## Assessment of Spain’s implementation of the Basel Core Principles for Effective Banking Supervision

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### Market structure and trends
- Financial sector assets are estimated at about twice nominal GDP.
- Asset composition:
  - About 80 percent of these assets are accounted for by banks and 15 percent by insurance companies.
- Institutions and intermediation (end-2004):
  - Credit institutions: 346 total, comprising 136 commercial banks, 47 saving banks (cajas), 83 cooperatives, 79 specialized credit institutions, and the state-owned Instituto de Crédito Oficial (ICO).
  - Total loans and deposits of the resident private sector roughly equivalent to 115 and 75 percent of GDP, respectively, in 2004.
  - Commercial banks and cajas jointly account for more than 90 percent of system assets.
- Asset quality, capital, and funding:
  - NPLs reached 0.8 percent of gross loans in 2004.
  - Basel ratios surpassing 12 percent for both commercial banks and cajas.
  - Profit margins compressed by high competition and steady increase in loan provisions since introduction of statistical (dynamic) provisioning in July 2000.
- International strategy:
  - Large banks reduced exposure to Latin America to about one-quarter of overseas assets after the 2002 Argentine crisis.
  - The United Kingdom now accounts for one-third of overseas assets following European expansion and BSCH acquisition of Abbey National in 2004.
- Basel II adoption and risk management:
  - Spain scheduled to adopt Basel II by 2007.
  - Majority of large Spanish banks expected to use the internal ratings based approach.
  - Cajas implementing a common risk management tool developed by CECA; some large banks and cajas have validated models already.
  - Authorities face challenge to ensure models are thoroughly evaluated and validated.

### Macroeconomic and preconditions
- Real GDP growth was 3.1 percent in 2004.
- External sector deducted 1.9 percentage points from growth in 2004.
- House prices have virtually doubled in real terms since 1997; private and official analysts acknowledge overvaluation on the order of 25 to 35 percent.
- External current account deficit widened to 5.3 percent of GDP in 2004.
- Inflation around 3 percent in 2004 (euro-area average 2.4 percent).
- Monetary conditions: negative short-term real interest rates in Spain for the past three years from the euro-area accommodative stance.
- Fiscal stance: relatively tight fiscal policy with a small general government surplus in 2004.

### Regulatory and supervisory structure
- Main supervisory agencies and roles:
  - Bank of Spain (BE): oversight of credit institutions; defines prudential/accounting regulations; evaluates risks; enforces legal/prudential framework; implements bank resolutions.
  - Comisión Nacional del Mercado de Valores (CNMV): securities markets supervision (BE retains supervision of the book-entry public debt market).
  - Dirección General de Seguros within the Ministry of Economy and Finance (ME): insurance supervision.
- Legal framework nuances:
  - Autonomous Communities (CAs) retain regulatory and supervisory powers over saving banks and credit cooperatives excluding solvency or financial stability issues.
  - Commercial bank licenses granted/removed by the ME upon recommendation of the BE.
- Supervisory tools and practice:
  - Periodic onsite inspections, offsite review of submitted financial information, regular communication with bank management.
  - Intensive off-site monitoring supported by the Central Credit Register (CIR) for monthly reporting of risks ≥ €6,000.

### Problem credit institution resolution and deposit insurance
- Sanctions regime: infractions classified as light, serious, and very serious; penalties range from private warnings to revocation of banking licenses.
- Extraordinary resolution mechanism permits appointment of an “interventor” with veto powers or replacement of management and board in exceptionally grave cases.
- BE can provide emergency liquidity assistance within ESCB operational framework; national central banks responsible for financial stability and liquidity assistance in their jurisdiction.
- Deposit insurance:
  - Three funds operate under same rules—for commercial banks, savings banks, and credit cooperatives—covering up to €20,000 per depositor.
  - An umbrella agency administers investment and use of funds; fund boards: eight members selected by the ME, four representing BE, and four representing respective member institutions.
  - Funds can contribute to recapitalization of distressed banks under exceptional circumstances and at direction of the BE.
- Practical application (last 15 years): used in cases affecting six banks and seven savings banks; for banks various resolution mechanisms applied; for savings banks support provided via long-term low interest loans with no depositor payouts.

### Main findings and supervisory assessment (summary)
- Overall assessment: Bank supervision is effectively carried out by the BE with a high degree of compliance with the Basel Core Principles.
- Strengths:
  - Effective risk-based supervisory prudential framework.
  - Professional credibility, recognized technical expertise, and operational independence.
  - Experienced supervisory personnel, close supervision, and effective communication with industry.
- Areas for enhancement:
  - Dual legal framework governing cajas poses risk of potential conflicts in exercise of supervisory and sanctioning authority due to overlapping national and regional legal frameworks.
  - Recommendation: preserve sole and exclusive roles of BE in prudential oversight in any future legal regime changes, avoid inconsistencies in division of responsibilities, and enhance coordination of supervisory bodies.

### Regulatory powers and sanctioning authority (key issues)
- Current legal framework establishes ME as principal agency for issuing financial regulatory rules; ME has delegated limited rule-making authority to BE (e.g., Circulars for accounting/solvency).
- Risks identified:
  - BE may be unable to respond adequately should there be conflicting interests between BE and government; potential undermining of BE’s supervisory independence.
- Recommendations:
  - Transfer most regulatory powers currently under the ME to enable BE to promulgate prudential rules.
  - Consider granting the BE license revocation authority in appropriate circumstances.
  - Consider increasing sanctioning power of the BE—particularly to suspend or remove executives/directors for serious infringements beyond one year (current law allows BE to suspend/remove for one year; longer suspensions require ME decision).
  - Strengthen BE’s moral suasion via issuance of additional BE guidelines on best banking practices to make supervisory expectations more explicit.

### Selected detailed principle findings (high-level)
- Principle 1 (Objectives, autonomy, powers, and resources):
  - Overall assessments: components largely compliant or compliant; comments stress legal fragmentation risk for cajas and recommend stronger role for BE in regulation/sanctions.
  - BE deemed operationally independent and adequately resourced (Assessment: Compliant).
- Principle 2 (Permissible activities): Assessment: Compliant.
- Principle 3 (Licensing criteria): Assessment: Compliant; minimum equity capital requirement specified as 3 billion pesetas (€18 million).
- Principle 4 (Ownership): Assessment: Compliant; notification thresholds include 10, 15, 20, 25, 33, 40, 50, 66, and 75 percent.
- Principle 5 (Investment criteria): Assessment: Compliant; quantitative limits include 25 percent of own funds for individual major risks, 20 percent for risks with non-consolidated institutions in the institution’s own economic group, and total major risks limited to 800 percent of own funds; tangible fixed assets limit 70 percent of own funds.
- Principle 6 (Capital adequacy): Assessment: Compliant; solvency ratio required to be not less than 8:100 (Article 25 RD 1343/1992); monitoring/remediation provisions specified for deficits including thresholds at 80 percent and 20 percent of minimum requirement.
- Principle 7 (Credit policies & loan classification): Assessment: Compliant (rules require rigorous individualized credit analysis, provisioning types: specific, generic (1 percent or 0.5 percent in some cases), and statistical).
- Principle 8 (Loan evaluation and loan-loss provisioning): Assessment: Compliant; Rule 11 of CBE 4/1991 and Annex IX of CBE 4/2004 set provisioning and classification criteria; quarterly T-10 reporting of doubtful transactions required.
- Principle 9 (Large exposure limits): Assessment: Compliant; major risk defined as >10 percent of own funds; limits and aggregation rules detailed in CBE 5/93.
- Principle 10 (Connected lending): Assessment: Compliant; Rule 62 of CBE 4/2004 defines connected parties and monitoring; board approval and quarterly reporting required for credits to senior officials.
- Principle 11 (Country risk): Assessment: Compliant; country categories and provisioning established; BE maintains specialized monitoring of exposures (notably Latin America).
- Principle 12 (Market risks): Assessment: Compliant; model approval, VaR limits, back-testing, and specialist inspection teams in place.
- Principle 13 (Other risks): Assessment: Largely Compliant; BE does not routinely issue prudential guidelines—recommend issuing best-practice guidelines to strengthen moral suasion.
- Principle 14 (Internal control and audit): Assessment: Compliant; emphasis on board responsibilities and internal audit; Ley 44/2002 requires board audit committees for large listed companies.
- Principle 15 (Money laundering / AML): Assessment: Largely Compliant; legal framework under Ley 19/1993 and SEPBLAC supervision; reporting thresholds include movements exceeding 80.500 euros and currency/travelers’ checks over 30.050 euros; FATF mutual evaluation expected in June 2006; resource constraints noted and June 15, 2005 BE/SEPBLAC cooperation agreement recommended for full implementation.
- Principle 16 (On-site and off-site supervision): Assessment: Compliant; risk-based program with permanent BE presence at two largest banks and cajas; supervisory teams organized by institution size/complexity.
- Principle 17 (Bank management contact): Assessment: Compliant; requirement to notify BE of breaches and strategy changes during first three years of operation.
- Principle 18 (Off-site supervision): Assessment: Compliant; mandatory periodic reporting; Central Risk Data Base (CIR) for exposures > €6,000.
- Principle 19 (Validation of supervisory information): Assessment: Compliant; external audits used as complementary tool; BE validates via onsite inspections.
- Principle 20 (Consolidated supervision): Assessment: Compliant; detailed consolidated reporting (C-5) and BE powers to inspect non-financial entities with controlling relationships.
- Principle 21 (Accounting standards): Assessment: Compliant; CBE 4/2004 aligns Spanish accounting with EU-adopted IFRS; external audit mandatory.
- Principle 22 (Remedial measures): Assessment: Compliant; sanctioning tiers specified with fines up to €300,000 or 1 percent of own capital for very serious infractions; recommend delegating further sanctioning authority to BE.
- Principle 23–25 (Cross-border and host/foreign supervision): Assessments: Compliant; BE authority to supervise overseas activities, require authorizations for branches/acquisitions abroad, and enter cooperation agreements with foreign supervisors.

