, BdE - Timing conventions: - NT = Near Term (within 6 months / 1 year) - MT = Medium Term (within 2–3 years) *EXECUTIVE SUMMARY, cr17345 (IMF).* ### EXECUTIVE SUMMARY ___________________________________________________________________________ 7 ### EXECUTIVE SUMMARY ### INTRODUCTION - Banking regulation and supervision of Spanish banks has improved considerably since the 2012 FSAP. - Drivers of progress: - Authorities’ commitment to implement measures agreed at the time of the 2012 program for restructuring and recapitalization of the banking system. - National transposition and implementation of European Union (EU) directives and regulations. - Establishment in 2014 of the Single Supervisory Mechanism (SSM), to which Banco de España (BdE) participates as a national competent authority (NCA). - Spain’s participation in the SSM reinforced post-crisis supervisory progress by enabling: - More insightful peer comparison and supervisory analysis of significant Spanish banks. - The SSM’s structured methodologies and procedures, emphasizing governance, internal controls, and senior-level dialogue with banks. - BdE’s role within the SSM: - Demonstrated strong commitment; many experienced staff move to the ECB for senior roles. - Participation in Joint Supervisory Teams (JSTs) and direct supervision of Less Significant Institutions (LSIs). - Maintains a solid supervisory tradition: off-site reviews, intensive onsite inspections, and emphasis on asset classification and provisioning. ### MAIN FINDINGS - Remaining reforms and institutional issues: - Areas outside ECB competence persist (example: authorization of bank mergers falls under the Ministry of Economy, Industry and Competitiveness (MdE), subject to mandatory opinions from BdE and other authorities, including autonomous regions). The decision-making process on mergers should ensure prudential and supervisory concerns are not subordinated to non-economic considerations. - Some powers and competences remain national (e.g., detailed definition of fit and proper criteria). Compatible with the Spanish constitutional framework, BdE could be granted broader autonomy—through appropriate legislative mandate—on updating prudential regulations in areas not yet harmonized at the EU or SSM level. - National legislation should grant BdE full and unencumbered operational independence with respect to its supervisory function, in line with its independence as a central bank. - Credit risk, asset classification, and provisioning: - Actions to address misclassification and under-provisioning have shown very good progress, but vigilance must remain. - Reviews of onsite inspection and SREP reports show NPL levels remain high. - Supervisory vigilance should continue, especially on assessment of forborne loan classification and collateral valuations, and by increasing bank boards' attention to these areas. - Promotion of supervisory tools based on appraisers’ valuation is recommended to support en masse offsite supervisory analysis of credit risk. - Corporate governance and related issues: - Banks’ internal governance practices have improved since the last FSAP; the SSM increased focus on governance and internal controls. - Governance remains a work in progress, particularly for LSIs: suitability of board members and their knowledge and skills (internal audit and IT matters) need improvement. - Related-party requirements need to be extended to all significant stakeholders and their interests. - Supervision of LSIs: - LSIs are subject to a lighter touch with limited direct interaction with BdE; no mandatory meetings are envisaged in minimum engagement levels (MEL) for LSIs. - Proportionality may be justified for smaller, less complex banks, but prudential and oversight vigilance must be maintained. - BdE’s decision to contain the gap between on-site inspection cycles is seen as positive. - Reporting obligations and emerging risks: - A general obligation is missing for banks to communicate material changes or adverse developments to supervisors; legal requirements exist only for certain circumstances. - With rising non-traditional risks (fintech, conduct, cyber), swift communication with supervisors is paramount. - An SSM initiative requiring banks to inform supervisors of any cyber incident is now in place. - Recommendation: introduce a general obligation in legislation for banks to communicate material changes and adverse developments. - Consumer protection and conduct risks: - The retail orientation of Spanish banks makes consumer protection and market conduct significant supervisory focus areas; these risks could spill over into the prudential realm. - Incidents involving placement of preference shares, floor clauses, and mortgage fees create financial, prudential, and reputational risks. - Recent legal reforms foster consumer protection; ECB and BdE closely monitor banks’ preparedness for impacts of ‘floor clause’ liabilities. - Supervisors should continue monitoring recent episodes and develop a proactive approach to identify emerging issues affecting banks. - Credit cooperative sector (LSI subsector): - The credit cooperative sector remains fragmented and is long overdue for fundamental reform. - Challenges: relatively higher operating costs, limited opportunities to change business models, and special ownership structure. - Main reform goal: increase resilience via higher mutualization of losses and/or ability to raise capital in the market. - Government initiative to incentivize higher mutualization of losses is welcome; if industry-driven reform fails, authorities should consider compulsory schemes. ### RECOMMENDATIONS - Main recommendations (as listed in Table 1) 1. Ensure that in the decision-making process on mergers, concerns of prudential nature are not subordinated to others of non-economic nature. - MT MdE 2. Compatible with the Spanish constitutional framework, grant the BdE autonomy in updating prudential regulations in areas not yet harmonized at EU or SSM level. - MT MdE 3. Reinforce the requirement for banks to apply strict and accurate assessments when classifying loans, valuing collateral, and creating provisions (in line with the new provisions of Circular 4/2004, Annex IX), as well as ensuring that forborne loans terms are not too generous. - NT ECB, BdE 4. Maintain and reinforce the monitoring of banks to ensure that they provision adequately against potential liabilities in litigation cases including mortgage ‘floor clause’ liabilities and fees incurred by mortgage customers at the commencement of the loan. - NT ECB, BdE 5. Intensify the drive to improve corporate governance practices in banks, particularly in the LSIs and the credit cooperatives, as well as addressing weaknesses in the internal audit function. - NT ECB, BdE 6. Require the LSIs to conduct periodic liquidity stress tests using the in-house liquidity stress test tool (FLESB) to cross check the results. - NT BdE 7. Introduce a general obligation for banks to notify the supervisory authority, in advance, of all material changes in their activities, structure, and overall conditions. - MT MdE 8. Reduce the heterogeneity of onsite practices at different levels: methodology (providing finer criteria to define the scope and depth of investigations, the modality of interaction with the bank), implementation (using the revision of inspection reports to further harmonize inspection styles), resourcing (to be able to have more missions headed by ECB staff and comprising staff from different NCAs). - NT ECB 9. Extend related-party requirements on directors and senior management to cover major shareholders and significant interests held by such shareholders. - NT BdE 10. Increase the number of AML/CFT inspections of banks particularly for the LSIs. - NT BdE, SEPBLAC - Other Recommendations 11. Streamline the recruitment process for inspectors, make it more flexible, and reduce the time needed for new hires to become operational. - NT BdE 12. Further develop a pro-active stance on the potential prudential impact of conduct risk and consumer protection issues. - NT ECB, BdE *EXECUTIVE SUMMARY, cr17345 (IMF).* ### 13. Amend legislation to replace the MdE as the appeals body by an independent ### 13. Amend legislation to replace the MdE as the appeals body by an independent tribunal, on matters of appeal against BdE decisions. ### Recommendations and Implementation Timing - Recommendation 13: "Amend legislation to replace the MdE as the appeals body by an independent tribunal, on matters of appeal against BdE decisions." - MT MdE - Recommendation 14: "Make more use of monetary fines as part of the sanctioning regime for credit institutions." - NT BdE - Recommendation 15: "Further the use of tools based on the analysis of appraisers’ valuation for supervisory credit risk analysis." - MT ECB, BdE - NT = Near Term (within 6 months / 1 year); MT = Medium Term (within 2-3 years) ### Institutional context and governance relevant to the recommendation - The MdE has broad-based responsibility to determine the bank regulatory framework, while the BdE is the national competent authority (NCA) for banking supervision within the SSM. - Appointment and tenure of BdE leadership: - The Governor of the BdE is appointed by the King based on a proposal by the President of the government, following a hearing of the Minister of Economy before the relevant parliamentary committee. - The Deputy Governor is appointed by the government based on a proposal by the Governor and must be Spanish and have recognized competence in monetary or banking matters. - Both are appointed for a non-renewable six-year term. - The law does not require that the reasons for removal of the Governor or Deputy Governor be publicly disclosed; however, there have been no cases of removal in the history of BdE. - BdE governance bodies and voting: - Governing Council (Consejo de Gobierno, CG): Governor, Deputy Governor, six elected Council members (six-year term, renewable once), Secretary-General of the Treasury and Financial Policy and Vice-president of the National Securities Market Commission (CNMV). - Executive Commission (Comisión Ejecutiva, CE): Governor (President), Deputy Governor, and two elected Council members. - Directors-Generals and Secretariat attend CG and CE meetings in a participatory but non-voting capacity. - The Secretary-General of the Treasury and Financial Policy and the Vice-president of the CNMV are permitted to vote when the CG takes decisions on all supervisory matters, including on LSI issues. - CE and CG make decisions by simple majority (Art. 23(2) and 21(4) LABE). ### Rationale and related findings from the review - Role overlap and residual responsibilities: - Despite transfer of many powers to BdE and the establishment of the SSM, "there are still residual areas where the BdE does not have the sole and exclusive prudential role." Example: "the MdE is still responsible for authorizing mergers, carve outs or the transfer of assets and liabilities, in whole or in part, in which a bank is involved, or any other agreement that has similar or legal effects to the foregoing, together with the amendments to the constitutional documents deriving from them. The MdE consults the Banco de España in its consideration of such operations." - Independence