## FINANCIAL SECTOR ASSESSMENT PROGRAM UPDATE — SPAIN: BASEL CORE PRINCIPLES FOR EFFECTIVE BANKING SUPERVISION — DETAILED ASSESSMENT OF COMPLIANCE (MAY 2012) ## Source details **Canonical URL:** [FINANCIAL SECTOR ASSESSMENT PROGRAM UPDATE — SPAIN: BASEL CORE PRINCIPLES FOR EFFECTIVE BANKING SUPERVISION — DETAILED ASSESSMENT OF COMPLIANCE (MAY 2012)](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12142.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12142.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12142.pdf.json) --- ### Executive summary and key findings - Crisis drivers and impact: - Significant deterioration in the economy and the real estate sector led to "a major decline in land values and the financial condition of developers impacting loan quality." - Construction and real estate loans: grew from 10 percent of GDP in 1992 to 43 percent in 2009; amounted to about 37 percent of GDP at end-2011. - Unemployment is over 21 percent. - Total assets of the Spanish banking sector amount to about 320 percent of GDP. - Five banks account for more than 70 percent of total assets. - Sectoral effects: - Savings banks (Cajas) were more severely affected due to "high concentrations in loans to finance land development and construction" and weak risk management; number reduced from 45 to 18. - Most Cajas "have transferred their banking activities to commercial banks" with complex shareholder and corporate structures emerging. - Supervisory strengths and concerns: - Core BdE supervisory process is strong, supported by qualified staff, experienced inspectors, risk-based matrices, permanent onsite presence at 16 banks, and well-developed IT tools (SAD, CIR, SIA, SIGAS). - Areas of concern: timeliness of remedial action and supervisory closure; BdE operational independence regarding issuance of prudential regulations and enforcement; oversight of concentration risk and related-party transactions. - Closure of supervisory work "does not seem to be sufficiently timely or effective for bank resolution." - Provisioning and capital: - Dynamic provisioning built earlier provided cushion, but continued crisis required additional provisioning and government-imposed extraordinary provisioning for real-estate-related exposures. - A Royal Decree Law imposed extraordinary provisioning levels on substandard and doubtful loans secured by land or real estate developments. - Legal and institutional issues: - BdE lacks authority to issue prudential regulations except where specifically delegated by law or the Ministry of Economy (MoE). - Enforcement action for very serious infractions is shared with MoE; revocation of license rests with Council of Ministers in many cases. - Recommendation: increase BdE authority to issue prudential regulations and transfer most sanctioning powers from MoE to BdE to enable quicker supervisor-led responses. ### Macroeconomic and banking-sector context - Real estate and credit stock: - Construction and real estate loans rose to 43 percent of GDP in 2009; about 37 percent of GDP at end-2011. - Funding and recession: - Spanish banks funded increased exposures largely in capital markets and abroad; reversal and Euro area debt crisis pushed the economy into a sharp recession in 2009–10. - Sector structure and consolidation: - Commercial and savings banks hold more than 90 percent of deposits and loans. - Nonbank financial entities represent less than 5 percent of total assets. - Number of savings banks reduced from 45 to 18; FROB has taken over five institutions (8 percent of the system). ### Supervisory framework, powers, and independence - Legal framework and delegation: - Core legislation cited: Law 26/1988 (LDI), Law 13/1994 (LABE); BdE inspection powers established in Article 43.bis.1 Law 26/1988. - BdE can adopt Circulares in some areas but prudential regulation generally follows laws or government action; Royal Decree Laws used for rapid changes (e.g., capital/provisioning increases). - Assessment: CP 1(3) — Materially Non-Compliant due to inability of supervisory authority to update prudential rules without law changes and regulatory timing linked to political cycle. - Independence and governance: - Governor and Deputy Governor appointed for a 6 year period and cannot be renewed. - Secretary General of the Treasury is a voting member of BdE’s Governing Council on supervision matters, raising independence concerns. - Assessment: CP 1(2) — Largely Compliant with recommendations to amend LABE to grant BdE operational independence in supervision. - Supervisory enforcement powers: - BdE has broad remedial authorities (require capital, strengthen controls, increase provisions, restrict activities, restrict compensation) under LABE, LDI and Law 13/1985, but sanctioning power for very serious infractions rests with MoE and license revocation largely with Council of Ministers. - From 2007 to 2010 only one sanctioning procedure initiated against banks and two against saving banks despite serious deficiencies. - Assessment: CP 1(4) — Materially Non-Compliant. ### Supervisory approach, tools, and resources - Risk-based supervision: - A risk matrix is developed for each bank including corporate governance, concentration risk and operational risk; risk direction described as stable, increasing or declining; annual supervisory plan based on matrix. - SABER model and IAC/ICAAP reports integrated into supervisory review. - Onsite/offsite mix and IT infrastructure: - Permanent onsite presence at 16 banks; supervisory resources split approximately 25 percent offsite, 30 percent onsite, 30 percent permanent onsite for large banks. - IT systems: Data Analysis System (SAD), Central Credit Registry (CIR), SIA, SIGAS support analysis and audit trail of supervisory activities. - Consolidated and cross-border supervision: - BdE empowered for consolidated supervision; conducts supervisory colleges for largest banks and has multiple MoUs with foreign supervisors. - Corrective actions and communication: - Supervisory communications include Letter of Recommendation (non-binding) and Letter of Requirements (binding), signed by Director General for Supervision after Executive Committee approval. - Enforcement practice is deliberate and documentation-heavy; assessors recommend expediting processes and linking enforcement to risk matrix benchmarks. ### Risk areas: credit, provisioning, concentration, related parties - Credit risk and lending practices: - Annex IX CBE 4/2004 requires Board-approved credit policies, realistic repayment plans, LTV limits and reserves; Order EHA/2899/2011 requires borrower ability to repay assessment. - Loans are classified as impaired after 90 days delinquency; Annex IX, Section 7.d CBE 4/2004: impairment when reasonable doubts exist or any part past-due more than three months. - Problem assets and provisioning: - BdE provisioning guidance: example 25 percent when loan six months delinquent, 100 percent when 12 months delinquent. - One-time provisioning program as of 12/31/2011 required collective impairment assessment of 7 percent for "normal" construction and real estate developer portfolio; 60 percent provision for land development loans classified substandard or doubtful; 50 percent for housing under development. - Assessment: CP 9 — Largely Compliant; dynamic provisioning expected to fade under new EU framework; provisioning adequacy must be reviewed. - Concentration risk and large exposures: - Total assets ~320 percent of GDP; high sectoral real estate and geographical concentration. - Large exposure limits: large exposure = exposure > 10 percent of regulatory capital; individual large exposure limit 25 percent of regulatory capital; special thresholds for credit entities (largest of 25 percent or 150 million Euros). - BdE uses CIR, quarterly reports RP60/RP61, SIA and ICAAP to monitor; assessors not confident that current ICAAP + internal controls fully cover concentration risk. - Assessment: CP 10 — Largely Compliant. - Related-party exposures: - Rule 62 CBE 4/2004 gives a broad definition of related parties but many requirements/guidance focus on "altos cargos" (senior management). - No general legal limit on related-party exposures; reporting obligations exist (half-yearly list of related parties; monthly CIR data). - Related-party lending was a significant contributor to poor credit quality in Cajas. - Assessment: CP 11 — Largely Compliant; recommend strengthened rules and supervisory attention. ### Capital, ICAAP and stress testing - Capital frameworks and measures: - Two capital definitions coexist: regulatory capital ("recursos propres") per RD 216/2008 and "capital principal" created by RDL 2/2011. - Minimum CAR ratio: 8 percent (RD 216/2008); CARcp over capital principal also 8 percent; institutions with wholesale funding above 20 percent of deposits must have CARcp of 10 percent. - EBA requirement: Core Tier 1 capital ratio of 9 percent by end of June 2012 (EBA ad-hoc definition). - RDL 2/2012 imposes additional requirement of capital principal: 20 percent on land-related exposures and 15 percent for "housing under development" problematic exposures. - Assessment: CP 6 — Compliant; recommendation to align with Basel III Common Equity for clarity and comparability. - ICAAP and capital planning: - Section 3.5 ICAAP: banks must project capital needs considering strategic plans, retained earnings, dividend payout rates, projected asset growth; stress tests and contingency plans required. - ICAAP implementation began in 2008 with IAC reporting; crisis and mergers slowed full deployment; Assessment: CP 7 — Largely Compliant. ### Liquidity, market, operational, and other risks - Liquidity risk: - BdE monitors short-, medium- and long-term funding gaps; expects banks to cover one-week, one-month and three-month buckets; no generic quantitative limits imposed but higher common equity required for banks relying on wholesale funding. - Market risk: - Trading accounts must be marked-to-market daily; model validation, stress testing and back-testing required; BdE has specialized validation staff; four groups authorized for advanced market risk, eight for IRB, one for AMA. - Operational risk and IT: - CBE 3/2008 requires business continuity plans, Recovery Time Objective < 12 hours, IT security, outsourcing controls and BdE access to outsourced data; BdE IT inspection team of 31 people. - AML/CFT: - Law 10/2010 assigns SEPBLAC enforcement and BdE reviews AML/CFT systems; BdE and SEPBLAC coordinate and perform joint inspections; 24 sanctions imposed since 2007 ranging from 90,000 to 2,350,000 euros. ### Compliance aggregate and detailed CP assessments (selected) - Aggregate compliance counts: - Compliant (C) – 19 - Largely compliant (LC) – 9 - Materially noncompliant (MNC) – 2 - Noncompliant (NC) – 0 - Not applicable (N/A) – 