### Recommended action plan (selected recommendations)
- Legal framework and supervisory roles:
  - Preserve the sole and exclusive roles of the BE in prudential oversight of financial institutions when implementing future legal changes.
  - Avoid inconsistencies in division of responsibilities and enhance coordination among supervisory bodies to reduce fragmentation.
- Regulatory powers:
  - Transfer most regulatory powers currently under the ME to the BE so BE can promulgate prudential rules.
  - Consider granting BE license revocation authority in appropriate circumstances.
- Sanctioning and remedial authority:
  - Consider delegating further sanctioning authority from the ME to the BE for gravest infractions, particularly those calling for suspension or removal of bank officers beyond one year.
- Supervisory tools and transparency:
  - Issue BE guidelines on best banking practices, especially to foster effective risk management and strengthen moral suasion.
- Connected lending and conflicts of interest:
  - Review whether existing conflict of interest policies adequately address situations where bank directors/officers serve on boards of industrial companies to which they extend credit.
- Money laundering:
  - Fully implement the June 15, 2005 BE/SEPBLAC collaboration agreement, including joint inspections to the extent practical.
  - Review adequacy of inspector resources to implement a risk-based AML inspection program.
- Accounting and external auditors:
  - Consider seeking direct BE authority to remove external auditors, despite BE’s current influence through ICAC and moral suasion.

### Authorities’ response (summary positions)
- Authorities acknowledge the BE’s effective supervision and dispute several assessors’ recommendations:
  - They argue current ME–BE division of competences is effective and constitutionally consistent; ME issues prudential norms of appropriate normative rank, and BE enforces them and may issue Circulars when empowered.
  - Authorities disagree that BE lacks adequate sanctioning tools in practice and maintain that supervision of solvency and key prudential matters is a State (not regional) competence.
  - On cajas recapitalization, authorities highlight FGD powers to provide low interest loans, non-refundable aid, subscription of subordinated debt, acquisition of assets, and other measures; FGD has historically used preventive measures and facilitated mergers.
  - Authorities consider many assessors’ recommendations (e.g., transfer of regulatory powers) unnecessary and maintain several BCPs should be assessed as “compliant” rather than “largely compliant.”

*Source: _cr06218 — IMF staff assessment of Spain’s implementation of the Basel Core Principles (excerpts).*

### 1.      This assessment of Spain’s implementation of the Basel Core Principles for Effective

### _cr06218 - 1.      This assessment of Spain’s implementation of the Basel Core Principles for Effective

### Market Structure and Trends
- Financial sector composition and size
  - Financial sector assets are estimated at about twice nominal GDP.
  - About 80 percent of these assets are accounted for by banks and 15 percent by insurance companies.
- Institutions and intermediation (end-2004)
  - Credit institutions: 346 total, comprising 136 commercial banks, 47 saving banks (cajas), 83 cooperatives, 79 specialized credit institutions, and the state-owned Instituto de Crédito Oficial (ICO).
  - Total loans and deposits of the resident private sector roughly equivalent to 115 and 75 percent of GDP, respectively, in 2004.
  - Commercial banks and cajas jointly account for more than 90 percent of system assets.
- Structural developments
  - System liberalization and consolidation over past 20 years, including formation of BSCH and BBVA through mergers.
  - Elimination of geographical restrictions on cajas in 1988 triggered expansion.
- Role and characteristics of savings banks (cajas)
  - Cajas operate as non-profit entities with no share capital; rely on retained profits for capital needs but may borrow from the market on same footing as banks.
  - Cannot be bought by banks; can sell branches or other assets; can merge with one another upon approval by the autonomous communities and can buy other financial institutions including banks.
  - Increased share of customer deposits from one-third in 1980 to more than one-half in 2004.
  - Lending concentration: individuals and small- and medium-size enterprises.
- Asset quality, capital, and funding
  - NPLs reached 0.8 percent of gross loans in 2004—an historic low.
  - Basel ratios surpassing 12 percent for both commercial banks and cajas.
  - Profit margins compressed by high competition and steady increase in loan provisions since introduction of statistical (dynamic) provisioning in July 2000.
  - Banks increasingly use domestic and international capital markets: asset securitization and issuance of medium- and long-term debt.
- International strategy
  - Large banks reduced exposure to Latin America to about one-quarter of overseas assets after 2002 Argentine crisis.
  - Business expansion in Europe focused on Germany, Portugal, and the United Kingdom, which now accounts for one-third of overseas assets.
  - BSCH acquisition of Abbey National in 2004 increased international footprint.
- Basel II adoption and risk management
  - Spain scheduled to adopt Basel II by 2007.
  - Majority of large Spanish banks expected to use the internal ratings based approach.
  - Cajas: ongoing project to implement a common risk management tool developed by CECA.
  - Models often suggest large excesses of current capital and loan loss provisions; authorities face challenge to ensure models are thoroughly evaluated and validated.
  - Some large banks and cajas have already validating their models.

### General Preconditions for Effective Banking Supervision
- Macroeconomic soundness and stability
  - Real GDP growth was 3.1 percent in 2004.
  - External sector deducted 1.9 percentage points from growth in 2004.
  - House prices have virtually doubled in real terms since 1997; private and official analysts acknowledge overvaluation on the order of 25 to 35 percent.
  - External current account deficit widened to 5.3 percent of GDP in 2004.
  - Inflation around 3 percent in 2004 (against a euro-area average of 2.4 percent).
  - Monetary conditions: negative short-term real interest rates in Spain the past three years from the euro-area accommodative stance.
  - Fiscal stance: relatively tight fiscal policy with a small general government surplus in 2004.
- Public infrastructure and institutional arrangements for regulation and supervision
  - Main supervisory agencies:
    - Bank of Spain (BE): oversight of credit institutions (though regional governments retain some regulatory and supervisory powers over cajas).
    - Comisión Nacional del Mercado de Valores (CNMV): securities markets supervision (BE retains supervision of the book-entry public debt market).
    - Dirección General de Seguros within the Ministry of Economy and Finance (ME): insurance supervision.
  - National legal framework: ME and BE roles defined for regulation and supervision of credit institutions; Autonomous Communities (CAs) have regulatory and supervisory powers over saving banks and credit cooperatives excluding solvency or financial stability issues.
  - BE responsibilities include: (a) defining prudential and accounting regulations; (b) evaluating risks in the banking system and individual institutions; (c) enforcing legal and prudential framework; (d) implementing bank resolutions.
  - BE supervisory tools: periodic onsite inspections, offsite review of submitted financial information, and regular communication with bank management.
  - Commercial bank licenses granted and removed by the ME upon recommendation of the BE.
- Market discipline and governance
  - Legal and regulatory framework for transparency and governance of publicly traded institutions improved significantly between 2002 and 2004 following Comisión Aldama and EU directives.
  - Regulatory initiatives: adoption of IFRS (came into effect in Spain in June 2005) and Basel II preparations for implementation by 2007.
  - BE’s approach to standards implementation:
    - Conservative, comprehensive, and measured to minimize undue reduction of current capital or provisioning requirements.
    - Tools used include minimum risk parameters for specific asset portfolios, running models in parallel with current regulations for a two-year period, and practical use tests for risk management and capital allocation.
- Problem credit institution resolution
  - Sanctions’ regime classifies infractions as light, serious, and very serious; penalties range from private warnings to revocation of banking licenses.
  - BE may impose sanctions for light and serious infractions and recommend penalties to the ME for very serious infractions; license revocation rests with the Council of Ministers.
  - Extraordinary resolution mechanism permits appointment of an “interventor” with veto powers or replacement of management and board in exceptionally grave cases.
  - BE can provide emergency liquidity assistance within ESCB operational framework; national central banks responsible for financial stability and liquidity assistance to credit institutions in their jurisdiction.
  - BE maintains some deliberate ambiguity about emergency lending policies; recommendation made that BE set clear internal objectives, criteria, and rules to guide such operations even if not publicly disclosed.
  - Deposit insurance framework:
    - Three funds operate under same rules—for commercial banks, savings banks, and credit cooperatives—covering up to €20,000 per depositor.
    - An umbrella agency administers investment and use of funds; fund boards: eight members selected by the ME, four representing BE, and four representing respective member institutions.
    - Funds can contribute to recapitalization of distressed banks under exceptional circumstances—under least-cost resolution rules—and at direction of the BE.
  - Practical application of deposit insurance (last 15 years): used in cases affecting six banks and seven savings banks; for banks various resolution mechanisms applied; for savings banks support provided via long-term low interest loans with no depositor payouts; no reported cooperative rescues by their FGD.
  - Ownership structure of cajas complicates recapitalization under least-cost rules where recapitalization may not legally entail ownership participation.
- Main findings and supervisory assessment
  - Bank supervision is effectively carried out by the BE with a high degree of compliance with the Basel Core Principles.
  - BE has developed an effective risk-based supervisory prudential framework underpinned by professional credibility, recognized technical expertise, and operational independence.
  - Strengths: experienced supervisory personnel, close supervision, and effective communication with industry.
  - Areas for enhancement:
    - Dual legal framework governing cajas poses risk of potential conflicts in exercise of supervisory and sanctioning authority due to overlapping national and regional legal frameworks.
    - In practice coordination between BE and Autonomous Communities’ supervisory bodies has worked smoothly overall.
    - Recommendation: future legal regime changes should preserve sole and exclusive roles of BE in prudential oversight, avoid inconsistencies in division of responsibilities, and enhance coordination of supervisory bodies to align with European and international trends toward avoiding fragmentation and enhancing harmonization.