considerations: - "While membership of the SSM provides operational independence for the BdE, Spanish legislation has not been amended to confirm its operational independence in respect of its supervisory function, in line with its independence as a central bank." - Legislative and regulatory changes since 2012: - Transfer of licensing and sanctioning powers to BdE (measures implemented since 2012 and with the start of the SSM). - Law 10/2014, Royal Decree 84/2015, Circular 2/2016 and other instruments transposed CRD IV/CRR and introduced changes to BdE powers and supervisory practice. - Practical supervision and appeals implications: - The recommendation to replace MdE as the appeals body with an independent tribunal addresses the residual involvement of MdE in prudential matters and seeks to align the appeals process with the BdE’s supervisory role and the SSM framework. ### Related supervisory practice and supporting measures in the review - BdE powers and tools: - Sanctioning powers have been transferred to the supervisory authorities (BdE and, since the start of the SSM, the ECB). - Spanish constitutional arrangements limit BdE having autonomous regulatory power; mitigation comes from the EU single rule book and centralized exercise by the ECB of national discretions in CRD/CRR. - Complementary recommendations in the review: - Use monetary fines more frequently as part of sanctioning (NT, BdE). - Further use tools based on appraisers’ valuation for supervisory credit risk analysis (MT, ECB, BdE). - Valuation regime: Circular 4/2016 and October 2016 revision of Annex IX of Circular 4/2004 require specific appraisal frequencies (e.g., annual appraisal for doubtful and foreclosed assets above EUR 250,000; re-appraisal every 3 years for certain other exposures; statistical updating at least annually for specified categories). *Source: INTERNATIONAL MONETARY FUND (cr17345).* ### 16. The objective of the SSM is to contribute to the safety and soundness of the European ### 16. The objective of the SSM is to contribute to the safety and soundness of the European ### SSM mandate and ECB role - Objective: contribute to the safety and soundness of the European banking system and the stability of the financial system within the union and each member state, and ensure effective and consistent supervision across the EA. - ECB responsibilities within the SSM: - Establish a common approach to supervision and foster consistent application of regulations and supervisory practices across SSM countries. - Directly supervise Significant Institutions (SIs). - Carry out an oversight function for Less Significant Institutions (LSIs) to promote a more consistent supervisory approach across the SSM. - Provide views on draft material supervisory decisions on certain LSIs; such decisions are to be notified by NCAs to the ECB before adoption. ### Supervisory Board (SB) and Governing Council (GC) - Composition of the Supervisory Board: - Chair and Vice-Chair, four representatives of the ECB, and all heads of banking supervision in NCAs. - Institutional setup and decision process: - SB has no formal decision-making powers; it proposes complete draft decisions for adoption by the Governing Council of the ECB (GC), which comprises all EA central bank governors. - Under the non-objection procedure, decisions are deemed adopted unless the GC objects within a maximum of 10 days. - The Supervisory Board and Governing Council meet on average twice a month for the adoption of supervisory decisions. ### Joint Supervisory Teams (JSTs) and ECB organizational structure for supervision - Day-to-day supervision of significant groups: - Conducted by JSTs, supported by the ECB’s horizontal and specialized divisions. - ECB responsible for size and composition of JSTs and on-site inspection teams. - JST composition and allocation: - Led by a Coordinator at the ECB (generally not from the country where the supervised institution is headquartered). - Team comprises ECB and NCA staff, with NCA staff generally representing the largest component of JSTs, managed by one or more local sub-coordinators. - ECB component of JSTs allocated in two Directorates General (DG-MS1 and DG-MS2). - All horizontal functions (e.g., Internal Models, Onsite Inspections, Authorizations, Crisis Management, Methodologies, Risk Analysis) allocated in DG-MS4. - ECB oversight of LSIs: - Directorate General (DG-MS3) entrusted with oversight of NCAs’ supervision of LSIs; main mission to promote consistent and effective supervision of LSIs across NCAs. - DG-MS3 can propose to the Supervisory Board that the ECB assume direct responsibility for supervision of an LSI if necessary to protect SSM interests — this option has never been activated so far. - DG-MS3 carries out tasks in a proportionate and collaborative manner, with risk-based oversight of LSIs, especially ‘high priority’ LSIs (HPLSIs). - DG-MS3 includes a unit for licensing and approval of qualified holdings for LSIs. - Definition note: - Banks with total assets above EUR 500 million are designated HPLSIs according to their intrinsic riskiness (as expressed by the RAS score) and their impact on the domestic financial systems (subject to the condition of identifying at least three HPLSIs from those countries where LSIs represent no less than 15 percent of total assets). ### Banco de España (BdE) adaptation and internal organization - BdE participation in SSM staffing: - Some 80 staff have taken positions within the banking supervision area of the ECB (including a director general and two deputy director generals, out of the ten senior management positions in the SSM). - Human resources challenge: adaptation to new common procedures and methodologies, use of English as the official language, and significant regulatory changes. - BdE response: intensified training program and adapted recruitment strategy. - Internal reorganization to mirror ECB: - Two departments created for SIs: - “Inspección I”: assigned the four largest SIs (followed at the ECB by DG-MS1). - “Inspección II”: assigned the remaining SIs (followed at the ECB by DG-MS2). - “Inspección III”: follows offsite and onsite activities on LSIs and other financial institutions under BdE’s oversight. - Horizontal activities (analogous to ECB DG-MS4) split between: - “Inspección IV”: onsite inspections on SIs, risk and internal model specialists and technological innovation. - Planning and Analysis department: supervisory planning, methodologies, IT support, analysis of regulation and supervisory policies. - A unit reporting directly to the Director General created for technical coordination with the SSM. - Collaboration assessment: - Collaboration between the ECB and BdE as an NCA is considered productive and functioning well; tensions have been addressed in a collaborative spirit. ### BdE’s powers, scope, and residual limitations - Governing legislation: - Key laws include Law 13/1994 (LABE), Law 10/2014 (LOSS), Circular 2/2014, Royal Decree 84/2015 and Circular 2/2016, implementing CRD IV and CRR. - BdE role within SSM: - BdE is the sole NCA for prudential regulation and supervision of depository institutions in Spain. - The 2012 FSAP finding of concurrent responsibility with other public authorities (e.g., autonomous regions, CC.AA.) has been largely overcome, though not completely. - Residual areas not exclusively under BdE: - MdE retains responsibility for authorizing mergers, carve outs or transfer of assets and liabilities involving a bank, and approves other similar legal operations; MdE requests reports from BdE and other authorities in such matters. - CC.AA. retain certain corporate governance powers over cooperative banks (e.g., determining number of assembly meetings) and can initiate proceedings against cooperative banks for breaches under CC.AA. remit. - Rulemaking powers: - BdE has no general effective power to promulgate prudential rules directly by law; normally Government or a Minister empowered by law issues Royal Decrees or Minister Orders and may empower BdE to develop regulation via Circular. - In some delegated cases BdE can issue and update technical criteria (Circular) without additional permission; in other cases BdE cannot change aspects ruled in Law/Royal Decree/ministerial order without prior amendment of higher-rank legal text. - Lack of full autonomy mitigated by EU single rule book and by SSM, but residual NCA competencies (e.g., fit and proper criteria for LSIs outside licensing and qualifying holding authorizations) remain unchanged since 2012. - Accounting and foundations: - Banking accounting rules under BdE responsibility; currently standard-setting powers on bank accounting are conferred on BdE via Circular 4/2004 (art. 84 LOSS). - National accounting principles closely aligned with IFRS; significant divergence: amortization of goodwill (linear amortization under BdE Circular on a solo basis vs. IFRS deterioration test). BdE expects no effect on own funds, as goodwill is deducted anyway. - Banking foundations subject to BdE supervision and sanctioning power on certain prudential issues; non-prudential issues fall under MdE (if operate in more than one autonomous region) or CC.AA. (if in one). - Sanctioning powers and scope: - Article 89 of Law 10/2014 establishes BdE’s sanctioning powers with respect to Spanish individuals and entities who control credit institutions in other EU member states; applies also to certain acquisitions subject to Article 17 notification. - Sanctioning powers extend to: - branches opened in Spain by all foreign credit institutions; - financial holding companies, mixed financial holding companies and their directors and executives; - all other institutions provided for under the legal system when the Law states so; - third parties to which the above institutions have outsourced operational functions or activities. - Holding companies and supervisory reach: - Holding companies are not subject to authorization. - If parent of a consolidated banking group and meet definition of financial holding company (FHC) or mixed financial holding company (MFHC) (article 4 CRR), they are subject to supervision on a consolidated basis as the parent of the group (Article 82 Royal Decree 84/2015). - BdE may request information from FHC, MFHC, and mixed-activity holding companies (article 50 LOSS; Article 10 SSM Regulation). - BdE may carry out onsite inspections (or have them carried out by auditors) of mixed-activity holding companies and their subsidiaries—even located in another Member State—in cooperation with local authorities (Articles 87 and 89 Royal Decree 84/2015; Article 83 Royal Decree 84/2015). - Board members of FHC and MFHC subject to fit and proper tests; assessment criteria include management skills and experience, reputation, time commitment, and possible conflicts of interest. ### Reporting obligations, cyber incident reporting, and consumer protection - Reporting obligations: - No general obligation for banks to communicate substantive changes or materially adverse developments beyond specific laws and decrees. - Examples of mandatory notifications: - Law 10/2014 requires banks to notify BdE as soon as they become aware of any acquisition or disposal of holdings in their capital that cross thresholds established by the law (art. 22). - Royal