0 - Notable CP assessments: - Principle 1(1) Responsibilities and objectives — Largely Compliant - Principle 1(2) Independence — Largely Compliant - Principle 1(3) Legal framework for updating prudential rules — Materially Non-Compliant - Principle 1(4) Legal powers to require prompt remedial action and impose sanctions — Materially Non-Compliant - Principle 6 Capital adequacy — Compliant - Principle 7 Risk management/ICAAP — Largely Compliant - Principle 9 Problem assets/provisions — Largely Compliant - Principle 10 Large exposures — Largely Compliant - Principle 11 Related parties — Largely Compliant - Principle 19 Supervisory approach — Compliant - Principle 23 Corrective and remedial powers — Largely Compliant ### Main recommendations and actions proposed - Legal and institutional reforms: - Transfer most regulatory powers currently under the MoE to enable BdE to promulgate prudential rules. - Transfer most sanctioning powers currently under the MoE to BdE and consider granting BdE licensing revocation authority in appropriate circumstances. - Amend LABE to give BdE operational independence in its supervisory function in line with its Eurosystem independence; clarify internal governance structures publicly. - Supervisory practice and enforcement: - Accelerate decision-making and employ the full range of enforcement tools earlier to prevent asset dissipation and preserve capital. - Review enforcement procedures to expedite remedial actions (e.g., give more weight to inspectors' written communications; link issuance of letters of requirement to risk matrix benchmarks and risk ratings). - Adopt options from BCBS “Supervisory Guidance on Dealing with Weak Banks” for preventive and corrective tools; develop parallel actions to address individual unsound practices. - Concentration and related-party risk: - Strengthen regulatory framework and supervisory oversight of sectoral and geographic concentration; issue guidance/regulation specific to sector concentration (e.g., enhancements to CBE 3/2008 Capítulo Noveno and Capítulo Décimo). - Require banks to pursue adequate diversification, include stress-test impacts in concentration management, improve reporting and disclosure of concentration by region and sector. - Strengthen conflict of interest rules and supervisory monitoring of related-party lending, particularly in new commercial banks created from Cajas. - Provisioning and collateral valuation: - Complete and implement reforms to collateral appraisal requirements and review provisioning requirements as dynamic/generic provisioning fades under EU framework. - ICAAP and capital planning: - Ensure full ICAAP implementation and integration with BdE risk matrix for the whole system; require robust capital planning, stress tests and contingency plans. ### Authorities’ response (summary) - Spanish authorities (Treasury and BdE) appreciated the assessment and largely share the views and recommendations. - Authorities note that financial reform and restructuring of savings banks have accelerated; professional management teams and improved transparency in Cajas transformation. - Spain is actively engaged in international efforts to reinforce bank resolution regimes and will continue dialogue with IMF and international counterparts. *Source: FINANCIAL SECTOR ASSESSMENT PROGRAM UPDATE — SPAIN: BASEL CORE PRINCIPLES FOR EFFECTIVE BANKING SUPERVISION — DETAILED ASSESSMENT OF COMPLIANCE (MAY 2012), IMF Monetary and Capital Markets Department.* ### 2012. The views expressed in this document are those of the staff team and do not necessarily reflect ### FINANCIAL SECTOR ASSESSMENT PROGRAM UPDATE — SPAIN: BASEL CORE PRINCIPLES FOR EFFECTIVE BANKING SUPERVISION — DETAILED ASSESSMENT OF COMPLIANCE (MAY 2012) ### Executive summary and key findings - Significant deterioration in the economy and the real estate sector led to "a major decline in land values and the financial condition of developers impacting loan quality." - The crisis affected savings banks more severely because of "high concentrations in loans to finance land development and construction" and weak risk management, prompting "a complete restructuring of the sector and converting their vast majority into commercial banks." - Commercial banks had more diversified portfolios and "bolstered by high levels of loan loss provisions" but remain under pressure as provisioning and capital requirements rise. - Regulatory context: implementation of Basel II framed the regulatory changes during the period. - BdE supervisory process: - Core process is strong, supported by qualified staff and experienced inspectors. - Areas of concern: timeliness of remedial action, operational independence regarding issuance of regulations and enforcement, and oversight of concentration risk and related party transactions. - Closure of supervisory work "does not seem to be sufficiently timely or effective for bank resolution." - Supervisory practice observed: - Inspections were thorough and identified key risks communicated to bank management. - The process for requiring corrective action was lengthy; enforcement tools were not timely applied, with BdE often following a deliberate process and focusing on broader systemic responses. - BdE early identified provisioning needs and recommended corrective action, but formal decisions were adopted only after the deliberate BdE process. - Examples of underused supervisory enforcement measures include: cease and desist orders limiting dividends; strict review requirements before funding existing projects; severe curtailment of new projects. - BdE rationale: deterioration was more protracted than initially anticipated; supervisors encouraged mergers and sought broader fixes rather than immediate closures, considering legal framework, cost to the public purse, and implications for financial stability. - Legal framework issues: - BdE lacks authority to issue prudential regulations except where specifically delegated by law or the Ministry of Economy (MoE). - Enforcement action is shared with MoE; BdE must send more grave issues to the Ministry for enforcement. - Increased BdE authority to issue prudential regulations and a more flexible enforcement regime would enable quicker responses to systemic developments. - Supervision of concentration risk and related parties: - Regulatory framework and oversight were insufficient to address build-up of system weaknesses, partly linked to savings banks governance structures and division of responsibilities with Autonomous Communities (CCAA). - Number of savings banks drastically reduced; banking business largely transferred to commercial banks, but complex shareholder and corporate structures of the new banks require BdE vigilance to prevent legacy governance deficiencies from contaminating banking organizations. ### Assessment scope, methodology, and process - Assessment completed as part of IMF FSAP update during February 2012; reflects framework "in place as of the date of the completion of the assessment." - Not intended to assess EU regulatory framework merits or the restructuring processes of savings banks (these were addressed elsewhere in the FSAP). - Focused on BdE as the main supervisor; did not cover specificities of CCAA regulation and supervision except where BdE prudential regulation and supervisory processes apply to Cajas. - Assessment basis: - Applied the Core Principles (CP) Methodology issued by the Basel Committee in October 2006. - Used Essential Criteria (EC) and Additional Criteria (AC); EC determine full compliance; AC are best practices and commented on but not graded. - Qualitative four-part grading: compliant; largely compliant; materially noncompliant; noncompliant. - A fifth category "non-applicable" exists but was not used in this assessment. - Information sources and process: - Review of laws, rules, guidance; extensive meetings with BdE, MoE, rating agencies, auditing firms, banking sector participants. - Authorities provided a comprehensive self-assessment, additional questionnaires, and access to supervisory documents and files. - Assessment team: Fabiana Melo and Josè Tuya. - Proportionality: the assessment considered the Spanish financial system's structure, complexity, and the proportional application of CP expectations to the size, interconnectedness, and risk profile of supervised banks. ### Institutional and macroeconomic context (overview points) - The Caja segment has been largely restructured; as of the assessment date, "almost all the Cajas, with two small exceptions, have transferred their banking activities to commercial banks." - CCAA role: savings banks supervision was historically a shared responsibility with CCAA; decentralization has relevance given there are currently 17 CCAA. - The assessment applies to prudential supervision aspects conducted by BdE and is relevant to the whole banking sector given Caja banking activities transfer. ### Main areas for attention and recommended direction - Timeliness and effectiveness of remedial/supervisory closure actions: - Need to accelerate decision-making and employ the full range of enforcement tools where necessary to prevent asset dissipation and preserve capital. - Legal and institutional adjustments: - Consider granting BdE authority to issue prudential regulations without requiring specific delegation from the MoE. - Reconsider shared enforcement regime with MoE to allow more flexible and timely supervisor-led enforcement. - Oversight of concentration risk and related-party transactions: - Strengthen regulatory framework and supervisory oversight, with special attention to legacy governance features of restructured savings banks and complex ownership structures of new banks. - Crisis response and systemic solutions: - Ensure coordination between BdE actions and broader systemic solutions does not delay the use of targeted supervisory measures (e.g., dividend restrictions, project funding controls) to contain risks at individual institutions. ### Documentation and further assessment structure (referenced in source) - The report contains: - Glossary. - I. Summary, Key Findings, and Recommendations. - II. Detailed Assessment. - Tables including "Summary Compliance with the Basel Core Principles—ROSCs", "Summary Compliance with the Basel Core Principles—Detailed Assessments", "Recommended Action Plan to Improve Compliance with the Basel Core Principles", and "Detailed Assessment of Compliance with the Basel Core Principles". - Note: The restructuring of the savings banks sector and crisis management framework are covered by separate Technical Notes in the FSAP and are not the subject of this BCP assessment. *Source: FINANCIAL SECTOR ASSESSMENT PROGRAM UPDATE — SPAIN: BASEL CORE PRINCIPLES FOR EFFECTIVE BANKING SUPERVISION — DETAILED ASSESSMENT OF COMPLIANCE (MAY 2012), International Monetary Fund, Monetary and Capital Markets Department.