*Assessment conducted by IMF team using Basel Committee methodology; assessment basis included BE self-assessment, regulations, and financial stability reports.*

### 28.      The BE’s limited regulatory powers should be expanded. The current legal

### The BE’s limited regulatory powers should be expanded.

### Regulatory powers and legal framework
- The current legal framework establishes the ME as the principal agency charged with issuing financial regulatory rules.
- The ME has delegated to BE the authority to issue regulations on specific areas, such as accounting standards and financial statements, certain solvency standards that are already largely specified in laws, and financial disclosure.
- Notwithstanding this delegation and the good cooperation among the agencies, there is a risk that the BE may be unable to respond adequately should there be conflicting interests between the institutional goals of the BE and the government, which could undermine BE’s supervisory independence.
- Recommendation: introduce changes to the current legal framework for banking supervision to transfer most regulatory powers currently under the ME to enable BE to promulgate prudential rules.
- Recommendation: consider granting the BE license revocation authority in appropriate circumstances.

### Sanctioning authority under the Law of Discipline and Intervention (LDI)
- The LDI assigns sanction authority to the ME and BE on the basis of the severity of infractions: the ME imposes sanctions on the gravest offenses at the proposal of the BE, and the BE imposes sanctions in less severe cases.
- While the current framework appears to be working well, it is recommended to consider providing increased sanctioning power to the BE to bolster its effectiveness in promoting safe and sound practices.
- This increased authority may be particularly important for addressing serious infractions that require the suspension of executives and directors from serving in leadership positions of credit institutions.
- For instance, while current law appears to allow the BE to suspend or remove bank officers responsible for serious violations for one year, the BE may only propose more severe sanctions (suspensions or removals greater than one year) to the ME.

### Strengthening supervisory tools
- There is room to strengthen supervisory tools given the BE’s limited regulatory and sanctioning authority.
- It would be desirable to further strengthen moral suasion.
- One alternative is to issue additional BE guidelines on best banking practices, particularly those that foster effective risk management.
- Such guidelines may help strengthen the effectiveness of the BE’s moral suasion by making supervisory expectations on sound bank practices more explicit and transparent to the industry.
- Explicit standards would help reinforce communication between the BE and supervised institutions, particularly when the BE is proposing prompt corrective measures.

*Source: _cr06218 - 28.      The BE’s limited regulatory powers should be expanded. The current legal*

### 31.      This assessment of compliance with the Basel Core Principles has been made on a

### _cr06218 - 31.      This assessment of compliance with the Basel Core Principles has been made on a

### Assessment methodology
- A five-part assessment system has been used: compliant; largely compliant; materially noncompliant; noncompliant; and not applicable.
- To achieve a compliant assessment with a principle, all “essential” criteria generally must be met without any significant deficiencies.
- Definitions of other ratings:
  - Largely compliant: only minor shortcomings that are not seen as sufficient to raise serious doubts about the authority’s ability to achieve the objective of that principle.
  - Materially noncompliant: shortcomings sufficient to raise doubts about the authority’s ability to achieve compliance, but substantive progress had been made.
  - Noncompliant: no substantive progress towards compliance, or insufficient information to allow a reliable determination that substantive progress had been made towards compliance.
  - Not applicable: principle deemed by the assessors to not have relevance.

### Principle 1. Objectives, autonomy, powers, and resources — summary findings
- Principle summary: Clear responsibilities and objectives for each supervisory agency; operational independence and adequate resources; suitable legal framework for authorization and ongoing supervision; powers to address compliance and safety/soundness; legal protection for supervisors; arrangements for information sharing and confidentiality.
- Overall Table 1 detailed assessments for components of Principle 1:

Principle 1(1) — Clear responsibilities and objectives
- Description highlights:
  - At national level legal framework involves the Ministry of Economy and Finance (ME) and the Bank of Spain (BE).
  - Each Autonomous Community (CA) has some regulatory/supervisory powers over saving banks and credit cooperatives (excluding solvency/financial stability).
  - Key legal elements: Law 26/1988 (LDI), Law 13/1994 (LABE), regulations governing CAs, LABE Art. 7.6, LDI Art. 43 bis.
  - Coordination mechanisms: Art. 4 of Law 30/1992; cooperation protocols dated March 12, 2004 (BE and Directorate General of Insurance and Pension Funds) and June 9, 2004 (BE and CNMV).
  - BE empowered to participate in resolution via LABE Art. 23.1 f), Article 34 of RD 1343/1992, LDI Title III, LDI Title I, Articles 10 and 11 of RD 2606/1996.
- Assessment: Largely compliant.
- Comments: Dual legal framework governing cajas poses risk of potential conflicts in supervisory and sanctioning authority; future legal changes should preserve BE’s sole prudential oversight role and enhance coordination to avoid fragmentation.

Principle 1(2) — Operational independence and resources
- Description highlights:
  - LABE Art. 1.1, 1.2, and 4.1: BE acts with full autonomy and enjoys full operational and financial autonomy.
  - Governance: governor appointed by the king on proposal by head of government for a non-renewable term of six years; deputy governor same requirements.
  - BE has capacity and sufficient financial resources from ordinary operating income; can hire outside experts.
  - Budget process: BE operating expenses and investment budget approved by Governing Council, forwarded to government then National Legislative Assembly; budget not consolidated with other public sector budgets.
- Assessment: Compliant.
- Comments: BE enjoys sufficient financial revenues to ensure adequacy of resources for supervisory and regulatory responsibilities.

Principle 1(3) — Legal framework for authorization and supervision
- Description highlights:
  - LDI Art. 43.1: authorization generally by minister of economy subject to prior report from BE; for some savings banks CA is responsible but prior BE report mandatory.
  - Article 57 bis of Banking Law (LOB): revocation authority generally with Council of Ministers at suggestion of minister of economy; revocation for savings banks governed by CA authority.
  - LABE Art. 3: BE may issue “Circulars” for accounting standards, solvency standards, transparency (OM references).
  - BE empowered to request economic/financial/organizational information (LDI Art. 48.1, Order 31-3-1989) and conduct inspections (LDI Art. 43 bis).
- Assessment: Largely compliant.
- Comments: Risk that BE may be unable to respond adequately in case of conflicting interests with government; authorities should transfer most regulatory powers from ME to BE and consider granting BE license revocation authority in appropriate circumstances.

Principle 1(4) — Powers to address compliance and safety/soundness
- Description highlights:
  - LABE Art. 7.6 and LDI Art. 43 bis: BE supervises solvency, operations, compliance; may request inspections and information.
  - BE empowered to adopt early prevention measures (e.g., suspension of dividend distribution, limitation of branch expansion, capitalization plans, suspension of voting rights, intervention or management substitution).
  - Sanctioning framework: LDI Title I and Banking Law Art. 57 bis; BE initiates and processes sanctions (LDI Art. 18) with ME imposing sanctions for very severe infringements at BE proposal.
  - LDI Title III: BE determines intervention and substitution of administrators in exceptionally serious situations.
- Assessment: Compliant.
- Comments: Current sanction allocation works but delegation of further sanction power to BE advisable to bolster moral suasion and effectiveness, particularly for suspending/removing executives; current law appears to allow BE to suspend or remove officers for one year but requires ME for longer suspensions/removals.

Principle 1(5) — Legal protection for supervisors
- Description highlights:
  - Articles 106.2 CE and 139 of Law 30/1992: public administrations respond financially when legally established conditions are met.
  - BE Internal Rules Articles 25 and 26: BE must compensate individuals for loss caused by authorities/staff acting in exercise of duties; BE assumes legal defense and financial liability except where BE acts as complainant/accuser.
  - LABE Art. 6 and RD 1298/1986 Art. 6: secrecy/professional secrecy obligations for governing bodies and staff.
  - BE must reclaim from directors/employees liabilities resulting from fraud, negligence, or gross negligence (Art. 25.5 BE Internal Rules).
- Assessment: Compliant.
- Comments: Legal protection effectively shields supervisors acting in good faith.