Decree 84/2015 requires banks to communicate immediately to BdE any deficit of eligible own funds according to applicable regulations (art. 57). - Listed companies and issuers of securities traded in secondary markets obliged to report any relevant fact to CNMV. - Cyber incidents: - No legal obligation for banks to report cyber incidents generally. - Financial entities considered critical infrastructures can communicate incidents to INCIBE acting as CERT; communication to CERT will become mandatory for all entities considered critical infrastructures once the European Directive on Networks and Information Systems is transposed (before May 2018). - The SSM will soon launch a procedure for SIs to communicate all cyber incidents directly to the ECB; depending on severity the ECB may partake in the crisis management team. - Consumer protection and market conduct: - Article 5 of Law 10/2014 entrusts BdE with responsibility for supervision of relevant banking consumer protection rules; MdE issues the relevant regulation. - Implementation by Market Conduct department within the General Secretariat of BdE, composed of three divisions: - complaints by customers; - transparency and market conduct regulations; - supervising compliance with these rules (both onsite and offsite). The latter division comprises 32 staff and conducted 17 inspections in 2016. - BdE supervises consumer protection rules relating to banking products and services; for financial instruments CNMV is the relevant authority. - MdE transposition work on EU Directives for consumer protection: Directive 11/2013 on Alternative Dispute Resolution, Directive 2014/17 on Credit Agreements for Consumers relating to residential immovable property, Directive 92/2014 on comparability of fees related to payment accounts, payment account switching and access to payment accounts. - Prudential relevance: - Conduct and customer protection issues can impact banks' reputation and profitability (via customers' redress and/or fines) and ultimately solvency. ### Box 1 — Banks’ Mortgage Floor Clauses: assessment and supervisory actions - Background: - Many Spanish banks used embedded floor clauses in mortgage loans limiting reduction of floating loan rates when market benchmarks dropped. - 2013 Spanish Supreme Court ruled against some clauses due to lack of transparency; excluded retroactive application. - December 2016 European Court of Justice ruled against limitation on retroactivity as incompatible with EU law. - Spanish government issued in January 2017 a Royal Decree-Law establishing an out-of-court settlement procedure for credit institutions to deal with customers’ claims. - Accounting/treatment: - Under both IFRS and national GAAPs, banks must provision against potential redress of customers based on best estimate. - Supervisory actions: - JSTs of Spanish SIs collected information on client segments, requested worst case reimbursement amounts and banks’ best estimates, analyzed assumptions for best estimates, engaged external auditors and heads of internal audit committees, identified outliers and sought explanations, and monitored quarterly evolution of claims and redresses. - BdE requested LSIs affected to provide: - maximum gross impact of amounts to be reimbursed, including possible interests on arrears; - maximum gross impact excluding cases where the entity had negotiated a settlement with the client; - banks’ best estimates considering portfolio and experience with complaints; - provisions to be allocated by end 2016 to deal with reimbursements. - BdE analyzed impact on banks’ CET1 ratios in different scenarios and concluded that, in the worst scenario, only two LSIs would fail to comply with their overall requirement (Pillar 1 + Pillar 2 + CCB buffer) as of December 2016. - Legislative and disclosure measures: - Transposition of the EU Mortgage Credit Directive (MCD), with additional Spanish provisions, will enhance transparency of retail mortgage contracts. - Lenders already obliged to provide standardized pre-contractual information sheet and, for variable rate and/or FX loans, a separate document with periodic installment scenarios. - Proposal introduces requirement for lenders to provide a standardized warnings document informing clients of existence of relevant clauses or contractual elements (floor clauses, early expiration options, allocation of expenses associated with granting the loan and with loans in foreign currency) and of associated risks. *Source: cr17345 - 16. The objective of the SSM is to contribute to the safety and soundness of the European* ### 38. The 2012 FSAP recommended strengthening the BdE’s independence. At that time, the ### The 2012 FSAP recommended strengthening the BdE’s independence. At that time, the ### Independence and governance - 2012 FSAP finding: no evidence of government or industry interference in supervision operations, but involvement of political bodies (such as the CC.AA.) in licensing, sanctioning, and resolution created a potential for such interference. - 2012 FSAP observation: presence of the Secretary General of the Treasury in BdE’s CG was not conducive to independence. - Representation and participation: - The Secretary-General of the Treasury and Financial Policy represents the government in the BdE’s CG. - The Minister of Economy or the Secretary of State for Economy may attend CG meetings as participating but non-voting members when considered necessary and may submit a motion for consideration by the Governing Council. - The Minister attended a Council meeting on one occasion (June 2013) about the establishment of the Financial Stability Council. - Neither the Minister nor the Secretary of State ever submitted a motion for consideration. - Legal status and recommendation: - Legislation has not been amended to give BdE operational independence in its supervisory function in line with its independence as a central bank, as recommended by the 2012 FSAP. - In practice BdE appears to have operational independence in carrying out its supervisory function, but the case for formally reinforcing BdE’s independence as a supervisor remains valid. - Possible formal reinforcement measure: prevent representatives of the government from participating in decisions on supervisory issues, including the nomination of senior supervisory staff and the allocation of supervisory budget. - Appeals mechanism: - The MdE is the appeals body for submissions by aggrieved parties against BdE decisions, including sanctions. - Such an appeals mechanism has the potential, at least in theory, for government interference. - In many jurisdictions the appeals mechanism involves an independent tribunal, independent of government or industry influence. - Under Spanish law, there is also always the possibility to appeal before the Contentious-administrative Courts. ### Resources, staffing, and recruitment - Impact of SSM implementation: - Depletion of skilled resources at the BdE because of SSM implementation has been addressed by intensifying recruitment for supervisors (“inspectors”), although this has not been sufficient. - Increased personnel needs (to work on SIs in JSTs, on LSIs, and to coordinate with the ECB) addressed by: - Increasing number of inspectors recruited every year from the traditional 12–15 to around 25. - Hiring analysts with fixed term of 3 to 5 year contracts (around 100 in the last two years). - Headcount and shortages: - Theoretical headcount of about 500 for the Directorate General for supervision. - Current understaffing by about 20 people. - Shortage concentrated in “Inspección II” department, Planning and Analysis department and “Inspección III” department. - BdE estimates that in about four or five years, the DGs’ permanent staff numbers will once again be at full capacity. - Use of external personnel: - In some cases inspection teams have been partially staffed (by the ECB) with personnel from auditing firms (in junior positions within the team); this is an innovation for BdE. - Traditional recruitment process for inspectors: - Selection process entails several exams: written tests on financial mathematics, statistics, law, accounting, and the Spanish financial system; an exercise on balance sheet analysis; written and oral tests on English proficiency; an essay on the financial system followed the day after by a discussion before a panel. - Whole process spans approximately a six-month period (including the minimum disclosure times BdE is subject to as a public institution) and is considered very demanding. - Successful candidates gain access to a full time 10-month educational course (‘master’) on supervisory matters covering macroeconomics, statistics and econometrics, accounting and bank auditing, financial products and markets, commercial and banking law, bank risks, and financial supervision; teaching staff include renowned academic institutions, practitioners, and BdE professionals. - Approximately 25 percent of the course is delivered in English. - Time-to-productivity: total time until new recruits are assigned to units and start working is about 18 months, raising cost-benefit questions given resource pressures. - Ethics and post-employment rules: - BdE adopted an Ethics Code mirroring the ECB one and specific rules for personnel leaving the institution to be hired by supervised entities (“cooling-off”). - Cooling-off periods: - Managers and officers involved in the previous six months in supervisory tasks or inspections of a bank must wait one year before joining that same bank or six months before joining one of its direct competitors. - Cooling-off period is halved for other staff (i.e., below officer). - For managers and officers having worked in the previous six months in the General Secretariat or in the Directorates General for Banking Supervision, Financial Stability, Research, Monetary Operations, Markets and Payment Systems, International Affairs, the cooling-off period is six months. - For all other BdE staff, the cooling-off period is three months. ### Supervisory approach and process - Supervisory “production cycle”: - Typically annual and based on a Supervisory Examination Program (SEP) tailored individually to all SIs (by their JSTs) and to the most relevant LSIs (by BdE). - For the years 2017 and beyond, thematic reviews planned on banks’ business models and profitability drivers, preparedness for IFRS 9, compliance with BCBS’ principles on risk data aggregation and risk reporting, outsourcing. - SEP features: - SEP establishes Minimum Engagement Levels (MEL). - For SIs, DG-MS4 proposes a bank-by-bank MEL based on supervisory priorities and overall risk level and cluster of each bank. - MEL includes regular tasks (including minimum engagement with banks’ governing and supervisory bodies and management) and thematic reviews; JST specifies some tasks (e.g., deep dives) and may add further tasks; SEP approved by management of responsible DG. - SEP defined towards the end of each year; ad-hoc (non-SEP) tasks can be added as needed. - Implementation and monitoring: - Implementation of SEPs for SIs monitored on an ongoing basis at JST, DG, or DG-4 level. - Process includes identification of a specific risk, follow-up interaction with the bank (e.g., notification letter) or further investigation by the