* ### 15. Spain is experiencing the bursting of a real estate bubble after a decade of ### Spain is experiencing the bursting of a real estate bubble after a decade of excesses ### Overview and macro-financial context - Construction and real estate loans: - Grew from 10 percent of GDP in 1992 to 43 percent in 2009. - Amounted to about 37 percent of GDP at end-2011. - Banking sector funding and macro impact: - Spanish banks funded increasing exposures largely in capital markets and abroad. - The reversal of the domestic expansion and the onset of the Euro area debt crisis pushed the economy into a sharp recession in 2009–10. - Unemployment is over 21 percent. ### Banking sector structure and exposures - Size and market concentration: - Total assets of the Spanish banking sector amount to about 320 percent of GDP. - Five banks account for more than 70 percent of total assets. - Commercial and savings banks hold more than 90 percent of deposits and loans. - Nonbank financial entities represent less than 5 percent of total assets. - Savings bank sector consolidation: - Number of institutions reduced from 45 to 18 through intervention, mergers, or takeovers. - Tighter capital requirements led many savings bank groups to spin off banking activities into newly created commercial banks. - The FROB has taken over five institutions (8 percent of the system); one intervened bank was recently auctioned off, another is in the pipeline, and the takeover of a small, ailing bank is underway. ### Capital, provisioning, and profitability pressures - Capital raising and profitability: - Banks raised capital from private sources, including through exchange of convertible instruments, in response to EBA requirements. - Profitability has deteriorated. - Collateral valuation and provisioning: - Uncertainty in valuation of real estate collateral led the government to issue new measures in February (during the mission) requiring additional capital and provisioning for problematic real estate exposures and measures to encourage further consolidation. - Loan loss provisioning: - Dynamic provisioning built earlier helped meet increased specific provisions initially. - Continued crisis prompted additional provisioning. - A Royal Decree Law imposed extraordinary provisioning levels on substandard and doubtful loans secured by land or by real estate developments. - Real estate appraisal weaknesses: valuations relied on too optimistic discount rates and execution periods in the absence of market transactions. ### Institutional framework for regulation, supervision, and crisis management - Main supervisory agencies and responsibilities: - BdE: oversight of credit institutions (regional governments retain some powers over savings banks); oversight and supervisory responsibilities regarding payments systems. - CNMV: securities markets supervision; responsibilities regarding settlements systems. - DGSFP within the MoE: supervision of insurance companies and pension funds. - Financial stability coordination: - Comité de Estabilidad Financiera (CESFI) established in 2006; includes the three agencies and State Secretary for Economic Affairs as Chair; objective to strengthen coordination and exchange of information; CESFI has no decision-making powers of its own. - Accounting and reporting: - Since 2006, traded companies and issuers on an official secondary market must prepare consolidated financial statements in accordance with International Financial Reporting Standards (IFRS) and domestic Spanish standards for individual financial statements. - Domestic Spanish standards allow capitalizing research expenses and differ from IFRS on valuation options for certain assets (mainly real estate and intangible assets). - Instituto de Contabilidad y Auditoría de Cuentas (ICAC) sets Spanish accounting standards; BdE has delegated authority from the MoE to establish accounting standards for banks, coordinating with ICAC. - Emergency liquidity and safety net: - BdE, as a Eurosystem member, may provide Emergency Liquidity Assistance (ELA) within System restrictions; ELA may only be provided to a solvent credit institution facing temporary liquidity problems; national central bank must supply the ECB with a predefined set of information; consultation with ECB Governing Council required when amount of ELA is above a predefined threshold; one ELA use occurred during the recent crisis. - Deposit insurance and resolution bodies: - Fondo de Garantía de Depósitos (FGD): private legal entity prefunded by member credit institutions; originally three FGDs merged into a single fund by Royal Decree-Law 16/2011 of October 14, 2011; Management Board: 12 members (six from the BdE and two from each of commercial bank, savings bank, and cooperatives sectors); chairman is the Deputy Governor of the BdE. - FGD funding sources: members’ contributions, extraordinary contributions, issuing bonds, borrowing from third parties including the Government or the FROB. - FGD powers: range of financing mechanisms including liquidity and solvency support; RDL 16/2011 (as amended by Royal Decree-law 19/2011) authorizes the FGD to make non-refundable contributions in restructuring and resolution of viable and nonviable institutions, including those intervened or recapitalized by the FROB; in bank liquidation neither the FGD nor depositors enjoy preferential rights over the estate of a failed bank. - FROB: explicit objective to assist and foster reorganization of Spanish banking industry (Royal Decree Law 9/2009); received initial capital from FGD and the state; can issue securities guaranteed by the state up to three times its capital, and can leverage up to six times with Minister of Finance approval; resources raised by Royal Decree Law 2/2012; governed by a nine-member committee named by the MoE (four proposed by BdE, including deputy governor as chairperson; two from MoE; three representing FGDs). - Resolution and intervention process: - BdE is the triggering authority to determine solvency/liquidity jeopardy and activate intervention. - If entity is not viable, BdE appoints FROB as administrator with managerial powers. - FROB prepares a restructuring plan and submits it to BdE for approval; FROB also reports to the MoE and the Minister of Finance and Public Administrations on public finance impacts; the Minister may object to the plan based on such evaluation. - If restructuring fails, alternative is revocation of bank license (by the Council of Ministers) and, in case of insolvency, initiation of a court-driven bankruptcy process. - Limitations: BdE, FROB, and MoE cannot fully allocate losses to shareholders and creditors, or revoke a license (except MoE in specific cases), making the resolution process somewhat convoluted. ### Supervision preconditions and main findings (selected) - Legal framework and independence: - The dual legal framework governing Cajas poses risk of conflicts in supervisory and sanctioning authority between BdE and CCAA; fragmentation of CCAA supervision over governance and sanctioning may have contributed to deterioration of the savings banks sector. - Market concerns about BdE’s independence were amplified since the 2006 FSAP, driven by perceived delays in corrective actions and sanctions; sanctioning proposals by BdE’s Governing Council go to the Minister of Economy who has sanctioning power for very serious infractions and resolution capacity. - The law distinguishes BdE’s independence in monetary authority from its supervisory role; prudential regulation depends on governmental action, risking political-cycle-driven delays in critical regulations. - Licensing, structure, and governance risks: - The MoE is the licensing authority based on BdE analysis; BdE supervises ongoing compliance and authorizes/monitors significant ownership transfers and major acquisitions. - New commercial banks resulting from Cajas reform often have new shareholder entities with no identifiable ownership and close links to local industrial and political environments, potentially influencing bank operations and soundness; supervision should be tailored to these characteristics. - Prudential regulation, concentration, and related-party risks: - Pillar 2 implementation: BdE designed a standard format for banks to report ICAAP; reporting initiated in 2008 and revised subsequently; BdE staff meet banks annually to discuss reports and use results to evaluate risk profiles. - Concentration risk and related party lending were significant contributors to distress, particularly in Cajas: - High sectoral (real estate) and geographical concentration. - Related party lending to non-consolidated real estate enterprises and, in some cases, public entities or organizations linked to governance bodies. - Enhanced Pillar II framework and seguimiento continuado monitoring are recent and not yet fully applied to all institutions. - Supervision methods and resources: - BdE has a risk-based supervisory model with integrated onsite and offsite staff, strong technical staff, and a well-developed IT system. - Primary supervisory instruments are onsite inspections and permanent onsite presence at many banks; at the time of assessment there was permanent onsite presence at 16 of the banks. - Anti-money laundering: - New AML/CFT law adopted in 2010; SEPBLAC is responsible for enforcing and monitoring compliance; BdE reviews banks’ AML/CFT systems in its compliance inspections; BdE and SEPBLAC collaborate closely and perform joint inspections when warranted. *Source: _cr12142 - 15. Spain is experiencing the bursting of a real estate bubble after a decade of* ### 37. A risk-based matrix is developed for each bank. The supervisory team assigned to ### _cr12142 - 37. A risk-based matrix is developed for each bank. The supervisory team assigned to ### Risk-based supervision and supervisory planning - A risk matrix is developed for each bank by the supervisory team, rating the level of risk in a number of categories of banking activity. - The matrix includes elements of corporate governance, concentrations risk and operational risk. - The matrix describes risk direction as stable, increasing or declining. - Based on the matrix results, the annual supervisory plan is developed. ### Informational technology infrastructure and supervisory efficiency - Supervisory staff have access to a vast amount of information with systems that facilitate manipulation of the data. - In addition to financial information, there is an electronic file system where an audit trail is available of all the supervisory reports, activities and issues related to a bank, including all inputs by inspectors. ### Accounting and disclosure (CP 22) - The BdE is the body responsible for issuing accounting