Principle 1(6) — Information sharing and confidentiality
- Description highlights:
  - Cooperation mandated by Law 44/2002 (additional provision 2); LMV Art. 17 and LABE Art. 20 set cooperation frameworks between BE and CNMV.
  - LMV Art. 88, 90.6, 97: coordination in overlapping responsibilities; mutual information exchange; CNMV must obtain BE report prior to initiating sanctioning proceedings affecting credit institutions.
  - RD 1343/1992, RD 1298/1986, LDI Articles 43 and 58.2, LDI Art. 23 bis: provisions for cooperation with EU and other supervisors; notification of sanctioning proceedings affecting branches of institutions authorized in other EU states.
  - RD 1298/1986 Articles 6.4, 6.5, 6.1: BE released from confidentiality obligation to provide information to other supervisors; recipients must ensure confidentiality at least equal to Spanish law; general rule: supervisor information is confidential with restricted exceptions.
  - LABE Art. 6.3: governor may request closed session for classified material when reporting to National Legislative Assembly.
- Assessment: Compliant.
- Comments: Assessors encourage continued deepening of cooperation among ME and banking, securities, and insurance supervisors regarding regulation of financial products to foster capital market development.

### Principle 2. Permissible activities
- Principle summary: Permissible activities of licensed supervised banks must be clearly defined; use of the word “bank” controlled.
- Description highlights:
  - Art. 1 of RD 1298/1986: generic definition of credit institution aligned with EU regulations; specific terminology for banks, savings banks, credit cooperatives, financial credit entities in respective laws/regulations.
  - Authorization procedure analyzes institution’s plan of activities; CNMV informed if activities relate to investment/securities markets.
  - LDI Art. 52: Authorization universal for banking activities (in line with Directive 2000/12/CE Annex I).
  - LDI Articles 28–30: use of the word “bank” reserved; infringements prosecuted/sanctioned by BE; public registries must not register confusing names.
  - LDI Articles 28 and 29 and RD 1298/1986 Art. 1: Reimbursable deposit-taking from the public reserved for credit institutions; BE may prosecute/sanction infringements.
- Assessment: Compliant.
- Comments: In last five years BE initiated 14 sanctioning proceedings against non-authorized deposit-taking institutions.

### Principle 3. Licensing criteria
- Principle summary: Licensing authority must set criteria and reject applications failing standards; licensing process to assess ownership, management, operating plan, internal controls, projected financial condition, capital base; foreign owners require prior consent from home supervisor.
- Description highlights:
  - Legal basis: Articles 30.4 and 43 of Law 26/1988 (LDI); Articles 1–4 and 9 of RD 1245/1995.
  - RD 1245/1995 Art. 2.4: Banks must satisfy requirements at all times and have minimum own funds at least equal to minimum capital requirement.
  - LDI Art. 43.5 and RD 1245/1995 Art. 4: ME shall deny authorization for failure to meet requirements, including shareholder suitability.
  - RD 1245/1995 Art. 2.1.(b): Minimum equity capital must total at least 3 billion pesetas (€18 million).
  - Board requirements: Art. 2 requires Board of at least five members; directors must be of good business/professional repute and majority with appropriate knowledge/experience; lists of disqualifying conditions provided.
  - Internal controls and operating plan requirements: Articles 2.1.(g), 3.(b), and Articles 3 and 4 of RD 1245/1995.
  - Minister of Economy authorizes setting up credit institutions following BE report (RD 1245/1995 Art. 1.1).
  - Branches abroad: Articles 7 and 9 of RD 1245/1995 require consultation with corresponding supervisory authorities.
  - LOB Art. 57 bis 1.(c): license obtained by false information may be revoked.
- Assessment: Compliant.
- Comments: Encouraged BE to maintain close coordination with other European supervisory agencies given EU cross-border branch establishment to ensure fit and proper tests.

### Principle 4. Ownership
- Principle summary: Supervisors must be able to review and reject transfers of significant ownership or control.
- Description highlights:
  - LDI Art. 56.1: Significant holding defined as at least five percent of capital or voting rights or holdings enabling notable influence.
  - RD 1245/1995 Art. 18: expands definition to holdings acquired directly, through controlled companies, group companies, or persons acting in concert.
  - LDI Articles 57 and 58: prior notification to BE required before acquiring significant holding; thresholds for notification: 10, 15, 20, 25, 33, 40, 50, 66, and 75 percent or any change in controlling interest.
  - LDI Art. 61: CIs must notify BE as soon as aware of acquisitions exceeding limits.
  - RD 1245/1995 Art. 19 (CBE 6/1995): information requirements on capital structure and share transfers.
  - BE has three months to oppose proposed acquisition (LDI Articles 58 and 59).
  - Consequences of acquisition without notification: voting rights may not be exercised; possible intervention/substitution of directors; sanctions.
  - LDI Art. 62: ME may adopt measures (including revocation in exceptional circumstances) following BE proposal if influence threatens institution’s financial position.
- Assessment: Compliant.
- Comments: Consider greater delegation of authority from ME to BE pursuant to LDI Art. 62 in circumstances where soundness may be harmed by acquiring shareholder influence.

### Principle 5. Investment criteria
- Principle summary: Supervisors must have authority to review major acquisitions/investments and ensure corporate affiliations/structures do not expose banks to undue risks or hinder supervision.
- Description highlights:
  - LDI Articles 57 and 58: significant holdings in Spanish CIs must be approved by BE.
  - LDI Articles 30.bis.3–5: setting up branches abroad and acquiring significant holdings in non-EU states requires BE authorization.
  - Regulation of limits/deductions from eligible own funds:
    - LRP Art. 6.3 (Law 13/1985) allows establishment of ceilings on investments in real property, shares, foreign currency positions, risks with same person/group, etc.
    - Implementing rules:
      - Art. 30 RD 1343/1992 and Rules 25–28 of CBE 5/93 on limits on high risks: may not exceed 25percent of own funds (20 percent for risks with non-consolidated institutions in an institution’s own economic group). Total high risks may not exceed 800 percent of own funds.
      - Art. 31 RD 1343/1992 and Rule 29 of CBE 5/93 on limits on tangible fixed assets: these items may not exceed 70 percent of own funds.
    - LRP Art. 10, Art. 21.1.h) RD 1343/1992, Rule 10 of CBE 5/93 on deduction from eligible own funds of qualifying holdings in companies not listed as finance companies: deduction rules (thresholds 60 percent of own funds and 15 percent per holding) apply.
    - Article 21.1.e) g) of RD 1343/1992 and Rule 9.e) g) of CBE 5/93: deductions for holdings in financial institutions not consolidated where holding exceeds 10 percent.
  - LDI Art. 30 bis.5: reasons to deny authorization include inability to ensure effective consolidated supervision or negative effects on institution’s financial position.
  - RD 1245/1995 Art. 4: requirements observed at all times including sufficient organizational resources and internal controls.
- Assessment: Compliant.
- Comments: Supervisory approach and regulations ensure ongoing monitoring and control of CIs’ strategies and investment decisions; on-site exams verify limits and data accuracy.

### Principle 6. Capital adequacy
- Principle summary: Supervisors must set minimum capital adequacy requirements reflecting risks, define capital components capable of absorbing losses; internationally active banks’ requirements not less than Basel Accord.
- Description highlights:
  - Spanish solvency regulation adheres to EU regulations incorporating Basel Accord principles; Spanish regulation stricter in some areas (exclusion of certain own funds eligible under EU/Basel; additional deductions).
  - Law 13/1992 (redrafting of Law 13/1985) sets basic solvency for consolidatable groups and includes own funds requirements for financial conglomerates since 1993.
  - Article 25 of RD 1343/1992: solvency ratio requirement: “Consolidatable groups of credit institutions, as well as credit institutions not integrated into one of these groups must, at all times, maintain a solvency ratio of not less than 8:100.”
  - Article 6 of Law 13/1985 and Art. 30 ff. of RD 1343/92: additional limits/reinforcements:
    - Limits on major risks: individual exposures over 10 percent of own funds defined as high risk; individual limited to 25 percent of own funds (20 percent for own group); global limit 800 percent of own funds.
    - Limits on tangible fixed assets: 70 percent of own funds.
    - Penalties via deduction from own funds for excess qualifying holdings in nonfinancial institutions.
  - Article 7 of Law 13/1985: own funds composition elements listed.
  - Monitoring and remediation:
    - Article 9.4 Law 13/1985: BE must monitor individual solvency.
    - Article 10 of Law 3/1992 and LDI Articles 4–5: reducing own funds below 80 percent of minimum requirement for more than 6 months is very serious; 2–6 months is serious.
    - Article 11.1 Law 13/1992: failure to meet minimum own funds requires restoration of reserves and BE prior authorization for distributions.
    - Article 35 RD 1343/1992: if own funds deficit >20 percent of minimum requirement, institution must allocate net profits to reserves; if deficit <20 percent, profit distribution subject to BE and at least 50 percent allocated to reserves.
    - Rule 30 CBE 5/1993: institution must inform BE immediately of noncompliance and submit solvency recovery plan within one month.
    - DF 2 RD 1343/1992: BE empowered to stipulate frequency/form of own funds declarations.
    - Rules 33 and 37 of CBE 5/1993: reporting requirements semi-annually (some cases quarterly) on various solvency and limits items.
- Assessment: Compliant.
- Comments: Capital adequacy regulations provide a comprehensive prudential framework adhering to international standards and are stricter in capital composition.