SSM (e.g., onsite inspection), development of deadlines for bank responses, and monitoring remedial actions. - SREP: - Main task in the SEP is the Supervisory Review and Evaluation Process (SREP). - Established by Art. 97 CRD; further detailed in EBA’s 2014 Guidelines on common procedures and methodologies for the SREP and the 2015 Implementing Technical Standards (ITS) on joint decisions on prudential requirements. - SREP provides a structured framework for a holistic annual assessment of banks across the SSM, offering a synthetic overview of each bank’s risk profile considering capital and liquidity planning and peer comparison. - SREP basis for assessing capital and liquidity adequacy and for supervisory measures of quantitative and qualitative nature. ### Supervisory approach to LSIs - Monitoring types: - BdE adapted supervisory planning to the SSM framework with a common methodology for all LSIs across the EA. - BdE subjects LSIs to ordinary or simplified monitoring depending on size, complexity, RAS score and supervisory priority. - MEL and engagement: - MEL for LSIs under ordinary monitoring envisages a minimum level of engagement with senior management; typically annual meetings with chief officers, sometimes with Chair of the board. - Supervisors challenge boards and/or senior management on strategy and business model; examiners rely on internal audit findings for onsite assessments and may request internal audit plans. - External auditors: - Regular engagement with external auditors is part of SSM approach; communication between external auditors, BdE and ECB perceived as fluent. - Supervisors and external auditors meet at least once per year to discuss corporate governance, internal controls, and internal audit. - Simplified monitoring: - Objective: summarize main ratios and data to identify entities most likely to be in trouble. - All LSIs under simplified monitoring are subject to an annual SREP decision; risk profiles evaluated in ICAAP report (annually); recovery plans for 2016 were analyzed for all of them. - Warning signals triggered by breaches of thresholds based on legally binding rules or supervisory experience. - Around 70 percent of the non-SI entities (LSIs and non-SSM branches), representing around 2 percent of total assets of the banking system, are under simplified monitoring; 19 entities are under ordinary monitoring. - Possible BdE actions on alerts: request additional information, notify entity about weakness and ask for resolution, conduct an ad-hoc onsite inspection, undertake supervisory actions. - Interaction and inspection frequency: - LSIs under simplified monitoring subject to less direct interaction; no meetings envisaged in MEL—though regular meetings with senior managers took place for nearly 60 percent of them during 2016. - BdE internal regulations: onsite inspections traditionally occur at time intervals no longer than four years; maximum interval could be raised to 10 years for LSIs under simplified monitoring per SSM standards, but BdE intends to maintain current frequency. - Rationale: reduced intensity for smaller banks justified by proportionality and efficiency, but quantitative alerts alone are insufficient to detect all deterioration; BdE’s decision to avoid increasing maximum interval between inspections considered appropriate. - ECB coordination: - ECB developing a common SREP methodology for LSIs; BdE participates. - Model based on that for SIs with proportionality adaptations. - A common RAS developed and approved by the SB; field testing and trial period ongoing; development of criteria for quantification of capital and liquidity ongoing. - Changes to BdE SREP framework are minor (e.g., risk matrix) and otherwise similar. ### Credit cooperatives: governance, performance, and reform - Corporate governance weaknesses identified in the credit cooperative LSI sector: - General lack of awareness of good corporate governance in some institutions. - Relatively low number of independent members in boards of directors. - An underdeveloped risk culture in some institutions. - Board documentation dispatched to directors too close to annual meetings. - Inadequate recording of board and board committee meetings. - Insufficient succession planning at senior level. - Board committees staffed by persons with no or limited financial experience. - Shareholding and disclosure: - Current shareholding structure lacks clarity; capital subscribed by members but some members lack awareness that subscriptions are capital and not deposits. - Credit cooperatives can release up to 2 percent of capital by way of redemption each year subject to board approval; any distribution requires approval of BdE. - BdE has advocated since 2013 the need to apply to the commercialization of shares the same analysis as for MiFID products. - Shares in credit cooperatives are not seen as financial instruments and therefore not subject to MiFID rules. - Cooperatives established rules consistent with best international practice: each member has an information document, like a prospectus, highlighting risks; each prospective purchaser must sign a statement acknowledging such risks. - Performance and financial statistics (end-December 2016 unless otherwise stated): - Level of nonperforming loans (NPLs) in cooperative sector: 8.7 percent (6.1 percent for all banks). - Comparison to end-December 2015: 10.2 percent (6.6 percent for all banks). - Within 8.7 percent: residential mortgages NPLs 5.4 percent (same as previous year); all other loans NPLs 11.7 percent (down from 14.5 percent in 2015). - Foreclosed assets in cooperative sector: EUR 5.0 billion (EUR 79.3 billion for all banks). Corresponding 2015 figures: EUR 4.5 billion and EUR 81.7 billion respectively. - Coverage ratio (bad debt provisions to total NPLs): 55.2 percent at end-December 2016 (down from 60.4 percent the previous year). - Net income for cooperative sector in 2016: EUR 457 million (EUR 443 million in 2015). - Return on equity for cooperative sector in 2016: 4.3 percent (4.4 percent for all banks). - Total capital: EUR 15 billion of which 94 percent was in the form of Tier 1. - Regulatory capital as a percentage of risk weighted assets: 15.1 percent (14.8 percent for all banks). Corresponding 2015 figure: 14.2 percent (14.5 percent for all banks). - Reform challenges: - Two broad challenges: micro-level (limited capital base, poor corporate governance, high costs, relatively high levels of NPLs, restricted business opportunities, threats from more advanced banking) and macro-level (role in rural areas, constitutional support for cooperatives). - On an individual basis most cooperatives appear to be performing adequately though some are poor performing requiring assistance from AECR. - In many rural areas cooperatives are the only banks remaining. - International comparisons: cooperative sector market share about 7 percent in Spain; by contrast 50 percent in France, 30 percent in the Netherlands and Italy, and 15 percent in Germany—comparisons must account for differences in size and business models. *IMF staff report content unit cr17345* ### 67. The uniqueness of the credit cooperative sector in Spain requires a carefully thought ### 67. The uniqueness of the credit cooperative sector in Spain requires a carefully thought ### Uniqueness and structural diversity of the credit cooperative sector - Sector is small relative to the banking system but highly diverse in: - constitutional structure (IPSs, AECR, non-aligned, independent credit cooperatives), - size of individual institution, - business model, - financial performance. - This diversity makes creating a single, unified structure (for example, a Rabobank-like consolidation) unsuitable. ### Perspectives from AECR and industry-driven reform - AECR (representing a large part of the sector) believes the sector has a viable future, particularly with greater cooperation among individual credit cooperatives, and sees no need for radical reforms. - The mission highlights weaknesses that point to a need for stronger mutual support among cooperatives: - Limitations of an association (such as AECR) versus an IPS or affiliation due to absence of a binding obligation to financially support members. - Preferred reform path: - Industry-driven initiative to create one or more further IPS or affiliations of cooperative banks with a central body. - Affiliation model features: - Individual cooperatives retain own brand. - Central body responsible for policy, management and regulatory issues on behalf of the group. - If industry-driven initiative fails, authorities should consider compulsory schemes to achieve similar goals. ### Corporate governance and legal adjustments - Authorities could complement restructuring with measures to strengthen the sector’s governance: - Introduce a more exacting corporate governance regime. - BdE has begun reforms, e.g., a more rigorous fit and proper regime, but firmer measures are required to align other corporate governance requirements with best practice. - Specific suggested measures: - Make shares in credit cooperatives formally subject to MiFID-type rules. - Require boards to have greater diversification emphasizing expertise and independence. - Fix the tenure of individual directors. - Encourage greater participation at annual meetings, possibly by amending the one-member-one-vote rule. - Relevant legal rules should be amended to allow BdE to apply the measures above. ### BdE offsite monitoring and onsite inspections - BdE pursues integration and quality across onsite and offsite functions: - Internal procedures common across onsite and offsite units. - Horizontal reviews of SREP analyses and decisions for LSIs conducted within Inspección III before escalation to the Executive Committee. - Formal quality assurance by a dedicated unit under supervision planning. - Internal audit of BdE regularly performs investigations in the Directorate General for supervision (on average three per year in the past few years). - BdE is reviewing its Guidelines on the ICAAP (initially issued in 2008) to ensure consistency with the SREP framework in the SSM. Guidelines cover: - describing risk profile, - assessing governance, risk management and control systems, - establishing target level and composition of capital (and intragroup distribution for groups), - summarizing and self-assessing capital plans (and stress test assumptions and methodologies), - describing plan for future measures. - Onsite inspection planning and procedures are being adapted to the SSM harmonized framework with minor changes (e.g., final report sent to bank first for comments). - An internal regulation (‘Ordenanza’) currently establishes a maximum interval between two subsequent inspections of three years and the possibility of extending it to four years for smaller entities. ### Coordination with foreign supervisory agencies - Four Spanish SIs have important foreign operations; loans abroad are predominant for Santander and BBVA, and non-negligible for Sabadell and Popular. - The two largest banks have locally systemic subsidiaries in: - United Kingdom, Portugal, Mexico, Chile, Brazil (Santander), - Mexico and Turkey (BBVA). - These banks have traditionally adopted a highly decentralized model with largely independent