standards and has a working relationship with the audit industry. - The BdE meets annually with auditors and discusses issues of concern and audit scopes. - The annual audit produces a report for the BdE addressing the banks’ compliance with BdE requirements and an evaluation of the loan portfolio. - Disclosure in Spain is extensive and in recent stress tests there has been transparency in result reporting. ### Corrective and remedial powers of supervisors (CP 23) - The BdE has a broad range of supervisory enforcement authority. - Adoption of new regulations to implement Pillar 2, the current crisis and the pace at which deterioration can occur in the integrated global market indicate the need for flexible actions that can be applied at an earlier stage to effect corrective action. - The enforcement practice employed by the BdE follows a deliberate, well-documented approach that has reduced the need for sanctions. - It is unclear whether implementation of all enforcement tools available to the BdE was held in abeyance while searching for a systemic solution, or due to underestimation of the duration and depth of the economic crisis. ### Consolidated and cross-border banking supervision (CPs 24–25) - The BdE has broad authority to conduct consolidated supervision. - BdE is empowered to supervise banks on a solo and consolidated basis, including all the offices or entities within the group, irrespective of their location or legal structure. - Consolidated supervision is primarily based on information compiled by the parent bank to manage group-wide risks and controls. - Parent banks are subject to mandatory detailed regular reporting to the BdE, covering internal global risk management and internal controls. - The BdE coordinates and exchanges information with domestic and foreign supervisors to accomplish a full view of risk. - The BdE conducts supervisory colleges for its two largest banks and for a medium-sized bank and has signed MOUs with relevant supervisors. - The BdE coordinates supervisory activities of these three banking groups with host supervisors and relies on their reports. ### Key findings from Table 1A and detailed assessments (selected Core Principles) - 1.1 Responsibilities and objectives - Overlap of responsibilities between BdE and CCAA with respect to Cajas remains despite court decisions; fragmentation may have played a role in deterioration of the saving banks sector. - The issue may become less relevant as CCAA supervisory role diminishes with sector restructuring. - 1.2 Independence, accountability and transparency - Some market participants have expressed concerns about BdE’s independence, particularly due to apparent delays in implementation of corrective actions and sanction. - Sanctioning proposals are made by the Governing Council of BdE to the Minister of Economy, who has sanctioning power for very serious infractions and resolution capacity. - Assessors have not seen evidence of government and industry interference in BdE’s operation and supervision budget, but involvement of political bodies such as CCAAs and the MoE in licensing, sanctioning and resolution creates an environment for potential influence. - The presence of the Secretary General of the Treasury in the Board of BdE, with voting capacity (LABE Articles 20 and 21), is not conducive to independence. - 1.3 Legal framework - The supervisory authority cannot update prudential rules without changing laws. - Prudential regulation is done through laws (approved by the legislative body) or the government, causing changes to follow the political cycle and creating regulatory uncertainty. - 1.4 Legal powers - On powers to require prompt remedial action and impose sanctions, there are material deficiencies. - From 2007 to 2010 only one sanctioning procedure was initiated against banks, and two against saving banks, although several institutions had serious deficiencies in management and solvency in the period. - Lack of coercive powers may undermine credibility and effectiveness of supervision. - 3. Licensing criteria - The licensing authority is the MoE; law does not prevent the MoE from providing a license contrary to BdE’s opinion. - Authorities report this has never occurred in practice. - 4. Transfer of significant ownership - 122 requests for transferring significant participation have been received in the past 5 years, all but one have been approved. - The rejected application related to AML/FT restrictions and structural hindrance to consolidated supervision. - New commercial banks resulting from Cajas reform often have new shareholder entities with no identifiable ownership and close links to local political environment, which should be carefully monitored. - 7. Risk management process - Implementation of EU Directive 48/2006 on Pillar 2 has addressed the 2006 deficiency. - The Informe de Autoevaluación de Capital (IAC) report implemented is comprehensive and integrates with SABER and the supervisory risk matrix. - IAC implementation has been difficult for some institutions since initiated in 2008; the current version appears workable. - Wave of mergers and crisis management slowed ICA implementation and bank-by-bank evaluation. - 9. Problem assets, provisions, and reserves - The BdE approach to provisioning is conservative and the use of a dynamic provisioning element provided an additional cushion. - Conservativeness of provisioning was not homogeneous, particularly regarding valuation of real estate collateral. - Requirement for a one-off large catch-up provision for the system and large amounts of provisioning and capital support required in the conglomeration of savings into commercial banks indicates provisioning did not lead to prompt adjustments in light of the crisis. - BdE is analyzing the framework for valuation of real estate collateral to promote legal revision. - Dynamic/generic provisioning is expected to fade from use as a supervisory tool in the new EU common regulatory framework; provisioning levels will need to be adjusted going forward. - 10. Large exposure limits - BdE has extensive information on large exposures and concentration via quarterly information and the Central de Información de Riesgos (CIR) database. - Information is input into the System of Information on Borrowers (SIA), which analyses largest borrowers and grades them for supervision use. - BdE has strengthened monitoring and control of concentration risk and ICAAP includes concentration risk in additional Pillar 2 capital. - Given high sectoral (real estate) and geographical concentration, assessors are not confident that the current framework (ICAAP + internal controls) is sufficient to cover concentration risk. - 11. Exposure to related parties - The definition of related party appears broad enough to include indirect relationships through interposed persons, but requirements and guidance often focus on “altos cargos” (senior management). - Framework does not seem to cover adequately conflicts of interest in related party lending; related party lending was an important source of lower quality credit in the savings banks crisis. - 23. Corrective and remedial powers of supervisors (detailed) - BdE’s deliberate enforcement approach has reduced need for sanctions. - The crisis highlights need for flexible preventive and corrective actions applied earlier. - BdE should review enforcement procedures, including expediting processes to take earlier actions such as adding more weight to written communications from inspectors at conclusion of inspections or linking issuance of letters of requirement to risk-based benchmarks (risk matrix measurements and risk rating). - The BCBS paper “Supervisory Guidance on Dealing with Weak Banks” provides options for preventive and corrective action tools. *Source: Excerpt from IMF assessment text provided in content unit* ### 1.3 Legal framework ### 1.3 Legal framework ### Legal framework and institutional division - The law clearly distinguishes the regulatory capacity of BdE in its monetary policy role from its supervisory role. - Changes in the prudential framework follow the political cycle, because prudential regulation is done through laws (approved by the legislative body) or the government. - Consequences noted: - Risk that BdE may be unable to respond adequately should there be conflicting interests between the institutional goals of the BdE and the government, which could undermine BdE’s supervisory independence. - Accumulation of problems and an environment of regulatory uncertainty. ### Legal powers (CP 1.4) - Material deficiencies on powers to require prompt remedial action and impose sanctions. - Supervisors can and do send recommendations and requirements to banks, but sanctioning powers are lacking. - Previous FSAP recommended transferring sanctioning powers currently under the MoE to BdE. - Authorities stated there has never been a case of a sanction that, once recommended by BdE, has failed to be imposed by MoE; however, the Secretary General of the Treasury is a voting member of the Governing Council on sanction proposals raised to the MoE, which diminishes the strength of that argument. - From 2007 to 2010: - Only one sanctioning procedure was initiated against banks, and two against saving banks, although several institutions had serious deficiencies in management and solvency. - Lack of coercive powers may undermine the credibility and effectiveness of supervision. - Cross-reference: CP 23 — enforcement tools to protect bank capital and avoid asset dissipation were not widely used. ### Licensing and ownership transfer (CP 3, 4) - Licensing criteria (LC): - The licensing authority is the MoE; reasons for denial based on BdE’s report are clearly stated in Law. - No legal provision prevents MoE from providing a license contrary to BdE’s opinion. - Authorities report this has never occurred in practice and high prescriptiveness in legislation makes it unlikely. - During Caja sector reorganization, suitability of shareholders and senior management appears to have been assumed where shareholders were authorized entities under CCAA suitability criteria. - Transfer of significant ownership (LC): - 122 requests for transferring significant participation have been received in the past 5 years, all but one have been approved. - The rejected application related to AML/FT restrictions and structural hindrance to consolidated supervision concerns. - Concerns about new commercial banks created from Cajas: new shareholder entities often have no identifiable ownership and frequently have close links to the local political environment given their social services objectives, creating potential detrimental influence over operations and soundness. ### Risk management, provisioning, and large exposures (CP 7–11) - Risk management process (LC): - The 2006 LC grading was due to lack of ability to issue guidance on best practices and to require correction. - Implementation of EU Directive 48/2006 on Pillar 2 has addressed the 2006 deficiency. - IAC (ICAAP) implementation started in 2008; adjustments continue but current version appears workable. - Wave of mergers and crisis management slowed ICA implementation and bank-by-bank evaluation; effective implementation across the system cannot be fully assessed at this point. - Problem assets, provisions, and reserves (LC): - BdE approach to provisioning is conservative; dynamic provisioning element provided additional cushion early in crisis. - Conservativeness not homogeneous across banks, especially regarding valuation of real estate collateral. - System results had to be supplemented by broader government action, including a one-off large catch-up provision and large amounts of provisioning and capital support in conversion of savings into commercial banks. - BdE is analyzing the framework for valuation of real estate collateral to promote legal revision; implementation is important for full compliance. - As dynamic/generic provisioning is expected to fade from use under the new EU framework, provisioning requirements should be reviewed to ensure adequacy of credit loss estimation. - Large exposure limits (LC): - BdE has extensive information on large exposures and concentration from quarterly information and the CIR database; input into SIA which analyses largest borrowers on an individual and consolidated basis. - External auditors required to verify compliance with large exposures and concentration rules (long report). - BdE has strengthened monitoring/control of concentration risk; ICAAP includes concentration risk for Pillar 2 capital. - The entrance of banks from consolidation of Cajas increases importance of concentration risk (high sectoral real estate and geographical concentration). - Assessors not confident that current framework (ICAAP + internal controls) is sufficient to cover concentration risk. - Banks have two options to calculate additional capital for sector concentration: simplified ICS (índice de concentración setorial) and internal methodology under IRB. ### Related-party exposures (CP 11) - Definition of related party is broad (relationship can be established indirectly through one or more “interposed” persons). - Not all requirements and guidance are based on the broad definition; many focus instead on “altos cargos” (senior management). - Supervision can verify on onsite inspections whether such exposures are treated no more favorably than regulation or market conditions allow, but the framework does not seem to adequately cover conflicts of interest in related party lending. - Related party lending was an important source of lower quality credit in the savings banks crisis due to exposures to non-consolidated real estate enterprises and exposures to public entities or organizations linked to governance bodies of the Cajas. ### Supervisory enforcement and corrective powers (CP 23) - BdE has a broad range of supervisory enforcement authority; the deliberate approach reduced the need for sanctions. - Crisis experience indicates need for flexible, earlier-stage actions for preventive and corrective measures. - Recommendations for BdE to review enforcement procedures include: - Expediting the process to take earlier actions (e.g., adding more weight to a written communication from the inspector at the conclusion of an inspection or supervisory activity). - Linking issuance of letters of requirement to risk-based benchmarks such as risk matrix measurements and risk ratings. - Considering options from BCBS paper “Supervisory Guidance on Dealing with Weak Banks” for preventive and corrective tools. ### Compliance aggregate - Aggregate compliance counts: - Compliant (C) – 19 - Largely compliant (LC) – 9 - Materially noncompliant (MNC) – 2 - Noncompliant (NC) – 0 - Not applicable (N/A) – 0 ### Recommended actions (selected by reference principle) - 1.1 Responsibilities and objectives - Change the legal regime to clearly preserve the sole and exclusive roles of the BdE in prudential oversight of financial institutions, avoiding any possible inconsistency in the division of responsibilities. - 1.2 Independence, accountability and transparency - Amend the LABE to give BdE operational independence in its supervisory function in line with its independence as a Eurosystem central bank. - Make internal governance structures (selection, nomination and responsibility processes for supervision) clear and publicly available. - 1.3 Legal framework - Introduce changes to transfer most regulatory powers currently under the MoE to enable BdE to promulgate prudential rules. - 1.4 Legal powers - Introduce changes to transfer most sanctioning powers currently under the MoE to the BdE. - Consider granting BdE licensing revocation authority in appropriate circumstances. - 3. Licensing criteria - As restructuring continues, ensure licensing criteria, in particular fit and proper requirements for senior management, are fully applied. - 4. Transfer of significant ownership - Ensure governance of new institutions fully complies with requirements of this CP. - 7. Risk management process - Ensure IAC (ICAAP) implementation continues and is fully integrated into BdE’s matrix for the whole system. - 9. Problem assets, provisions, and reserves - Ensure completion and implementation of reforms to the collateral appraisal requirements. - Review provisioning requirements as dynamic provisioning fades to ensure adequacy of loss protection. - 10. Large exposure limits - Improve tools and controls for supervision regarding economic sector concentration within the existing ICAAP and internal controls framework. - BdE to issue guidance/regulation specific to sector concentration (e.g., detailed requirements in Circular de Banco de España (CBE) 3/2008, Capítulo Noveno and Capítulo Décimo). - Require banks to pursue adequate diversification and include stress test impacts in concentration management; improve reporting and disclosure of concentration by region and sector. - Supervisors should be able to require limits on a case by case basis and culminate in monitorable plans to reduce concentration risk. - Strengthen SREP guidance regarding concentration risk and adequacy of ICAAP capital coverage. - 11. Exposure to related parties - Ensure conflict of interest rules are enforced, related party lending monitored, and control tools updated given new organizational structures after restructuring. - 23. Corrective and remedial powers of supervisors - Review enforcement procedures to include: - Implementation of earlier notification to the bank of areas for improvement (e.g., required written communication from the inspector at supervisory activity conclusion). - Raise expectation of supervisory required action and enforcement based on risk-based benchmarks from the risk matrix and capital levels. - Adopt parallel actions to address individual unsound practices in addition to linear escalation, to protect assets and capital. ### Authorities’ response (summary, paragraphs 44–47) - Spanish authorities (Spanish Treasury and Banco de España) expressed appreciation to the IMF and assessment team for the comprehensive assessment and strongly support the FSAP. - Authorities share the main views of the assessment team and appreciate its recommendations; they note the financial reform has been accelerated and some improvements occurred in parallel to FSAP missions. - A deep restructuring of savings banks is underway: professional management teams have been ensured and transparency has been improved. - Spain is fully involved in international efforts to reinforce bank resolution regimes (Financial Stability Board Key Attributes and European Commission proposals). - Spanish authorities look forward to continuing dialogue with the IMF beyond the FSAP and declare willingness to continue working with international counterparts. *Source: _cr12142 - 1.3 Legal framework* ### 48. In addition, the Banco de España would like to add that although it recognizes that the ### _cr12142 - 48. In addition, the Banco de España would like to add that although it recognizes that the ### Banco de España — explanation of factors behind the pace of the restructuring process - The Banco de España recognizes that the restructuring process "has not been sufficiently timely" as noted in the assessment of some principles and in the section “Summary, key findings, and recommendations,” and identifies several factors that need to be explained for the recent restructuring process to be understood: - First, it is important to take into account that adequate instruments for resolution were not introduced until 2009. - Second, it is only now with hindsight that we know that the deterioration in the economy was more protracted than initially anticipated by all national and international institutions. - Third, the successive Spanish governments in power over the period decided and re-confirmed that only limited public funds should be used to rescue banks, thus discarding the ‘bad bank’—type alternatives. Other options were considered more appropriate, in part taking into account that the large Spanish banks were not affected, unlike large banks in other countries. This decision was taken not only due to the need to contain the public deficit, but also—and especially—due to the fact that a huge increase in the deficit could lead to an acute sovereign crisis, as has already happened in other countries. The decision to implement the restructuring through private solutions has many advantages but is inevitably slower and much more complex and cumbersome to implement than those that—however being more expeditious—involve huge amounts of public resources. - Fourth, the implementation of a private solution has proven particularly difficult and slow during this crisis because the large international institutions that could have participated in mergers and acquisitions of Spanish institutions were not in a position to do so. For this reason, the private solution was constrained to the domestic level. - Fifth, during this systemic crisis it was not possible to use the traditional resolution tool of winding-down a bank with write-downs for bondholders. If Spain had been the only country to impose losses on bond holders of medium-sized institutions, the funding for other healthy Spanish institutions would have been seriously impaired. Therefore, the benefits derived from the liquidation of a good number of credit institutions would not have compensated the potential damage to the banking system as a whole and especially to healthier institutions. - Sixth, the governance of the Cajas also added to the complexity of the restructuring process and affected its speed, due to the strong presence of political and trade union interests in their boards of directors and general meetings. This problem has been mitigated with the transformation of Cajas into banks, but will only disappear if the Cajas lose control over their participated banks. - Seventh, the fact that the Comunidades Autonomas exercised their power to approve the mergers of Cajas during the restructuring process significantly slowed down the process, given the need to hold long, complex and difficult negotiations with regional governments to reach adequate agreements. This problem has already disappeared thanks to the transformation of Cajas into banks. *Source: Excerpt from IMF content unit _cr12142 - 48.