### Principle 7. Credit policies
- Principle summary: Supervisory system requires independent evaluation of bank credit/investment policies, practices, procedures and ongoing portfolio management.
- Description highlights:
  - RD 1245/1995 Art. 2: CIs must maintain sound administrative and accounting organization and internal control procedures at all times; Board must establish operational/procedural rules.
  - RD 1343/1992 Art. 32 and CBE 5/93 Rule 4.4: institutions must establish interest and liquidity risk policy approved by governing body and verifiable by BE.
  - Institutions must identify management body/manager responsible for information and risk management.
  - Rule 10.1 of CBE 4/1991 and Annex IX of CBE 4/2004: institutions must exercise utmost care and diligence in individualized credit risk analysis at origination and throughout credit life; Board approval required for policies, methods, and procedures; Audit Committee and Internal Audit to ensure appropriate implementation and review.
  - Rule 25.7 of CBE 5/93: institutions must have internal information to monitor sectoral risk concentrations and ensure diversification.
  - Rules 10.2 and 10.3 of CBE 4/1991: accounting classification criteria for doubtful items including contingent liabilities.
  - Rule 11.4.d) of CBE 4/1991: credits in excess of €25,000 not adequately documented penalized with minimum provisioning of 10 percent; corporate holders must provide timely updated financial statements for analysis.
- Assessment: (Assessment heading for Principle 7 present in source but the detailed assessment text beyond provided excerpt is not included in supplied content.)

*Source: _cr06218 - 31.      This assessment of compliance with the Basel Core Principles has been made on a (PDF excerpt provided).*

### section II (classification of operations in terms of credit risk) and III (cover for losses as a result of

### _cr06218 - section II (classification of operations in terms of credit risk) and III (cover for losses as a result of

### Central Credit Register (CIR) and reporting requirements
- CBE 3/95 Central Credit Register (CIR) establishes the obligation to report, on a monthly basis, the amount and holder(s) of practically all risks equal to or exceeding certain minimum thresholds (€6,000 for business conducted in Spain with residents) granted by Spanish credit institutions (and foreign CIs in their operations in Spain), together with other data describing these risks.
- Reporting institutions have access to aggregate information on all risks reported by risk holders in the system or of potential clients who have expressly granted access to their data.
- Verification and analysis of these aspects are a main aim of on-site visits; when weaknesses in risk management policies and practices are identified in inspections, the BE issues the corresponding requirements to the respective institutions (letter to the Board of Directors).
- Assessment: Compliant.
- Comments: The Spanish supervision system is intense in terms of ongoing monitoring of CI policies, practices, and risk control management, reinforced with regular on-site inspection.

### Principle 8 — Loan evaluation and loan-loss provisioning: legal and supervisory framework
- Objective: Banking supervisors must be satisfied that banks establish and adhere to adequate policies, practices, and procedures for evaluating the quality of assets and the adequacy of loan-loss provisions and reserves.
- Rule 10.1 of CBE 4/1991: Credit institutions must exercise utmost care and diligence in the rigorous and individualized analysis of the credit risk inherent in their credits, not only when these credits are granted but also throughout the entire duration of credits, and shall not delay in reclassifying credits as doubtful assets and covering these assets with special funds.
- Rule 10 of CBE 4/1991: Establishes criteria for classifying an investment as doubtful, both objectively (arrears) and subjectively (deteriorated financial position).
- Rule 11 of CBE 4/91: Establishes the criteria for the following three types of minimum provisioning:
  - Specific: covers losses for transactions or customers classified as doubtful.
  - Generic: 1 percent of risks without specific cover or 0.5 percent in some cases (mortgages on completed housing).
  - Statistical: covers estimated latent overall insolvency in the various risk portfolios.
- Annex IX of CBE 4/2004 on analysis and coverage of credit risk: establishes criteria institutions must apply in their credit risk management policies, methods, and procedures, including specific rules for classifying transactions in terms of credit risk and for covering this risk with provisioning (specific and generic coverage).
- Additional Provision 1 of Law 19/1988 on the Auditing of Accounts: All Spanish financial institutions are obliged to audit their annual accounts; accounting standards contained in BE circulars are mandatory from the commercial viewpoint and external auditors issue opinions on annual accounts on the basis of these provisions.
- ICAC Resolutions (December 1, 1994 and December 15, 1995): External auditors prepare a supplementary report for the supervisor that must provide information on loan-loss provisions.
- Rule 11.4.b) and c) of CBE 4/1991: Establishes provisioning criteria for contingent assets and liabilities; Annex IX of CBE 4/2004 establishes specific rules for classifying contingent risks and liabilities and for covering this risk with provisioning.
- CBE 4/2004 updates CBE 4/1991 accounting rules to adapt to IFRS; key provisions include:
  - Rule 10.2.b): Transactions, matured or otherwise, in which there is reasonable doubt with regard to total reimbursement at the time and in the form contractually agreed must be classified as doubtful, including circumstances such as negative net worth, continuous losses, generalized payment arrears, an inadequate economic or financial structure, or other reasons.
  - Rule 10.5: Extending or redocumenting transactions where reimbursement is problematic neither affects payment arrears nor results in reclassification as regular transactions unless it is reasonably certain that the customer can meet his payments within the foreseen schedule or effective new guarantees are forthcoming and, in both cases, at least the pending ordinary interest is paid without taking the arrears interest into account.
  - Rule 11.4.b)c): Provisioning shall be made for guarantees and other pledges given and classified as doubtful, and contingent assets and other contingent liabilities classified as doubtful for reasons other than arrears in an amount equal to the estimated unrecoverable amount based on the strictest valuation criteria and respecting the minimum percentages stipulated in the above-mentioned circular.
- Rule 41.1 of CBE 4/1991: Spanish CIs and branches of foreign institutions must submit a quarterly statement (T-10) of transactions classified as doubtful and grouped according to various characteristics and the respective provisioning.
- CBE 3/1995: Monthly individualized information is available on risks reported to the credit register (CIR) by Spanish CIs and branches of foreign institutions operating in Spain, as well as information on evolution of the total amount of doubtful credits and respective provisioning included in balance sheets.
- Rule 29.7 12.b of CBE 4/2004 on loss in value of financial assets: requires the updated value of real guarantees to estimate future cash flows for debt instruments valued at amortized cost.
- Rule 29.22 of CBE 4/2004 on methods to estimate loan losses: institutions’ calculation models must take account of guarantees made on the basis of the information available on the date on which the estimate is calculated.
- Assessment: Compliant.
- Comments: Spain traditionally has applied very strong loan classification and provisioning rules, with strong compliance procedures via off-site credit risk follow-up (comprehensive credit risk register) and significant presence in banks through on-site examinations. In adopting IFRS and Basel II guidelines the BE follows a measured approach to preserve the strong credit risk control framework.

### Principle 9 — Large exposure limits: definitions and limits
- Objective: Supervisors must be satisfied that banks have MIS to identify concentrations and that supervisors set prudential limits to restrict bank exposures to single borrowers or groups of related borrowers.
- Legal definitions and aggregation:
  - Spanish regulations assume a very generic and broad definition of “group,” allowing supervisor discretion where there is indication of “close relation.”
  - Article 42.1 of the Commercial Code (RD 22 of August 1885): a “group” exists when several companies form a decision-making unit.
  - LMV Art. 4: Institutions constituting a decision-making unit shall be deemed to belong to the same group for large exposure limits purposes.
  - Article 5 of RD 1343/1992: A group constituting a decision-making unit shall be deemed an economic group pursuant to Article 4 of the Securities Market Law (LMV).
  - Rule 25 of CBE 5/93 on risk aggregation for the calculation of concentration limits: All risks held with (a) a person, (b) another economic group (Art. 5 of RD 1343/1992), and (c) non-consolidated companies belonging to the same economic group, shall be aggregated.
  - Article 30.4 of RD 1343/1992; Rule 25.2 of CBE 5/93: The BE may stipulate that specific groups of customers be considered as a single unit, even though they do not belong to the same economic group.
- Quantitative limits (Rule 26 of CBE 5/1993):
  - Definition of major risk: Any risk exceeding 10 percent of own funds.
  - Risks assumed with an individual or group not belonging to the risk-bearer’s group may not exceed 25 percent of own funds.
  - Risks with non-consolidated companies belonging to the CI’s own group are limited to 20 percent of own funds.
  - Total major risks are limited to 800 percent of own funds.
- Calculation and reporting:
  - Rule 25.5 of CBE 5/93: Risks calculated by aggregating transactions posted as assets in the balance sheet with sureties, guarantees, and all other obligations listed in memorandum accounts for the same person or group.
  - Article 30.4 of RD 1343/1992; Rule 6.3 of CBE 4/1991: CIs shall ensure appropriate monitoring of risk concentration via suitable administrative and accounting procedures and internal control mechanisms; institutions must have information required to assess concentration risk.
  - Rule 33.1 of CBE 5/1993: Institutions must provide the BE with periodic information on major risks and compliance with limits.
  - Rule 41.1 of CBE 4/1991: Two further statements must be submitted periodically to ensure geographical and sectoral concentration are reviewed.
- Assessment: Compliant.
- Comments: In practice, a wide range of concentrations are analyzed at both individual and group level using both BE information and information requested during on-site inspections.