subsidiaries that: - operate according to a simple business model (only banking, mainly retail), - are financially and operationally self-sufficient, - comply with group-level quality standards and central guidelines, - adopt a multiple point of entry (MPE) approach from a resolution perspective. - Cooperation between the ECB and host supervisors is overall smooth and well-functioning: - Collaboration based on MoUs signed with the ECB, and where absent, those previously established with BdE (though BdE MoUs are not directly transferable to the ECB). - MoUs cover exchange of information and arrangement of joint activities (workshops, onsite inspections). - Bilateral interaction characterized by open dialogue, shared perspectives, and good working relationships. - Multilateral cooperation via supervisory colleges is effective; host supervisors appreciate periodic feedback from the ECB on groups’ global risk situation. - BdE responsibilities and non-EEA interaction: - BdE is directly responsible for supervision of all non-EEA subsidiaries and all non-EA branches. - BdE has signed a MoU with two of the six non-EEA countries whose banking groups have a subsidiary in Spain. - BdE does not participate in any non-EEA college and there have been no inspections by non-EEA home supervisors on Spanish subsidiaries of banking groups supervised by BdE in the last five years. ### Conglomerate supervision - Four Spanish SIs have been designated as financial conglomerates per the Financial conglomerate directive (FICOD): Santander, BBVA, Ibercaja, and Criteria Caixa. - Criteria Caixa and Ibercaja are subject to supplementary supervision per FICOD. - Coordinator for both conglomerates is the ECB. - Based on Art. 49(1) CRR, BdE has granted the “Danish compromise” exemption to both conglomerates, which: - allows holdings of the conglomerate’s insurance companies’ capital instruments to be exempted from deduction from the conglomerate’s banks’ own funds, - equity holdings which are not deducted qualify as exposures and are risk weighted at 370 percent. - Supplementary supervision covers: - capital adequacy; - risk concentration; - intra group transactions; - internal control mechanism and risk management processes. - Typical supplementary supervision activities: - annual check of identification criteria with DGSyFP; - quarterly information exchange and annual meeting with DGSyFP on insurance subgroup business, financial results of the life company, main risks; - quarterly monitoring report (capital adequacy, risk concentration, intragroup transactions); - annual analysis of internal control mechanism and risk management at conglomerate level; - annual SREP at conglomerate level; - interaction with DGSyFP on Solvency II implementation; - deep dives on specific topics (e.g., business lines’ contributions to profitability and asset growth, commercial practices, interlinkages between banking and insurance). - BdE bilateral agreements with sectoral supervisors (per Law 44/2002) standardize exchange of information and improve supervision efficiency: - Agreements signed with DGSyFP (March 2004), CNMV (June 2009), and SEPBLAC (October 2013). - Current shortcoming: - Analysis of financial conglomerates’ situation remains mainly ad-hoc. - JSTs lack set criteria for evaluating information received (e.g., on risk concentration and intra-group transactions) and do not follow a given methodology to incorporate conglomerate-wide analysis into the annual SREP of the banking group. ### Capital: quality and adequacy - Capital Quality - Capitalization markedly improved since the crisis, but own funds remain characterized by a large incidence of deductions that are being progressively phased in, mainly deferred tax assets (DTAs). - Average Tier 1 and Total capital ratios at end 2016 are 13.1 and 14.8 percent, respectively; these are lower than EU average capital ratios of 15.5. and 18.5, respectively. - According to CRR, the phase-in for DTAs’ deduction can be extended until 2024; this deviates from the Basel framework which requires full deduction from 2019. - The ECB has opted to bring the end of the phase-in to 2019 for SIs; ECB has expressed orientation in favor of a 2019 deadline also for LSIs and a modification of Spanish regulation is in process to align with ECB Orientations, bringing both SI and LSI calendars to 2019. - Spanish 2013 Corporate Income Tax amendment on DTAs - Reduced uncertainty around certain DTAs so they do not have to be deducted from CET1 capital. - A mechanism to guarantee recovery of certain DTAs arising from temporary differences was established; these guaranteed DTAs are considered deferred tax credits (DTCs) and are eligible for CET1 fully loaded. - Reform limited to temporary differences generated by: - (i) provisions for loan losses or foreclosed assets, and - (ii) pension commitment expenses. - DTCs will be activated fully in the event of insolvency of the bank or partially when the bank makes a loss (i.e., only cover the loss). - If DTCs are not reversed within 18 years, they may be exchanged into government securities. - Presence of DTAs - Spanish banks show one of the largest gaps between transitional and fully-loaded CET1 ratios at end 2016 (except Belgium and Ireland). - On average the gap is 1.5 percent, with a range between 0 and 4 percent among Spanish SIs. ### Capital adequacy and SREP outcomes - The SREP capital decision defines adequate own funds for each bank via a Pillar 2 capital add-on (in CET1) added to Pillar 1 and capital buffers. - Clarifications from SREP 2016: - The Pillar 2 add-on is composed of a Pillar 2 Requirement (P2R) and a Pillar 2 Guidance (P2G). - P2R is a binding requirement like Pillar 1 and capital buffers; its breach affects the maximum distributable amount (MDA). - P2G does not affect MDA decisions; breach of P2G does not automatically trigger dividend restrictions. - The Pillar 2 add-on (both P2R and P2G) does not overlap with the CCB; the same CET1 cannot be used to cover both the CCB and the P2 add-on. - Other capital buffers except CCyB (i.e., G-SIB, O-SII, and systemic risk buffer) do not stack: only the largest of the three counts for the combined buffer calculation. - Pillar 2 guidance application and inputs - P2G was first applied by the ECB for the Pillar 2 decision in 2016. - An important input to P2G determination was the 2016 EU-wide stress test outcome, considering: - capital depletion under the adverse scenario, - specific risk profile and sensitivity to stress scenarios, - changes in risk profile since the cut-off date (December 31, 2015), - measures taken by the bank to mitigate risk sensitivities (e.g., asset sales). - LSIs and Pillar 2 - LSIs are subject to Pillar 2 requirement and CCB similar to SIs. - P2G has not been applied to LSIs yet, since the SSM methodology for LSIs is under trial process (it will be binding in 2018). - BdE intends to use results of the top-down FLESB stress test model as an input for the Pillar 2 level, based on granular data available to BdE (credit register, “ficheros de inversion crediticia,” detailed reporting on forborne exposures, etc.). - Leverage ratio - In the EU the leverage ratio is a reporting and disclosure requirement until December 2018. - It is considered within supervisory analysis of capital adequacy (not a hard requirement), as required by the EBA SREP guidelines. - It will become an own funds requirement (Pillar 1) from Jan 2019, with the old exposure measure used for the first two years. - Based on the current EC proposal to revise CRD/CRR: - the minimum is set at 3 percent, - the new exposure measure (from 2021) will include more exclusions than Basel, - no G-SIB buffer is currently included (though it will be considered once Basel finalizes the standard). ### Internal models for credit risk and TRIM - Use of IRB models in Spain: - Seven SIs and two subsidiaries of other EA countries’ SIs use approved IRB models for some asset classes. - All IRB banks authorized to use internal models (mostly Advanced IRB) for corporate and retail portfolios. - Five banks also have models covering bank exposures and three have models for sovereign portfolios. - Spanish banks have a lower share of assets under the IRB approach than the EU average. - Spanish banks consider their models very conservative, attributing this largely to BdE’s prudent approach regarding data quality and quantitative criteria. - TRIM (Targeted Review of Internal Models) - Launched by the SSM in late 2015 as a multi-year review of IRB and market risk models across the SSM. - Preparatory phase conducted in 2016 and early 2017. - 2017 activities: - Onsite credit risk model-specific reviews initiated on high-default portfolios (retail, SME). - Market risk and counterparty credit risk onsite missions. - Around 100 bank-specific missions in 2017; an additional some 100 bank-specific missions (credit risk side mostly low-default portfolios: institutions, large corporates, specialized lending) scheduled for 2018. - Inspection teams headed by SSM experts and composed of SSM staff and external experts. - Preparation, execution, and results are directed and monitored centrally by the ECB through consistency checks and peer reviews. *Source: cr17345 - 67. The uniqueness of the credit cooperative sector in Spain requires a carefully thought* ### 93. The overall objective of the TRIM is to enhance the credibility and confirm adequacy of ### cr17345 - 93. The overall objective of the TRIM is to enhance the credibility and confirm adequacy of ### TRIM objective and expected outcome - Overall objective: enhance the credibility and confirm adequacy of approved internal models across the SSM. - Implementation methods: - Verification of internal models’ compliance with regulatory standards. - Definition and implementation of harmonized interpretations and rules to constrain modeling freedom (as defined in the ECB’s Guide to TRIM). - Expected result: improved comparability across banks via a reduction of unwarranted variability (i.e., unrelated to the underlying risks) of the output of internal models. ### Credit risk and problem assets — context and historical measures - Post-2012 actions: Government emergency Royal Decree Laws (RDLs 02/2012 and 18/2012) required one-off provisions for real estate loans as at December 31, 2011 and for foreclosed assets subsequently held by banks in respect of these loans. - Provision ranges under the RDLs: from 7 percent for performing real estate loans to 60 percent for loans secured on plots of land. - Last BdE return (dated September 2014) showed total assets affected: EUR 74.5 billion, broken down as: - loans: EUR 44.7 billion - foreclosed assets: EUR 29.8 billion - Concern: RDLs may now restrain BdE’s ability to establish a provisioning policy appropriate to current conditions; any change should not lead to a reduction in the total level of provisioning. ### Misclassification issues and supervisory findings - Evidence of misclassification in some banks: - loans wrongly classified as performing; - restructured loans classified as performing without meeting required probation periods; - forborne loans’ terms sometimes generous; - collateral valuations sometimes not up-to-date with BdE requirements. - Consequence: BdE requiring additional provisions where misclassification