* ### 49. These are some of the factors that explain why the whole restructuring process was ### _cr12142 - 49. These are some of the factors that explain why the whole restructuring process was ### II. DETAILED ASSESSMENT — Overview - Table 3 presents a Detailed Assessment of Compliance with the Basel Core Principles. - Focus of excerpt: Principle 1 — Objectives, autonomy, powers, and resources of banking supervisory authorities, with detailed Essential Criteria (EC) and Additional Criteria (AC) assessments for Spain (BdE, MoE, CCAA). ### Principle 1 — Objectives, autonomy, powers, and resources (summary) - Principle definition: clear responsibilities and objectives for each authority; operational independence; transparent processes; sound governance; adequate resources; accountability; legal framework for authorization, ongoing supervision, powers to address compliance, and legal protection; arrangements for information sharing and confidentiality. ### Principle 1(1) — Responsibilities and objectives (Assessment: Largely Compliant) - EC1 — Laws and defined responsibilities: - Legal framework involves BdE, MoE, and CCAA (for savings banks/Cajas). - Core legislation cited: Law 26/1988 (LDI), Law 13/1994 (LABE). - Constitutional allocation: CCAA have some supervisory powers over saving banks and cooperatives. - CCAA possess regulatory and supervisory powers in sanctioning and licensing, corporate governance, consumer protection and transparency. - BdE supervisory powers over solvency and financial stability. - Each CCAA operates under its own legal framework for jurisdictions under its competence. - MoE: no inspection powers but legally responsible for granting licenses (Article 43 of LDI), imposing sanctions for very serious offenses, deciding on appeals against BdE resolutions (Article 25 of LDI), intervening in liquidation of credit institutions in certain cases (Article 38 LDI), establishing/modifying accounting standards and issuing regulation on loan contracts, lending reporting, electronic banking services (Article 48 of LDI). Some regulatory powers delegated to BdE. - BdE precise supervisory powers: Article 7.6 LABE — compliance with solvency and other legislation and regulations applicable to Credit institutions. - All supervisory attributions legislation publicly available on BdE’s website. - Article 43.bis.1 Law 26/1988: BdE has inspection powers over Spanish credit institutions and their groups, including entities of the group and all offices inside or outside Spanish jurisdiction; BdE can require supervised entities all information needed, including databases, files and computer programs; entities/persons subject to BdE supervision are obliged to provide required information. - EC2 — Minimum prudential standards: - Minimum prudential standards set in laws and regulations. - Legislation and instruments cited: LDI; Law 13/1985; Law 13/1992; Royal Decree 216/2008; CBE 3/2008; CBE 4/2004; Ministerial Order 2899/2011 (enters into force on April 28, 2012). - BdE issues “guias” detailing criteria, practices and procedures for compliance. - EC3 — Updating laws and regulations: - Banking laws and regulations have been constantly updated. - Legislative changes can be promoted by Government, Congress, Senate (Article 87.1 CE), MoE, and BdE in their competence areas. - BdE can modify regulations it issues. - Many changes derive from EU directive incorporation. - Royal Decree Laws allow quick updates and have immediate force of Law subject to ex-post parliamentary validation. - Recent increases in capital requirements and provisioning were established by Royal Decree Laws. - EC4 — Public availability of financial strength information: - BdE requires public disclosure of accounting statements; quality verified against non-public supervisory reports. - Main disclosure regulation: CBE 4/2004; Law 13/1985 requires disclosure of prudential information including internal organization, market strategies, risk control and remuneration policies. - Detailed information on institutions available on BdE’s website. - BdE publishes twice a year a Report on Financial Stability; annually publishes its report on Banking Supervision (Memoria Anual). - AC1 — Risk-based allocation of supervisory resources: - BdE conducts a risk-based supervisory approach (see CP 19) with supervisory plans updated at least yearly and adjusted as needed. - Assessment comments: - Overlap of responsibilities persists between BdE and CCAA regarding Cajas (governance/sanctioning under CCAA vs solvency under BdE), which may have contributed to deterioration in saving banks sector. - Restructuring under Article 7 of Royal Decree-law 9/2009 brought to BdE supervision of corporate governance measures for institutions involved in restructuring, illustrating blurred separation. - 2006 FSAP recommendation to reinforce legal regime to preserve sole prudential oversight of BdE and enhance coordination remains valid. - Issue may diminish as CCAA role diminishes with sector restructuring and modified governance structures. ### Principle 1(2) — Independence, accountability and transparency (Assessment: Largely Compliant) - EC1 — Operational independence, accountability, governance structures: - LABE establishes BdE as central bank within Eurosystem; not subject to general government administration legislation (Articles 1.2 and 4.1). - Distinctions in law between monetary policy functions and supervisory functions, particularly regarding regulatory and sanctioning powers (see CP 1.3 and 1.4). - Governing bodies: - Governing Council and Executive Committee. - Governing Council members: governor, deputy governor, Secretary General of the Treasury, Vice President of CNMV, and six members appointed by government. - Secretary General of the Treasury and Vice President of CNMV cannot vote on monetary policy matters but can vote on banking supervision matters. - Minister for Economy may participate without voting capacity. - Executive Committee: governor, deputy governor, and two of the six council members. - Governor and Deputy Governor: - Appointed simultaneously for a 6 year period and cannot be renewed (Article 25.1 LABE). - Appointment by government must be justified by MoE to Congress. - Dismissal grounds per Article 25.4 LABE: expiration of term, resignation, reaching 70 years, dismissal by Government on grounds of mental incapacity, serious breach of obligations, overcoming incompatibility during term, prosecution on a serious criminal offence. - Past 3 governors served full mandates. - Heads of supervision and regulation: - Usually career employees; no fixed term; removal only by: a) reaching 70 years of age; b) retirement; c) resignation; d) resolution adopted by Executive Committee following Governor’s proposal; e) dismissal due to disciplinary proceeding per internal labour rules; f) incompatibility arisen during term; g) prosecution for wilful misconduct. - Article 74 IRBE sets same grounds for dismissal of General Directors. - EC2 — Publication of objectives and accountability: - BdE’s supervisory objectives stated by law and published. - BdE publishes Annual Report on Banking Supervision in Spain (Memoria Anual) describing annual actions and includes internal audit statement on procedural appropriateness of decisions by regulation and supervision departments; memoria must be approved by governing council and submitted to parliament. - Law requires annual report and accounts submitted to congress for information and to MoE for approval (Article 4.2 LABE). - BdE accounts subject to external audit per Eurosystem requirements and Spanish Court of Audits (Article 31 IRBE and 4.2 LDI). - BdE and CNMV have a joint website providing detailed information about prudential supervision of credit institutions and investment firms (per EU Directives). - EC3 — Credibility, professionalism, integrity: - Governor and Deputy Governor appointed by government; required competence in monetary or banking affairs; council members required competence in economics or law (Articles 24.1 and 24.3 LABE). - Conflict of interest rules for Governor, Deputy Governor, and council members (Articles 26 and 28 LABE); post-office restrictions: cannot hold employment related to credit institutions and securities markets for a two years period after office. - Internal Code of Conduct for BdE staff covering conflict of interests, professional secrecy and disclosure of confidential information. - Industry interviews confirm supervisory teams are qualified and professionally respected. - EC4 — Financing and resources: - Governing Council establishes budget for operating costs and investments; referred to Government and presented to Parliament for approval; not consolidated with other public sector budget. - Funding appears stable and sufficient, evidenced by steady training activities, hiring of staff, and on-site activities (see CP 19 and 20). - New supervisory approach relying on more intensive on-site supervision of larger number of banks may impact resources; authorities need to assess. - Some staff fatigue related to crisis management and long duration of crisis. - AC1 — Term appointment for head(s) of authority: - Governor and Deputy Governor appointed for a six year period and cannot be renewed. - Assessment comments and recommendations: - Market concerns expressed about BdE independence due to apparent delays in implementation of corrective actions and sanctioning, particularly amid savings banks restructuring; sanctioning proposals are made by BdE Governing Council to Minister of Economy who holds sanctioning power for very serious infractions and resolution capacity. - No evidence seen of government or industry interference in BdE operations or budget. - Involvement of political bodies (CCAAs and MoE) in licensing, sanctioning and resolution creates potential for influence. - Presence of Secretary General of the Treasury on BdE Board with voting capacity on prudential regulation issuance, nomination of senior supervisory staff and allocation of supervisory budget (LABE Articles 20 