### Principle 10 — Connected lending: controls and monitoring
- Objective: Prevent abuses arising from connected lending; require arms-length lending to related companies and individuals, effective monitoring, and risk mitigation.
- Definitions and requirements:
  - Comprehensive definition of “connected or related parties” (see BCP 9); Rule 62 of CBE 4/2004 provides detailed definition and information requirements.
  - Art. 30.4 of RD 1343/1992 allows BE to stipulate that specific groups of customers be considered a single unit even if not in same economic group.
  - LRP Art. 9.4: Empowers the BE to require information and carry out on-site examinations of non-financial CI-related parties to assess legal and financial influence on CIs.
  - Article 5.1 of Law 31/1968 and Art. 2 of Decree 702/1969: Persons recorded in the Senior Bank Officials Register may not obtain loans, sureties, or guarantees from the institution unless expressly authorized by the BE.
  - Rule 32 of CBE 5/1993: Stipulates criteria and terms for authorization; decision must be adopted by Board without involvement of the director concerned. BE receives quarterly list of credits to persons holding management positions and to companies where such persons have majority capital stake or are general manager.
- Governance and monitoring:
  - Annex IX of CBE 4/2004 requires institutions to establish board-approved policies, methods, and procedures for granting, analyzing, and documenting credit risk; Audit Committee and Internal Audit shall ensure appropriateness, effective implementation, and regular review.
  - Credits to directors, companies linked to directors, the bank’s own group, etc. are monitored using monthly CIR information and the quarterly report on risks with related persons and connected companies (Rule 32.2 CBE 5/93).
  - On-site inspections verify board minutes include credits granted to directors and companies in which they have holdings and that the person concerned does not participate in approving these credits.
  - Rule 26.3 of CBE 5/1993: Risks assumed with respect to the risk-bearer’s non-consolidatable group may not exceed 20 percent of own funds; risks held with directors of companies belonging to the CI’s own group shall be aggregated in the calculation.
- Assessment: Compliant.
- Comments: Assessors encouraged authorities to consider whether current conflict of interest policy guidelines adequately address potential conflicts, particularly where bank directors or officers also serve as directors in industrial companies in which the bank has ownership and to which the bank extends credit or other financial services.

### Principle 11 — Country risk: classification and reporting
- Objective: Supervisors must be satisfied that banks have adequate policies and procedures for identifying, monitoring, and controlling country risk and transfer risk, and for maintaining appropriate reserves.
- Framework:
  - Regulations and supervisory activities enable the BE to have a clear understanding of country risk management in supervised institutions and country risks in the banking sector in general.
  - CBE 4/1991 defines country and transfer risk, outlines requirements that banks must undertake to review and manage such risks, and establishes detailed quarterly reporting requirements.
  - The Circular establishes criteria to categorize countries into six distinct groups (ranging from least to highest risks) to facilitate risk classification.

*Source: _cr06218 - section II (classification of operations in terms of credit risk) and III (cover for losses as a result of*

### Annex IX of CBE 4/2004 articulates requirements for establishing country risk management policies and

### _cr06218 - Annex IX of CBE 4/2004 articulates requirements for establishing country risk management policies and

### Country risk management (Annex IX)
- Annex IX of CBE 4/2004 articulates requirements for establishing country risk management policies and procedures, and sets specific country risk classification criteria and minimum provision requirements.
- A specialized unit of the BE carries out ongoing monitoring of country risks, particularly in Latin America, where the bulk of overseas exposures have been lodged.
- Comprehensive country risk information is reported and evaluated by BE supervisors on a frequent basis and compliance is evaluated as part of on-site inspections.
- Assessment: Compliant.
- Comment: Given Spanish banks’ substantial growth in exposures to European countries, assessors encouraged authorities to consider reviewing, and if necessary, making appropriate adjustments in supervision practices with respect to country risk monitoring and assessment.

### Principle 12 — Market risks
- Regulatory and accounting rules underpin the BE’s ability to evaluate CI market risk identification and control.
- Article 2, Royal Decree 1245/1995 requires institutions to have sound internal controls and risk management systems.
- CBE 4/1991 (updated by CBE 4/2002) requires CIs to evaluate and monitor market risk and make available information necessary to support BE supervisors’ market risk assessment.
- CBE 5/1993 requires sufficient resources to cover positions in foreign exchange, gold, trading portfolios, and commodity price risks; outlines requirements for approval of market risk models, minimum capital charges and fixed daily VaR limitations.
- BE and banking associations produced guidelines addressing internal controls in Treasury activities in 1997; BE uses these and internal updated guidelines during onsite inspections. Two specialized inspector teams focus on treasury/internal models and custody.
- On-site inspections cover contingency plans, stress-testing, simulation methodology and back-testing.
- Assessment: Compliant.
- Comment: Assessors encouraged authorities to review and update, as needed, the 1997 public guidance on treasury activities.

### Principle 13 — Other risks
- CBEs 4/1991 and 5/1993, supported by Arts. 2 RD 1245/1995 and 32 RD 1343/1992, emphasize controls, board responsibilities, and CI reporting to evaluate liquidity, market risk, foreign exchange risks, concentrations, and operational risks.
- BE evaluates CI risk management largely through risk-based onsite inspections; risk management function is pivotal in onsite examinations.
- BE does not routinely issue prudential guidelines on different kinds of risk but fosters dissemination of sound practices via publications, speeches, participation with banking associations, and Basel Committee leadership.
- Assessment: Largely Compliant.
- Comment: Lack of regulatory authority hampers BE’s scope of action; supervisory tools rely mostly on moral suasion. Assessors recommend BE consider issuing guidelines on best banking practices to make supervisory expectations more explicit and strengthen moral suasion and transparency.

### Principle 14 — Internal control and audit
- Legal foundations:
  - Article 133, Ley de Sociedades Anónimas and Art. 2.1 g) RD 1245/1995 on board responsibilities.
  - Ley 44/2002 requires board audit committees with majority non-executive directors for large publicly traded companies.
  - Ley de Transparencia 26/2003 requires annual corporate governance reports and cajas to establish investment and compensation committees within the board.
  - El Código Olivencia (Feb 1998) and El Informe Aldama (Jan 2003) supplement voluntary corporate governance practices.
  - Art. 62, LDI allows the ME, at BE request, to suspend voting rights of major shareholders and revoke previously approved significant ownership stakes where shareholder influence can gravely damage institution’s financial health.
- BE evaluates internal controls, emphasizing internal audit functions: technical and human resources, independence, scope/frequency of audits, and reporting to management and board.
- Assessment: Compliant.
- Comment: BE supervisors place considerable emphasis on evaluating CIs’ adequacy of internal controls.

### Principle 15 — Money laundering (AML)
- Ley 19/1993, modified by Ley 19/2003, provides legal framework on prevention of laundering of capital; requires identification of clients and ultimate beneficiaries, retention of customer records a minimum of 5 years, and reporting of suspicious transactions to SEPBLAC.
- Reporting thresholds: movement of cash and Cashier’s checks over 80.500 euros subject CIs to reporting and other obligations; transactions involving currency and travelers’ checks over 30.050 euros must be disclosed to SEPBLAC.
- SEPBLAC has legal authority and responsibility for supervising/enforcing CIs’ compliance with AML rules; BE does not supervise AML compliance but provides human and financial resources to assist SEPBLAC.
- SEPBLAC issues rules on reporting requirements and “Know Your Customer” policies; major credit institutions apply SEPBLAC’s reporting system requirements for suspicious transactions.
- SEPBLAC’s recent focus: reviewing compliance in the largest commercial and savings banks (cajas) and affiliates; scope includes adequacy of AML policies, appointment of compliance officers, suspicious transaction reporting, internal lines of communication and controls.
- BE and SEPBLAC cooperation:
  - A BE Director must serve as a SEPBLAC commissioner.
  - In June 2005, BE and SEPBLAC entered into a cooperation agreement calling for information sharing, simultaneous inspections, joint planning, and shared responsibility for corrective measures.
- Assessment: Largely Compliant.
- Note: The Financial Action Task Force (FATF) expects to complete a mutual evaluation of Spain’s framework for combatting money laundering and the financing of terrorism in June 2006.
- Comments: Given sector size and relatively small number of inspectors, doubts remain whether current inspector force can implement a risk-based inspection program with sufficient depth and frequency. Authorities are encouraged to review adequacy of resources. Assessors also encourage BE and SEPBLAC to fully implement the June 2005 collaboration agreement, including joint inspections.

### Principle 16 — On-site and off-site supervision
- BE has an effective risk-based supervisory program integrating onsite inspections, offsite monitoring/analysis, and communication with management and directors.
- Legal underpinning: Art. 7.6 of the Autonomy Law of the Bank of Spain and Art. 43 of the Disciplinary and Intervention Law.
- Supervisory teams are organized by size/complexity of institutions; permanent BE presence at the two largest banks and cajas.
- Supervisory plans take into account bank risk profiles using a consistent set of defined risks; banks’ risk matrices are used to prioritize resources.
- On-site inspections are led by an examiner-in-charge, preceded by detailed scoping and pre-arranged materials, include ongoing dialogue and end-of-exercise meetings; written reports with corrective measures are sent to management and board.
- Compulsory external audit of CIs’ individual and consolidated annual accounts underpins off-site supervision.
- Assessment: Compliant.
- Comment: Assessors encouraged BE supervisors to continue strengthening use of banks’ risk matrix to prioritize risks and allocate supervisory resources.