occurs. ### New rules on asset classification and provisioning (Circular 4/2016, Annex IX) - Date of introduction: October 2016. - Objectives: - Develop principles and criteria for estimation of loan loss provisions by banks using their own methodologies and align with IFRS. - Align Spanish practices with EBA definitions of non-performing and forborne exposures, ECB draft guidance on NPLs, and Basel principles (December 2015 supervisory guidance on credit risk). - Prelude to IFRS 9 (scheduled January 2018). - Key changes vs previous regime: - Revision of Circular 4/2004—Annex IX is a significant departure from prescriptive calendar approach. - Allows greater discretion by banks in determining provisions in line with IFRS while retaining an element of calendar approach. - Introduces more tailored provisioning approach; maintains overall coverage of risks but reallocates provisions between NPLs and foreclosed assets. - Classification framework in Annex IX: - Four grades: performing; performing under special monitoring; doubtful for reasons of arrears; doubtful for other reasons. - Banks unable to develop robust internal methods must use alternative specific percentages of coverage per classification grade. - For doubtful arrears transactions, percentages are based on age of past due amounts. - Example coverage percentages (relate to amount of loan not covered by collateral): - 20 percent for house purchase loans three-to-six months in arrears. - 60 percent for consumer credit (e.g., credit card debt) for the same period. - Collateral valuation rules: - Banks may use internal methods or discount figures in the annex applied to the reference price. - Discount figures range from zero percent for money deposits to sixty percent on urban land and unregulated building land. - Annex IX provides reference discounts for foreclosed assets to adjust appraisal values to fair value less cost of sale. - Implementation outcomes: - Disparate results across banks; overall change in provisions deemed not significant by BdE. - Significant institutions generally using internal methods; less significant institutions generally using annex tables. - Banks using internal methods must carry out parallel exercise using tables for comparison. - BdE expects reallocation of provisions among classifications; some banks may require lower provisions and others higher, depending on asset types and classifications. - BdE position on expected loss approach and IFRS 9: - BdE well-positioned to incorporate expected loss approach. - IFRS 9 scheduled to come into effect in January 2018. - BdE previously used dynamic provisioning before the crisis; recent circular changes anticipated IFRS 9 and contributed to abandonment of dynamic provisioning. - BdE expects IFRS 9 impact in Spain to be more contained because accounting provisioning rules have been enhanced. - An advanced project is underway to adapt the accounting circular, including Annex IX, to IFRS 9 so compliance with the new circular will align with the new accounting standard. ### Data and tools for supervisory analysis of credit risk - Central credit register (Central de Información de Riesgos — CIR): - Mandatory reporting by banks of all transactions: loans, debt securities, financial guarantees, loan commitments, other commitments entailing credit risk, and lending of securities. - Monthly information available on risk exposures and doubtful loans; data can be broken down by individual borrower, economic group, sector of activity, etc. - CIR enhancements (2013): - Exposures must be reported on a transaction-by-transaction basis with no minimum reporting threshold (except for new nonrelevant products when the amount is less than EUR 6,000 and under certain conditions). - More detailed breakdowns for major product types. - Data requested include interest rates and dates of execution, maturity, default and settlement of principal and interest. - Detailed information required on each asset received as collateral. - Restructured, refinanced, renegotiated, subrogated and segregated transactions must be separately identified. - Uses of CIR: - Supports supervisors’ analysis of banks’ credit risk and allows comparison of classification of same obligors across banks to identify outliers. - Enables deep dives on portfolio quality ‘en masse’. - Use of raw CIR data by supervisors is allowed on a need-to-know basis and subject to strict security criteria. - Valuations Analysis Tool for appraisal companies: - Developed by BdE unit supervising appraisal companies to guarantee consistency of collateral valuations. - Works on hundreds of thousands of appraisals to identify outliers, rank appraisal companies by prudence, and cross-reference banks requesting appraisals. - Tool is about to leave pilot phase and is being improved (finer homogeneous-value zones, acquisition/use of actual transaction data, planned extension to land, offices, commercial real estate). - Tool helps detect pockets of overvaluation and should be further promoted in Spain and across the SSM where conditions allow. ### Inspections on credit risk — methodology, findings, and remedies - BdE onsite supervision focus: accounting review, accuracy of asset classification, collateral valuations, and provisioning levels. - Typical inspection process: - Detailed review of datasets and analysis of specific credit files within a sample. - Concludes with recommendations on accounting classification and quantitative estimate of provisioning shortfalls to be covered within an agreed timeframe. - Recommendations on internal control usually included. - Role of Credit Quality Reviews (CQRs): - CQRs assist in evaluating credit risk portfolios via sample analysis and may lead to estimates of shortfalls in NPLs and/or provisions. - Transaction testing (asset quality reviews / deep vetting) is fundamental for assessing impairment and loss recognition and aligning with BCPs. - Observed heterogeneity within SSM onsite inspections: - Lack of consistency across countries and supervisory traditions. - Quantitative conclusions not always made; follow-up letters do not always require banks to adjust provisions when shortfalls are estimated. - Heterogeneous approaches risk creating an unlevel playing field and potential downward pressure on accounting review emphasis. - ECB actions: - Internal ECB review identified divergences in inspection outcomes across the Euro Area. - ECB working on refinement of SSM manual to homogenize onsite credit risk practices. - Planned complement: common methodology for analysis of credit files from selected samples (drawing on AQR “second level rules”) covering sampling, classification, NPL identification and reporting, provisioning, collateral valuation. - Supervisory powers and recommendations: - It is critical supervisors be empowered to impose reclassification of assets and additional provisioning where necessary. - Capital add-ons can be used as an alternative to mitigate rising impairment losses when power to impose additional provisioning is lacking or unclear, but requiring higher provisioning is considered preferable to requiring higher capital without proper provisioning. - BdE practice: require higher provisioning rather than higher capital ratios without provisioning. - ECB should confirm its power to impose additional provisioning: Art. 16(2)(d) of the SSM regulation grants the ECB power “to require banks to apply a specific provisioning policy.” If doubt remains about this power, it should be clarified by authentic interpretation or amendment. ### Concentration risk - Weaknesses identified in 2012 addressed by adoption of CRD IV and CRR, complemented by EBA rules. - Enhancements include: - Improved tools and controls for supervision of economic sector concentration. - Guidance specific to sector concentration. - Enhanced requirements for banks to identify, monitor and manage exposures where many loans are granted to employees of a company, sector or local government. - Circular 2/2016: - Completes adoption of CRD IV/CRR. - Requires banks to have effective controls relating to sectoral concentration and specific reporting requirements for such risks. *Source: IMF staff report (cr17345).* ### 119. Under the new rules, banks are required to have a concise and practical definition of ### 119. Under the new rules, banks are required to have a concise and practical definition of ### Credit concentration (para. 119) - Banks must have a concise and practical definition of what constitutes a credit concentration. - The definition should encompass different types of credit concentration, including: - exposures to the same counterparties; - exposures to groups of connected counterparties; - exposures to counterparties in the same economic sector (real estate, agriculture, etc.); - geographical (regions/countries) concentrations of asset exposure; - concentrations in a commodities or currencies; - large indirect credit exposures (e.g., to a single collateral issuer). - The definition also covers the application of credit risk mitigation techniques to the credit concentrations. ### Interest Rate Risk (G; paras. 120–126) - IRRBB status and supervisory framework: - Interest rate risk in the banking book (IRRBB) is one of the four categories of the ‘risks to capital’ element of the Risk Assessment System (RAS). - The EBA SREP guidelines require supervisors to consider all forms of interest rate risk: changes in the level, slope, or shape of the yield curve; basis risk from imperfect hedging due to differences in the reference rates; explicit options written in contracts and implicit options available to customers (e.g., withdrawal of non-maturity deposits and prepayment of mortgage loans). - Monitoring and thresholds: - JSTs and BdE supervisory teams regularly monitor IRRBB metrics, such as the change in a bank’s economic value (EV) in response to changes in interest rates. - They check whether the change in EV in response to a 200 bps increase or drop in the level of interest rates exceeds the regulatory outlier rule (EV decline larger than 20 percent of regulatory capital). - Larger banks are expected to develop their own methodologies for IRRBB estimation and capital allocation, based on their risk appetite, without relying only on supervisory proxies. - Governance and inspections: - Supervisory attention is paid to governance, management and controls of IRRBB, including analysis of Asset and Liabilities Committees’ minutes and meetings with managers responsible for IRRBB. - Two onsite inspections addressing IRRBB (among other subjects) have been conducted on LSIs in the last three years, and one on an SI is planned for 2017. - BdE horizontal team and enhanced reporting: - The BdE specialized IRRBB horizontal team runs annual supervisory estimates and complements STE data with detailed information on implicit and explicit options based on Spanish supervisory reports (Circ. 2/2016, rule 63 and Annex II). - Spanish templates provide separate evidence of IRRBB exposures for each material currency, rates applied until following repricing date, internal parameters for non-maturity deposits (share of ‘unstable’ balances, separate pass-through rates for rate increase/decrease, average maturity of ‘core’ non-maturity deposits), and finer breakdowns for certain items. - ECB 2017 supervisory stress test on IRRBB: - The ECB chose a sensitivity analysis of IRRBB as its annual supervisory stress test for 2017. - The analysis involves 112 SIs. - It focuses on changes in the economic value (EV) of the banking book assets and liabilities and on the development of net interest income (NII). - It is based on six hypothetical scenarios drawn from the Basel Committee 2016 standards: two parallel shocks of +/- 200 bps, a flattening and a steepening scenario, an end-2010 scenario, and an end-2016 scenario (baseline). - It is run on EUR positions and on positions denominated in other currencies if they represent more than 20 percent of the aggregated banking book assets. - The exercise also analyzes how banks model optionality implicit in contracts and how banks use interest rate derivatives in IRRBB management. - Use of results: - The results are meant to feed into the SREP 2017 and inform, in a non-mechanical way, the assessment of a bank’s Pillar 2 guidance (P2G), focusing on relative vulnerability rather than solely quantitative outcomes. ### Liquidity and Funding (H; paras. 