and 21), and role on sanctions falling under BdE capacity (less serious and serious infractions) is not conducive to independence. - LABE’s explicit distinction between monetary policy functions and supervisory functions is a source of concern. - Recommendation: amend LABE to give BdE operational independence in its supervisory function in line with its independence as a Eurosystem central bank; this would not hamper coordination in systemic crisis situations (other mechanisms exist — see CP 1.6). - Recommendation: clarify and publicly make available internal governance structures (selection, nomination and responsibility processes for supervision) to assure and communicate independence of supervisory processes. ### Principle 1(3) — Legal framework for authorization and ongoing supervision (selected ECs) - EC1 — Authority for granting and withdrawing licenses: - Royal Decree 1245/95, Article 1.1 and LDI (Article 43.1) attribute to MoE authority for granting licenses after consultation with BdE. - Licensing authority for savings banks is each CCAA (see CP 1.1). - Withdrawal of licenses: Article 57 bis of the Banking Law of 31 December 1946 (BL) — responsibility of the Council of Ministers based on MoE proposal. - MoE can withdraw license directly in cases of: i) exclusion from the deposits guarantee scheme, ii) cease of activities, iii) court resolution opening liquidation within bankruptcy procedure, iv) branches whose principal authorization has been withdrawn by its home authority. - EC2 — Supervisor empowered to set prudential rules and consult: - LABE entitles BdE to adopt rules to exercise monetary authority functions (Article 3—Circulares monetarias) but not automatically for supervisory functions. - Issuance by BdE of Circulares for prudential supervision allowed only if expressly empowered under different laws/regulations or by delegation from MoE through Ministerial Orders. - Currently BdE can adopt Circulares on accounting standards and consumer transparency (by delegation of MoE), and aspects of solvency already detailed in laws, Royal Decrees or MO. - Law 13/1985 empowers BdE to issue guidelines on prudential matters and adopt international bodies’ guidelines; such guidelines are not enforceable but used for supervisory judgment and orient banks. - BdE is required to consult with stakeholders before issuing Circulares per internal rules; depending on subject, BdE requests opinions from other authorities/agencies and affected entities via professional associations and public consultations. - Delegated powers can be overridden by Government; example: RDL 2/2012 modified aspects of prudential regulation and accounting previously regulated by BdE. - EC3 — Power to obtain information: - Through delegated power from MoE (48.1 LDI and OM de 31/3/1989) BdE can establish accounting standards and frequency/granularity of supervisory reporting and public disclosure. - More recent amendments to LDI (Article 43 bis ...) grant BdE information powers (text cuts off in excerpt). *Source: _cr12142 - 49. These are some of the factors that explain why the whole restructuring process was* ### Section 1 bis) have expanded existing powers of the BdE to request from both entities ### _cr12142 - Section 1 bis) have expanded existing powers of the BdE to request from both entities ### Supervisory access and Section 1 bis powers - LDI (Article 43 bis Section 1 bis) empowers the BdE to request from both entities and individuals under its supervision any information (including access to records, softwares, files and databases) needed to assess compliance with the regulation and discipline provisions they are subject to. - BdE performs onsite and off-site supervision and has access to banks’ board, senior management, and records, including minutes of the board and risk and audit committees. - For many banks under permanent intensive supervision, supervisors have real time access to information systems. - Information is frequently requested and provided on a case by case basis as necessary. - In licensing processes the supervisor is not entitled to request information directly to the applicant; requests need to be channelled to the MoE. ### Assessment and independence (Principle 1(3)) - Assessment: Materially Non-Compliant - Key findings: - The supervisory authority cannot update prudential rules without changing laws; compliance with EC2 is not achieved. - The law distinguishes BdE’s monetary policy role from its supervisory role, creating a risk of conflicting interests between BdE and the government. - Prudential regulation is enacted through laws or government action; timing of regulatory action correlated with the political cycle (example: issuance of RD2/2012). - Use of emergency Royal Decree Laws has produced periods of regulatory inaction followed by spurts of activity, contributing to regulatory uncertainty (noted example: various applicable definitions of capital in CP 6). - Given materiality of the shortcoming in these circumstances, CP 1(3) is considered MNC. - Recommendation (from source): - Implement recommendations under this CP in tandem with recommendations on CP 1.2 because government participation in the Council responsible for approval of Circulares has potential implications on supervisor independence. - Authorities should introduce changes to the legal framework to transfer most regulatory powers currently under the MoE to enable BdE to promulgate prudential rules. ### Legal powers to act (Principle 1(4)) - Assessment: Materially Non Compliant - Legal framework and powers: - LABE (Article 7.6), LDI (Article 43 bis), and Law 13/1985 (amendments) provide legal basis for supervisory action including Pillar 2 powers (Article 11, November 2007). - BdE can require capital, reinforcement of controls, more provisioning, increased risk weights, reduction of risk exposure, reduce business and close branches, and reduce executives compensation in specified circumstances. - LDI Title I Chapter II/III defines gradation of infractions (very grave / grave / minor) and sanctions, including financial penalties, public/private advertence, suspension, removal, disqualification, and revocation of license for very serious infractions. - Article 31 LDI empowers BdE to intervene in a bank or provisionally replace board/management in exceptionally serious situations; BdE must give a reasoned explanation to the MoE. - Constraints and deficiencies: - Sanctioning power for very serious infractions rests with the MoE; revocation of authorization is reserved to the Council of Ministers upon proposal of the MoE (Banking Law of 1946 Article 57 bis). - The Secretary General of the Treasury is a voting member of BdE’s Governing Council when proposals for sanctions are elevated to the MoE, which diminishes BdE’s effective sanctioning independence. - From 2007 to 2010 only one sanctioning procedure initiated against banks, and two against saving banks, despite multiple institutions having serious deficiencies. - Supervisory measures tend not to escalate beyond recommendations unless quantitative deficiencies are triggered; BdE needs a more structured, forward-looking approach for declining banks not yet in breach of rules. - Recommendations (from source): - Transfer sanctioning powers currently under the MoE to BdE (echoes previous FSAP recommendation). - Implement more structured and forward-looking remedial approaches for declining banks. ### Legal protection for supervisors (Principle 1(5)) - Assessment: Compliant - Findings: - CE and Law 30/1992 set conditions for public institution liability; BdE internal regulations (Articles 25 and 26) establish BdE assumes legal management, defense, and legal advice for employees and governing body members. - BdE will assume all financial and compensatory liability resulting from offenses or omissions committed by authorities or staff in performance of duties, including posting guarantees or sureties in civil or criminal claims. - There have been 78 cases of appeal and litigation before courts involving the BdE within the last five years; all cases have been ruled favourably to the BdE. ### Cooperation and confidentiality (Principle 1(6)) - Assessment: Compliant - Domestic cooperation: - LDI (Article 43 bis) requires collaboration of all entities of any Spanish public administration with BdE. - BdE, CNMV, and DGSFP have bilateral MoUs (BdE–DGSFP 2004; BdE–CNMV updated 2009) and a 2006 multilateral MoU with MoE creating CESFI. - Legal provisions mandate coordination between BdE and CNMV, including mandatory reciprocal consultation on sanctioning and licensing. - Cooperation with CCAA is governed by Law 30/1992 and LABE but no MoUs have been signed with CCAA; BdE reports cooperation is smooth. - Cross-border cooperation: - Article 7.8 LABE and RDL 1298/1986 allow agreements with foreign supervisors and central banks; Law 13/1985 (Article 10 quáter) and Royal Decree 216/2008 (Article 76 ter) permit supervisory colleges. - BdE has signed MoUs with EU member country supervisors (Germany, Belgium, France, Holland, Italy, Luxembourg, Portugal, Romania), Latin American supervisors (Colombia, Chile, Mexico, Peru, Brazil, Argentina, Venezuela, Uruguay, Puerto Rico), and third countries (China, U.S., Andorra). - BdE reports frequent and smooth information exchange; assessors confirmed with some host supervisors. - Confidentiality safeguards: - RDL 1298/1986 Article 6.1 requires counterpart authorities in non-EU third countries be subject to professional secrecy comparable to Spanish law and releases BdE from confidentiality to provide supervisory information. - Article 6.5 requires recipients to guarantee conservation of confidentiality; bilateral MoUs include confidentiality clauses. - RDL 1298/1986 Article 6 establishes BdE-obtained information is confidential with explicit exceptions (criminal courts, AML authorities, etc.). LABE allows the governor to request secret sessions to maintain confidentiality when reporting to parliament. ### Licensing and permissible activities (Principles 2 and 3) - Principle 2 (Assessment: Compliant) - Definitions for “bank”, savings banks, credit cooperatives, and special financial institutions are set in RD Legislativo 1298/1986, Article 37 LOB, Article 21 RDL, Article 3 Law 13/1989, and Article 1.3 RD 692/1996. - Permissible activities defined in Article 52 LDI. - Use of the word “bank” limited by Articles 28–30 LDI; BdE enforces sanctions and public registries must not register unlicensed institutions. - BdE maintains an official registry of credit institutions, updated weekly and published on BdE’s website. - Principle 3 (Licensing) (Assessment: Largely compliant) - Licensing authority: MoE (RD 1245/1995 Article 1.1; Banking Law of 1946); MoE authorizes based on BdE and SEPBLAC reports. - Licensing criteria