### Principle 17 — Bank management contact
- BE supervisory process emphasizes contact with supervised institutions during offsite monitoring and on-site inspections.
- CBE 5/1993 obligates banks and financial groups to notify BE promptly when concentration risk limits are exceeded or capital requirements breached.
- Article 6.3 RD 1254/1995 requires new CIs, during first three years, to notify BE of significant changes to operating strategy versus the strategy submitted at approval.
- BE maintains routine contact with management and has access to high-level officials and board members; lead examiner-in-charge serves as focal point.
- Contact with smaller institutions may be less frequent; on-site inspection interval may occur within a 3-year window, but offsite monitoring can include direct contact when warranted.
- Assessment: Compliant.
- Comment: Assessors encouraged BE to consider whether more frequent management contact is advisable in smaller to mid-sized institutions where intervals between on-site inspections may be longer.

### Principle 18 — Off-site supervision
- LABE and LDI enable BE to establish and modify accounting rules and financial reports and adapt them to EU and international standards; CBE 4/2004 updates accounting and reporting to new European framework.
- Financial institutions must provide statistical information on: on- and off-balance sheet assets, liabilities, losses and gains, own capital resources, liquidity, large exposures, provisions for insolvencies, market risks and deposit originations on a solo and consolidated basis.
- Periodic (at least semi-annual) remittance to BE of financial statements required by Article 47 and LDI Art. 9 and Ley 3/85 modified by Ley 13/92 and CBE 5/93.
- Non-compliance with reporting requirements is a serious infraction subject to sanctions.
- BE develops and maintains the large Central Risk Data Base (Central de Información de Riesgos del BE): credit information for transactions greater than €6,000, used routinely by bankers and supervisors.
- Assessment: Compliant.
- Comment: BE’s off-site supervision effectively complements on-site examinations through comprehensive risk analysis guiding on-site work.

### Principle 19 — Validation of supervisory information
- BE uses risk-profile–based supervision plans combining offsite and onsite activities; in-house resources conduct the vast majority of supervisory work.
- External audits of annual accounts are treated as an additional tool; BE meets external auditors at least annually and receives their reports.
- BE analyzes consistency of periodic information to identify and remove errors prior to in-depth assessments; on-site inspections verify reported data reliability.
- BE does not have direct authority to oppose appointment of external auditors but can exercise moral suasion and influence through ICAC membership.
- Inspector organization: three groups with teams of 7-10 individuals; a fourth group provides analysis support. One group focuses on cajas, another on smaller-to mid-sized banks, and the most experienced staff supervises the two largest banks.
- BE inspectors have wide access to bank information under Art. 45 LDI.
- Assessment: Compliant.
- Comment: BE’s on-site activities, particularly in the largest institutions, provide an effective means of validating supervisory information.

### Principle 20 — Consolidated supervision
- Legal/accounting frameworks, scope of BE authority, consolidated information collection and on-site inspections enable consolidated supervision.
- CBE 5/1993 defines consolidatable group/subgroup and requires justification to BE for excluding any entity holding a 20 percent or more participation or voting rights from group consolidation.
- CBE 4/1991 requires consolidatable groups to submit C-5 quarterly statement and various quarterly consolidated disclosures (listed below exactly as required):
  - Consolidated balances
  - Detail and amortization of differences in capital consolidation
  - Accounting for loss and earnings
  - Details on minority interests
  - Relationship among entities belonging to economic group and entities connected but not belonging to the economic group
  - Direct participations (including voting rights)
  - Relationships among credit entities and foreign financial companies where there is an investment or controlling interest
  - Collective investment firms managed by consolidated group
  - Summary of consolidation process
  - Consolidated activity categorized by country
  - Relationships among shareholders and senior managers of banks and foreign financial firms where there is an investment or a controlling interest (annual)
- Article 9.3, Ley 13/1985 enables BE to inspect non-financial entities with a controlling relationship.
- Article 24, Ley 13/1985 requires CIs to reduce from capital accounts the larger of (a) the part of total investments in qualified participations in non-financial companies exceeding 60 percent of the credit entity or the group’s capital, or (b) the sum of each non-financial qualified participations exceeding 15 percent of the credit entity or group capital.
- Article 43 LDI extends BE’s power to inspect offices and pertinent units domestically and abroad.
- BE has entered into bilateral collaboration agreements with supervisors of Insurance and Pension Funds (under the ME) and the CNMV; Article 6, RD 1298/1986 allows BE to enter into collaboration agreements with foreign supervisors provided reciprocity and confidentiality are comparable to Spanish laws.
- Prudential standards apply on a consolidated basis per Article 6, Ley 13/1985.
- Article 30 LDI requires prior BE authorization to establish branches or acquire ownership in countries not EU members; Article 4 LDI considers establishment of unauthorized offices outside Spain a very serious infraction.
- Assessment: Compliant.
- Comment: Framework fosters BE’s ability to conduct consolidated supervision.

### Principle 21 — Accounting standards
- BE plays a pivotal role in fostering prudent accounting standards and transparency.
- Ley 26/1988 underpinned BE’s faculties to establish and modify accounting rules and financial statement modalities.
- CBE 4/2004 adapts Spanish accounting regime to IASB-derived Normas Interncionales de Información Financiera adopted by the EU.
- Commercial Code and laws (Ley de Sociedades Anónimas (RD 1564/1989), LDI (L.26/1988), Ley de Auditoria de Cuentas (L.19/1988)) hold managers/administrators responsible for accurate and timely financial records and public disclosure.
- CBE 4/91 (updated by CBE 4/2004) requires annual bank account balances and complementary financial statement data to provide a fair image of institution’s capital position, financial risks and condition.
- Ley 19/1988 requires external audit of annual accounts for all CIs; Article 4.g) LDI makes non-compliance a very serious infraction.
- BE meets major external audit firms periodically; external auditors must provide BE with information on serious violations or unfavorable/qualified opinions.
- BE does not have direct authority to revoke appointment of external auditors but can influence through ICAC and moral suasion.
- Assessment: Compliant.
- Comment: Assessors encouraged authorities to consider seeking direct BE authority to remove external auditors.

### Principle 22 — Remedial measures
- Under Article 23 f) LABE, BE has authority to recommend or require remedial measures; moral suasion is heavily used and backed by a legal sanctions regime.
- Art. 4.6 LDI defines light, serious, and very serious infractions; sanctions range according to gravity.
- Sanctioning process (Art. 18 LDI) begins with an “expediente,” naming an “instructor,” notice of charges, evidence gathering, and resolution; most serious infractions resolved by the minister of economy; license revocation by decision of the Council of Ministers.
- In the case of cajas, license revocation authority rests with the Council of Ministers, although CAs can revoke under their statutes.
- Sanctions may be imposed on individual officers/directors as well as on institution.
- Sanctions under Chapter 3 of Title I LDI:
  - For very serious infractions: one or more sanctions will be imposed on the offending credit institution: a fine up to €300,000 or 1 percent of own capital funds whichever is higher; revocation of license; a public warning
  - For serious infractions: one or more sanctions will be imposed: a fine of up to  €150,000 or half of 1 percent of own capital funds whichever is higher, and/or a public warning.
  - For a light infraction there will be either a public warning and/or up to a €60,000 fine.
- Other supervisory measures: Art. 34 RD 1343/1992 requires institutions below required capital levels to present a capital restoration plan and restrict regular operations as approved by BE; failure may trigger BE intervention.
- Title III, LDI enables BE to intervene by placing an “interventor” or replacing management and board; institution remains open while viability is determined.
- Dividend payment restrictions apply during first three years for new banks and other financial limitations up to the first five years of operation.
- Assessment: Compliant.
- Comment: Authorities should consider whether delegating further authority to bring about timely corrective action to the BE would bolster moral suasion and enforcement effectiveness.

### Principle 23 — Globally consolidated supervision
- BE draws authority to supervise overseas activities of locally incorporated banks from Art. 43 26/1988 LD.
- BE routinely evaluates risk management and internal controls at the two largest and most internationally active Spanish banks; a specialized team monitors risks and trends in Latin America.
- Regulations governing cross-border establishments require BE authorization and regulatory information when opening foreign branches, creating affiliates or taking significant participations in non-EU credit entities; submission of professional background data, and business and organizational structure plans are required.
- BE can require additional facts or deny authorizations to establish branches abroad if administrative structure or management capacity is inadequate.
- BE reporting requirements encompass activity of branches and affiliates abroad; CBE 5/93 establishes capital and risk concentration limits at consolidated group level.
- Where overseas offices make consolidated supervision unattainable, BE may reject acquisition or establishment requests in non-EU states and may close or limit banks’ cross-border activities via sanctioning process.
- Assessment: Compliant.
- Comment: BE’s sanctioning authority appears effective in causing CIs to limit activities or operations of Spanish banks’ overseas branches or affiliates when warranted.