127–138) - RAS and supervisory scope: - “Risks to liquidity and funding” is one of the four elements of the RAS. - Supervisors assess inherent liquidity and funding risk and a bank’s management and control of such risks, beyond verifying compliance with minimum requirements (currently the Liquidity Coverage Ratio or LCR; from 2018 also the Net Stable Funding Ratio or NSFR). - Evaluations cover liquidity needs in the short and medium terms under normal and stressed conditions, intraday liquidity risk, liquidity buffers and counterbalancing capacity. - Funding analysis objectives: - Assess whether a bank’s medium- and long-term obligations are adequately met with a range of stable funding instruments under normal and stressed conditions, including capacity to roll over maturing funding and potentially increase liabilities in a sustainable way. - Funding risk drivers include restricted market access due to poor capital position, unclear strategy, negative rating outlook or negative investor opinion. - Funding sustainability assessment focuses on three main aspects: - structural funding mismatch (tendency to fund balance sheet more with short-term liabilities and to have more assets than liabilities in the medium- and long-term time buckets); - long term wholesale funding (ability to rollover and raise additional wholesale funds in terms of amount or capacity, maturity, currency, and price compared to the risk-free rate and peer banks); - retail funding strength (share of retail deposits over total funding and share of guaranteed deposits over total deposits). - Early warning indicators reviewed periodically: - LCR; - loan-to-deposit ratio; - share of wholesale funding; - survival period. - Internal assessments and stress testing: - Supervisors assess the own liquidity assessment performed by a bank within its ICAAP and its recovery plan, including stress test assumptions and integration of stress test outcomes into strategies, policies and plans. - In the case of LSIs, a specific liquidity stress exercise has been carried out for the first time this year (under the FSAP scope). - LSIs run simple sensitivity tests and are encouraged to implement complete liquidity stress tests (as part of their ILAAP). - The FLESB tool has extended its analysis to include a liquidity stress test exercise to challenge LSI results. - Funding composition and reliance on ECB: - Spanish banks rely substantially on wholesale and ECB funding. - The Spanish banking system is more reliant on foreign funding than peers, making it structurally vulnerable to potential shifts in investor confidence. - Spanish banks applied for TLTROII (maturity 2020) for an amount equal to around 25 percent of total. - Market concerns and supervisory monitoring: - Some market participants express concern that the ECB’s exit from unconventional monetary policies might lead Spanish banks to further rely on external wholesale funding, negatively affecting funding stability and profitability via higher funding costs and lower interest income. - The exit process is expected to be gradual, granting banks time to rebalance funding if they act swiftly and decisively. - Banks prepare and communicate exit strategy plans, including scenarios and strategies to reduce the share of ECB funding; these plans inform banks’ resolution plans. - Supervisory observations and behavioral issues: - Supervisors observe banks do not appear concerned about substituting ECB funding based on funding plans and Asset and Liabilities Committees’ minutes. - Many banks have collateral available for additional funding, many do not renew bond issuances at maturity, and some are still deleveraging. - Banks express concern about uncertainty surrounding the ultimate decisions on the size of MREL and on the instruments considered eligible, which might delay bond issuance and affect markets at expiry of ECB extraordinary financing. - The crisis has changed attitudes: availability of central bank liquidity is generally assumed and the stigma of accessing central bank facilities has virtually vanished. - This ingrained confidence in central bank support can generate complacency counter to appropriate risk management culture. ### Corporate Governance (I; paras. 139–143) - Improvements and regulatory basis: - Corporate governance standards have improved significantly in Spanish banks with increased board and senior management awareness of sound corporate governance needs. - Transposition of CRD IV has been central: banks must have robust governance arrangements, clear organizational structures, effective risk identification/management/monitoring/reporting, adequate internal control mechanisms, and remuneration policies consistent with sound risk management. - EBA Guidelines on Corporate Governance complement CRD IV, establishing responsibilities of the Board and senior management covering duties, composition, functioning, and business conduct framework. - Supervisory promotion and inspection focus: - The ECB and the BdE have promoted good corporate governance, giving it greater prominence in inspection programs and SREP. - Where lack of knowledge at board level is perceived, relevant members are urged to undertake further education. - Persistent weaknesses identified: - Signs of persistent weaknesses emerged from reviews of inspection and SREP reports and discussions. - These weaknesses are particularly evident in the credit cooperative sector. - Observed issues include insufficient levels and diversity of knowledge and skills in boards and board committees, skill deficiencies in internal audit and IT, insufficient attention to risk management, and inadequate recording of board and committee meetings. - Internal audit in some banks (mainly LSIs) appears underdeveloped: insufficient status, expertise, experience, and too narrowly defined scope; audit committee members including the chairman sometimes lack sufficient expertise and experience. ### Related Party and Intra-Group Transactions (J; paras. 144–149) - Related party framework: - Spain has a largely adequate definition of related party. - Rules require lending to related parties to be subject to the same conditions as loans to non-related parties with similar credit risk. - No specific limits regarding maximum level of exposures to related parties; such exposures are governed by the large exposures criteria and must not exceed 25 percent of eligible capital. - Differences in application: - Rules generally apply to both directors/senior management and shareholders, but certain rules apply to directors/senior management only. - Institutions must apply to BdE for authorization to grant loans and guarantees to members of the board of directors and managing directors and similar officers but not for lending involving shareholders. - Half yearly, banks must provide the BdE with a list of board members and top management to whom loans have been extended but not provide analogous lists for shareholders or their interests. - Banking foundations: - BdE has established a special regime for banking foundations to avoid conflicts of interest, requiring a management protocol setting out general criteria for transactions between the foundation and the credit entity(ies) it owns. - Information and reporting: - Information on exposures to related parties is available through the Central Credit Register (CIR), which holds updated credit records of natural and legal persons and enables BdE to perform supervisory obligations. - Intra-group exemptions: - The level of intra-group exemptions in respect of solvency and large exposures ratios is minuscule. - For solvency ratio calculations, CRR Article 113(1) requires risk-weighted calculations for all exposures; exemptions under Article 113(6) (including intra-group exposures) are permitted with prior competent authority approval and subject to conditions. - For large exposures (limit of 25 percent of eligible capital under Article 395 of the CRR), exemptions are allowed subject to similar conditions. - BdE has allowed only two such exemptions—one under each category—for relatively small banks; details are reported to BdE via COREP under specific columns. ### Sanctioning Powers (K; paras. 150–151) - Enforcement framework: - Both the ECB and the BdE have a broad range of corrective and sanctioning powers. - The SSM framework for enforcement and sanctioning combines powers assigned to the ECB (e.g., withdraw authorization) and NCAs, with the latter not fully harmonized. - Where the ECB lacks power to directly impose and enforce measures or sanctions, it can request or instruct NCAs to act based on their powers; this arrangement has not yet been tested in Spain. - BdE corrective measures for LSIs include: - (i) imposing more stringent prudential limits and requirements; - (ii) restricting or limiting the business, operations or network of institutions; - (iii) restricting or suspending payments to shareholders or share repurchases; - (iv) restricting asset transfers; - (v) barring individuals from the banking sector; - (vi) replacing or restricting the powers of managers, board members or controlling owners; - (vii) facilitating a takeover by or merger with a healthier institution; - (viii) providing for the interim management of the bank; - (ix) proposal to ECB for revoking banking license. *IMF Staff Report excerpt (cr17345).