### Principle 24 — Host country supervision
- BE empowered to establish agreements with foreign central banks and supervisors under Art. 7.8 of LABE 13/1994 and Art. 6.1 RD 1298/1986; reciprocity and comparable confidentiality required for non-EU members.
- Cooperation arrangements in place with European supervisors (Germany, Belgium, France, Holland, Italy, Luxembourg, United Kingdom, Portugal) and Latin American supervisors (Colombia, Chile, Peru, Brazil, Argentina, Venezuela); pending arrangements with Panama and Puerto Rico.
- Arrangements have strengthened institutional relationships and facilitated supervisory information sharing.
- BE evaluates effectiveness of supervision when banks apply to establish cross-border establishments or acquisitions in non-EU countries; Art. 13.2 RD 1245/1995 and Art. 30 Ley 26/1988 LDI allow BE to deny applications impeding effective consolidated supervision.
- Assessment: Compliant.
- Comment: Assessors encouraged authorities to review whether information exchange arrangements remain current and to consider additional arrangements with other foreign supervisors hosting significant operations of Spanish credit institutions.

### Principle 25 — Supervision over foreign banks’ establishments
- Local branches and subsidiaries of foreign banks are subject to similar prudential requirements, offsite reviews and onsite inspections as domestic banks.
- For licensing, BE examines home country supervisory practices, group structure, transparency of proposers, and requests information about partners and home supervisors.
- For EEA affiliates creating cross-border offices, consultation with appropriate supervisory authorities is obligatory; for non-European entities BE will contact the relevant supervisor.
- Cooperation agreements encourage on-site access to local offices and subsidiaries; practice includes informing home authorities of deficiencies or serious infractions that may carry fines or penalties.
- Assessment: Compliant.
- Comment: BE has adequate systems to collect information from home country supervisors and parent organizations and should continue to evaluate the effectiveness and quality of information obtained.

*Source: IMF staff report content provided in the supplied document.*

### 1. Objectives, autonomy, powers, and resources

### 1. Objectives, autonomy, powers, and resources

### Overview and assessment snapshot
- The system in Spain for banking regulation and supervision is described as "of high quality."
- Only three BCPs have been assessed “largely compliant” rather than “fully compliant.” (Paragraph 32)
- Identified thematic areas discussed include: legal framework, regulatory powers, connected lending, other risks, money laundering, accounting standards, and remedial measures.

### Recommended Action Plan (selected recommendations from Table 3)
- Legal Framework—Responsibilities and Objectives (BCP 1(1))
  - While cooperation between the BE and the CAs appears effective, the dual legal framework governing cajas poses risk of potential conflicts in exercise of supervisory and sanctioning authority.
  - Recommendation: Future changes in the legal regime should:
    - Preserve the sole and exclusive roles of the BE in prudential oversight of financial institutions.
    - Avoid inconsistency in division of responsibilities.
    - Enhance coordination of supervisory bodies to reduce fragmentation and enhance harmonization.

- Legal Framework—Regulatory Powers (BCP 1(3))
  - Introduce changes to transfer most regulatory powers currently under the ME to the BE to enable promulgation of prudential rules.
  - Consider granting the BE licensing revocation authority in appropriate circumstances.

- Connected Lending (BCP 10)
  - Assess whether current conflict of interest policy guidelines adequately address potential conflicts, particularly where bank directors/officers also serve as directors in industrial companies in which the bank has ownership and to which the bank extends credit or other services.

- Other Risks (BCP 13)
  - Along with strengthening BE’s rule-making authority as in BCP 1(3), issue guidelines on best banking practices, particularly those that foster effective risk management.

- Money Laundering (BCP 15)
  - Fully implement the June 15, 2005 BE/SEPBLAC collaboration agreement including joint BE/SEPBLAC inspections to the extent practical.

- Accounting Standards (BCP 21)
  - Consider seeking direct BE authority to remove external auditors, despite BE’s current influence and sanctioning power to cause removal.

- Remedial Measures (BCP 22)
  - Consider delegating from the ME to the BE further sanctioning authority for the gravest infractions, particularly those calling for suspension of bank officers.

### Authorities’ response — summary of positions and arguments (paragraphs 33–49)
- General stance
  - The Spanish authorities thank the IMF assessment team and welcome recognition that the Spanish supervisory system has a high degree of compliance and that Bank supervision is effectively carried out by the BE. (Paragraph 33)
  - On several issues authorities disagree with assessors, especially recommendations to change the division of competences between the Ministry of Economy and Finance (ME) and the Bank of Spain (BE) and observations on the role of Autonomous Communities (CAs) in supervision of cajas. (Paragraph 34)

- On BCP 1(3) (paragraphs 35–36)
  - Authorities do not agree with the “largely compliant” classification for BCP 1(3).
  - Key arguments:
    - Current legal framework has demonstrated efficacy due to good cooperation between ME and BE.
    - Competences are clearly delimited: ME elaborates prudential rules which are then passed by parliament or approved by Council of Ministers or Minister depending on normative rank.
    - ME has overview of banking, insurance, and securities sectors and negotiates EU normative in Council and level 2 Committees.
    - BE enforces prudential rules and is independent in enforcement; BE can issue Circulares when explicitly empowered by higher-rank norms to address technical details.
    - Therefore, authorities consider the institutional framework complies with BCP 1(3) and should be considered “compliant.”
  - On license revocation and sanctioning authority (BCP 1(3) and BCP 22):
    - Under Spanish law, power to license and sanction credit institutions belongs to the public administration; the Bank of Spain is independent but does not belong to the public administration.
    - The legal system allows delegation of public duties to non-public bodies like the Bank when efficient and constitutionally consistent.
    - BE can impose sanctions for light and serious infringements; imposition of sanctions for very serious infringements is the Ministry of Finance’s remit, but BE proposes the actual sanction to the Minister.
    - Authorities conclude no change is required and BCP 1(3) should be “compliant.” (Paragraph 36)

- On BCP 1(1) and Cajas (paragraphs 37–40)
  - Authorities reject assessors’ view of a risk of potential conflicts between BE and CAs.
  - Basic national regulation obliges all cajas; sanctions are regulated in the LORCA (ley 31/1985, de 2 de agosto, de regulación de las normas básicas sobre órganos rectores de las cajas de ahorro).
  - The first final disposition of LORCA defines what is basic in prudential supervision and direction of cajas; ME and BE are entrusted with discipline, inspection and sanctioning on matters of competence, notably monetary and financial policy, solvency and safety.
  - Tribunal Constitucional rulings identify functions considered “basic” and reserved to the State, including supervision of solvency, financial stability, own resources, solvency and liquidity ratios, insolvency provisions and rules for risk concentration.
  - Other supervision aspects are basic if they: (1) ensure effectiveness of state competences, (2) connect with state’s general economic policy, (3) affect the monetary sector, or (4) require a single decision center.
  - Supervision of instrumental aspects related to exam of solvency is also basic (accounting rules, compulsory provision of information).
  - CAs may establish additional measures only in matters not reserved to the State; supervision and sanction on solvency matters belong exclusively to the State. Authorities therefore consider this criterion “compliant.”

- On recapitalization and deposit insurance for cajas (paragraphs 41–46)
  - Authorities dispute assessors’ statement that ownership structure of cajas poses additional challenges for recapitalization.
  - The FGD (Fondo de Garantía de Depósitos), per Articles 10 and 11 of Royal Decree 2606/1996, has multiple preventive and reorganization measures:
    - FGD can recapitalize a caja via financial aid: concession of low interest, long-term loans; concession of non-refundable aid; subscription of subordinated debt; acquisition of damaged or non profitable assets. (Paragraph 42)
    - FGD can force restructuring of capital: application of own resources to absorb losses; facilitate merger with another, more solvent, caja; transfer business to another credit institution. (Paragraph 43)
    - FGD can subscribe cuotas participativas. (Paragraph 44)
    - Preventive measures may not entail ownership participation, but FGD can influence management through an action plan agreed with the Caja and approved by the BE. (Paragraph 45)
  - Historical performance:
    - The Deposit Guarantee Scheme for Cajas (FGDCA) has historically had better patrimonial situation compared to Banks, due to smaller incidence of crises in this group (only 14 interventions, all of them in the period comprised between 1983 and 1991). (Paragraph 46)
    - FGDCA has mostly taken preventive actions, often zero interest loans or subscription of perpetual subordinated debt, frequently conditioned on mergers.

- On BCP 13 and risk management (paragraph 47)
  - Authorities state that current normative already defines criteria for identifying, measuring, monitoring and controlling “Other risks,” credit risk in particular, detailed in Annex IX of Circular 4/2004.
  - These are more than “best practices” because they have normative rank; BE has made recommendations and requests to entities. Authorities consider the criterion “compliant.”

- On supervisory contact and inspection cadence (paragraph 48)
  - Regarding BCP 17 and management contact with smaller to mid-sized institutions where on-site inspection intervals may be longer, authorities note BE supervisory practice does not rely only on inspections and includes continuous contact and very frequent meetings with entities’ managers.

- On cross-border supervision and information (paragraph 49)
  - On BCP 24, BE practice relies on parent credit institutions providing information on subsidiaries, allowing remote inspections, without ruling out direct contact and information exchange with other supervisors.

*Source: _cr06218 - 1. Objectives, autonomy, powers, and resources*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06218.pdf_