* ### 152. Enforcement appears to work effectively in Spain. As part of its supervisory activity, BdE ### cr17345 - 152. Enforcement appears to work effectively in Spain. As part of its supervisory activity, BdE ### Enforcement framework and practice - BdE can issue two types of measures: requirements (banks are required to implement) and recommendations (banks are advised to follow). - Review of inspection reports indicates that banks comply with the enforcement regime. - Under Spanish legislation infringements are categorized as minor, serious and very serious. Serious and very serious infringements are each defined in law; minor infringements are not defined. - By change of law, BdE is now the sanctioning authority for all infringements. BdE must: - notify ex-post the MdE of all sanctions in respect of very serious infringements and - submit quarterly to the MdE the essential information on proceedings under way and the resolutions adopted. - annually send to the Parliament a report on actions that have given rise to penalties for very serious infringements. - The BdE has the power to impose sanctions to LSIs and their directors and executives, including monetary fines. ### Fining regime (introduced 2014) - For legal persons, one or more of the following penalties may be imposed: - A fine, which, depending on the severity of the breach (with especial legal thresholds for each category of infringements—minor, severe, very severe), may be: - between two and five times the amount of the gains arising from the infringement, when such gains may be quantified; or - between 0,5 percent and 10 percent of total net annual turnover; or a fine of between EUR 100,000 and EUR 10 million. - Withdrawal of the institution’s authorization, only in the case of very severe infringements. - Penalties available for de facto or de jure directors or executives responsible for the infringement (one or more may be imposed): - A fine for each of them for an amount up to EUR 5 million. - Suspension from the office of director or executive in the credit institution for a term of no more than three years. - Removal from office in the credit institution, disqualifying such persons from holding a director’s or executive post in this same credit institution for a maximum term of five years. - Disqualification to hold a directorship or executive post at any credit institution in the financial sector and removal, where appropriate, from any such post held by the infringer at a credit institution, for a period of no more than ten years. ### Recent use of sanctions - In the past three years, BdE has imposed only one fine, EUR 150,000, in respect of a consumer protection infringement in a credit cooperative. - Five further cases are currently being examined—all related to potential consumer protection infringements. - No monetary fines have been imposed or contemplated in respect of infringements of prudential rules. - No sanction has been imposed in the last five years for incomplete or inaccurate reporting: the procedure was initiated only once, and the bank complied immediately. - Since November 2014, the ECB is the competent authority for the imposition of pecuniary sanctions on SIs for breaches of prudential requirements (and on LSIs for breaches of ECB regulations or decisions). ### Administrative appeals - The power to decide on administrative appeals against decisions issued by BdE concerning credit institutions is conferred upon the MdE. This concerns all decisions, like sanctions, negative resolutions concerning authorizations, injunctions, etc.; the MdE can either uphold or overrule the affected decision. ### AML/CFT framework and supervision - AML/CFT compliance and supervision are the responsibility of the Commission for the Prevention of Money Laundering (Commission), chaired by the Deputy Minister of Finance. - The Commission’s executive service is SEPBLAC (“Servicio Ejecutivo de la Comisión de Prevención del Blanqueo de Capitales e Infracciones Monetarias”), which acts as the Financial Intelligence Unit (FIU). - All financial providers and relevant non-financial services are required to report suspicious transactions to the FIU and to the competent law enforcement authorities. - The Commission comprises over 20 of Spain’s key AML/CFT agencies (policy makers, SEPBLAC, law enforcement, supervisors including BdE, customs and tax authorities, intelligence services, data protection authorities, the judiciary, etc.). - The Commission develops and implements AML/CFT policies, facilitates domestic coordination and cooperation, and plays a role in sanctioning breaches of AML/CFT requirements. - In October 2013, the Commission and the BdE signed a MoU replacing the 2008 version; the 2013 MoU allowed BdE to carry out AML/CFT inspections in accordance with the 2010 AML/CFT Law. - In practice: - SEPBLAC is responsible for supervision of AML/CFT. - BdE supervises AML/CFT insofar as it falls within its remit of overseeing soundness of banks’ policies, procedures and internal controls and compliance with general regulations. - Both agencies carry out onsite inspections for their respective AML/CFT areas; both exchange supervision schedules, findings, and other relevant information. Simultaneous inspections by BdE and SEPBLAC are sometimes carried out. ### AML/CFT inspection activity (selected counts) - BdE onsite AML/CFT inspections (SIs only): - 12 in 2013, 6 in 2014, 4 in 2015, and 2 in 2016. - Four inspections are planned for 2017, some involving LSIs. - SEPBLAC inspections (SIs and LSIs): - 4 in 2013, 23 in 2014, 22 in 2015 and 13 in 2016. - SEPBLAC and sector supervisors send inspection reports to the Commission Secretariat, which starts and performs disciplinary proceedings for AML/CFT infringements. The Commission decides when to open a sanctioning procedure; the procedure is conducted by the Secretariat of the Commission (the Treasury) and sanctions are confirmed by the Cabinet of Ministers, the Minister of Finance, or the Director of the Treasury, per the seriousness of the violation. ### FATF mutual assessment findings (2014) - Positive findings: - Spain has up-to-date laws and regulations which implement the revised FATF Standards and is compliant or largely compliant with most of the recommendations. - The Commission is an effective coordination mechanism for AML/CFT policies and SEPBLAC is a strong financial intelligence unit and supervisor. - Spain has demonstrated significant successes in money laundering investigation and prosecution. - Spain has a high level of understanding of its ML/TF risks. - Identified weaknesses (largely outside the banking sector): - Limited capacity to handle complex ML cases in the judicial system in a timely manner. - Significant gaps in the legal obligations regarding wire transfers. - Lawyers do not adequately apply the required preventive measures. - Banking-specific notes: - Strong system to manage AML/CFT in the financial sector; implementation of preventive measures is strongest in the banking sector. - Some larger banks do not yet oversee their foreign operations to a group-wide standard. - BdE had improved engagement with the AML/CFT supervisory body and cooperation between supervisors generally works well and is particularly strong between SEPBLAC and BdE. ### Main recommendations (selection) - Enhance BdE’s independence and powers: - Legislation should be amended to give BdE operational independence in its supervisory function in line with its independence as a central bank; for example, prevent government representatives on its board from participating in supervisory decisions (including nomination of senior supervisory staff and allocation of the supervisory budget). - Grant BdE broader autonomy, through appropriate legislative mandate and compatibly with the Spanish constitutional framework, to update prudential regulations in matters not harmonized at the EU or SSM level. - Ensure that concerns of prudential nature never get subordinated to non-economic considerations in authorizations of mergers and similar operations (responsibility of MdE after hearing BdE and other authorities). - Supervisory actions and monitoring: - Maintain pressure on banks to apply stricter and more accurate assessments when classifying loans, creating provisions, restructuring loan terms, and assessing collateral valuation; review of inspections and SREP reports indicates a certain degree of loan misclassification in at least some Spanish banks. - Verify that banks implement the new provisions of Circular 4/2016, Annex IX, in a conservative manner, particularly for provisioning and collateral valuation where banks have discretion. Significant institutions are using internal methods; less significant institutions are using the tables in the annex. Institutions using internal methods must also carry out a parallel exercise using the tables for comparative purposes. - Monitor banks to ensure adequate provisioning for recent litigation cases, e.g., mortgage ‘floor clause’ liabilities and fees incurred by mortgage customers at the commencement of the loan; supervisors have engaged banks to understand the likely impact and must maintain monitoring. - Intensify the drive to improve corporate governance in banks, particularly cooperative banks; inspection and SREP reports noted weaknesses in board knowledge and skills, internal audit and IT, risk management, and underdeveloped internal audit functions in some banks. - Invite LSIs to implement complete liquidity stress tests (as part of their ILAAP) and continue to improve BdE in-home liquidity stress test model to challenge LSI results; smaller banks run simple sensitivity tests and should implement complete liquidity stress tests. The FLESB tool has been extended to include a liquidity stress test exercise to challenge LSI results. - Introduce a general legal obligation for banks to notify BdE in advance of any substantive changes in their activities, structure and overall condition, or as soon as they become aware of any material adverse developments. - Address heterogeneity of onsite practices across the SSM by refining the SSM manual, harmonizing methodology, implementation (e.g., revision of inspection reports), and resourcing (increase number of cross-border teams involving ECB and NCAs). - Extend related-party requirements currently imposed by BdE on directors and senior management to significant bank shareholders and other significant interests held by such shareholders. - Increase the number of AML/CFT inspections in LSIs; BdE has carried onsite AML/CFT inspections only on SIs since 2013 with counts noted above while SEPBLAC inspected both SIs and LSIs more frequently. ### Other recommendations (selection) - Streamline and make the BdE inspectors’ recruitment process more flexible to reduce time needed for new hires to become operational; currently time-to-job is approximately a year and a half. - Further develop a pro-active approach to the prudential impact of conduct risk and consumer protection issues, monitoring episodes and promptly identifying emerging issues that may impact banks’ reputation, profitability, and solvency. - Amend legislation to replace the MdE as the appeals body against BdE decisions with an independent appeals tribunal to avoid potential government interference. - Use monetary fines more frequently, together with other sanctioning tools; no monetary fines have been imposed or contemplated for prudential rule infringements and no sanctions in the last five years for incomplete or inaccurate reporting. - Promote use of tools based on analysis of appraisers’ valuation for supervisory analysis of credit risk and foster development of similar tools across the SSM where local conditions allow. The unit in charge of appraisers’ supervision developed a Valuations Analysis Tool for comparison of residential real estate valuations across appraisal companies to detect pockets of overvaluation. *Source: cr17345 - 152. Enforcement appears to work effectively in Spain. As part of its supervisory activity, BdE* --- _Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17345.pdf_