are established in law (LDI Article 43; RD 1245/1995 Articles 1–9) and include organization, internal controls, AML requirements, minimum capital, fit and proper for shareholders and board. - Key numeric and procedural points: - Applicants address Secretary General of the Treasury; BdE forwards information/requests via MoE. - Banks must register new board members and senior management in BdE’s “senior managers register.” - After authorization, license revocation for unsuitability of shareholders is exceptional; insufficient resources can lead to revocation only if capital is below 80 percent of the minimum for longer than 12 months. - Fit and proper and related checks: - Suitability criteria include absence of criminal convictions, insolvency, or declaration of incompetence; public entities automatically considered honorable. - Capital must be nominative; shareholders that are legal entities must inform all holders of participations above 5 percent. - Banks must inform BdE whenever any share transaction representing acquisition of 0.25 percent or more has taken place. - Minimum initial capital: - RD 1245/1995 (Article 2.1.b) requires minimum capital of at least 18 million Euros for licensing a new bank. - Supervision of new entrants: - Article 6 RD 1245/1995: more intensive supervision and operational restrictions over first 5 years; major deviation from business plan can lead to revocation. - Observations and recommendations: - MoE can in law provide a license contrary to BdE’s opinion; no legal certainty that MoE decisions will always coincide with BdE’s supervisory views, though authorities report this has not occurred in practice. - Existence of “nearly empty” bank licenses complicates corporate structures and hampers transparency; easier to acquire an empty bank than start a new licensing procedure. - Recommendation: BdE should ensure licensing criteria, particularly fit and proper for senior management, are fully applied in complex reorganizations (e.g., Cajas reform). ### Ownership transfers and major acquisitions (Principles 4 and 5) - Principle 4 (Transfer of significant ownership) (Assessment: Largely Compliant) - Definitions and thresholds: - LDI Article 56.1: significant participation = at least 10 percent of capital or voting rights; holdings allowing notable influence also significant. - Prior notification required for increases reaching thresholds of 20, 30, and 50 percent; banks must inform within 10 days of transfers of 1 percent or more of social capital. - BdE has 60 working days to object to a proposed acquisition; failure to object renders it approved. - Banks must report transactions of 0.25 percent or more; annual reporting discloses holdings ≥ 5 percent. - Power to reject unauthorized transfers, suspend voting rights, intervene, and initiate sanctioning procedures. - Observations: - 122 requests for transferring significant participation received in past five years; all but one approved. The single denial was related to AML/FT restrictions and structural hindrance to consolidated supervision. - Concern about new commercial banks resulting from Cajas reform where new shareholder entities may lack identifiable ownership and have close links to local political environment—risk of detrimental influence. - Recommendation: Supervision tailored to these special characteristics; BdE/MoE should be ready to use sanctioning powers under LDI Article 4 (ll). - Principle 5 (Major acquisitions) (Assessment: Compliant) - Law defines cases requiring prior approval: significant participation in credit institutions, any branch or subsidiary abroad (LDI Article 30 bis). - Other investments are subject to limits and, where exceeded, must be deducted from regulatory capital (specific percentage thresholds and deductions described in Article 10 Law 13/1985, Article 16 RD 216/2008, CBE 3/2008). - Authorization denial criteria include negative effects on safety and soundness, hindrance to consolidated supervision, or lack of effective supervision in host jurisdiction. - Article 17 RD 1245/1995 requires provision of host country AML regulation in acquisition applications. - Assessment: authorizations and ongoing supervision adequately monitor major acquisitions; exposures to non-banking activities are monitored and constrained by limits/deductions. ### Capital adequacy and Pillar frameworks (Principle 6) - Assessment: Compliant - Regulatory capital frameworks: - Two definitions of capital coexist: - Regulatory capital (“recursos proprios”) per RD 216/2008 (Tiered structure similar to Basel II; Tier 1 includes ordinary shares, preferred shares limited to 30 percent of Tier 1 with loss-absorption features; Tier 2, subordinated debt limited to 50 percent of Tier 1; limits on general provisions). - “Capital principal” created by RDL 2/2011 (step towards Basel III Common Equity; includes adjustments for AFS securities gains/losses and accepts up to 25 percent mandatory convertible instruments (ManCos) with specified conversion terms; ICAAP target capital ratio based on capital principal). - Minimum ratios: - Minimum CAR ratio established by RD 216/2008 is 8 percent (calculated over “recursos proprios”). - RDL 2/2011 created mandatory CARs over “capital principal” (CARcp) which is also 8 percent. - Credit institutions whose wholesale funding is above 20 percent of deposits must have a CARcp of 10 percent. - EBA “capital package” required banks to reach a Core Tier 1 capital ratio of 9 percent by end of June 2012 (EBA ad-hoc definition different from capital principal and Basel III Common Equity). - Additional measures: - RDL 2/2012 imposes an additional requirement of capital principal of 20 percent on land-related exposures and 15 percent for “housing under development” exposures considered problematic (to be calculated on top of CARcp requirements). - Supervisor powers and practice: - Article 6 Law 13/1985: BdE determines capital calculation, RWAs, and additional requirements; BdE can impose ceilings, limits, and restrictions commensurate with risks. - BdE may require banks to hold CARcp above regulatory levels if institution fails to cover worst-case systemic stress test. - BdE has authority to require prompt remedial action; LDI enumerates infractions related to capital (e.g., CAR below 80 percent of minimum for over six months is a very grave infraction). - Internal models (IRB, AMA) allowed upon BdE authorization; validation and ongoing monitoring procedures are described and in practice rigorous. - As of assessment: - 4 banking groups authorized to use advanced approaches for market risk. - 8 for IRB. - 1 for advanced measurement approach (AMA). - Observations and recommendations: - Co-existence of different capital definitions (regulatory capital, capital principal) reduces clarity and comparability. - Recommendation: authorities should seek to use Basel III definition of Common Equity capital to replace capital principal to enhance international comparability and transparency. - FROB injections understood to be grandfathered under Basel III and to be phased out. ### Risk management and ICAAP (Principle 7) - Assessment: (detailed ECs described in source; BdE has substantially implemented Pillar 2 and ICAAP) - Key elements: - Laws and regulations, Circular 3/2008, and ICAAP guidance require banks to have comprehensive risk management policies commensurate with size/complexity; annual IAC (ICAAP) report required. - BdE reviews IAC reports, conducts onsite inspections (Rule 108 Circular 3/2008), updates supervisory risk matrices, and issues guidance for ICAAP and SREP. - BdE evaluates board oversight, senior management responsibilities, internal governance, risk measurement, IT systems, model validation, and internal audit integration. - Model validation: banks must revalidate models regularly, perform back-testing; BdE has specialized validation staff and a five-stage validation process involving methodology, data, quantitative and qualitative procedures, and IT environment. - Supervisory focus has shifted during the crisis to crisis management and restructuring (notably Cajas transformation), with emphasis on restructuring and credit risk for affected institutions. - Observations: - IAC reporting started in 2008 but crisis induced delays in implementation and use; BdE has amended format and instructions to address deficiencies. - BdE relies on internal audit work but reviews workpapers and meets internal auditors during inspections. - For larger/complex banks, continuous onsite presence monitors dedicated risk units; ICAAP requires forward-looking capital planning and three-year target capital ratios. - Recommendations (derived from findings): - Continue strengthening ICAAP implementation and forward-looking supervisory review to ensure capital adequacy and timely corrective measures. - Ensure BdE maintains rigorous validation and monitoring of internal models and enforces remediation where models/systems fail qualifying standards. *Source: IMF assessment text contained in the provided PDF content unit.* ### Section 3.5 on Capital Planning of the ICAAP requires banks to make capital needs ### _cr12142 - Section 3.5 on Capital Planning of the ICAAP requires banks to make capital needs ### Capital planning and ICAAP (Section 3.5) - Banks must make capital needs projections considering the bank’s strategic plan, retained earnings, dividend payout rates, and projected asset growth. - Stress tests should be conducted to identify events or changes in market conditions that may affect future capital needs. - Banks must develop contingency plans to address possible capital shortfalls. - Reference: AC3 ### Supervisory requirements for other material risks - The supervisor requires banks and banking groups to have appropriate policies and processes for assessing other material risks not directly addressed in subsequent CPs, such as reputational and strategic risks. - Rule 105(2) (VIII) of CBE 3/2008 requires assessment and control of other relevant risks, such as reputation risk. - The BdE risk matrix reviews and considers reputational and business risks when assigning a risk rating to the bank. ### Assessment of Principle 7 - Assessment: Largely Compliant - Comments: - Inspection documents and systems emphasize BdE’s focus on risk management in onsite inspections. - Bank meetings indicated advanced risk management practices at systemic banks. - The LC grading in 2006 reflected inability to issue guidance on best practices and to require correction; implementation of EU Directive 48/2006 on Pillar 2 addressed the deficiency. - IAC report and its implementation provide comprehensive guidance for benchmarking and fit into supervision by risk and SABER/supervisory risk matrix. - IAC implementation has been difficult for some institutions and has been adjusted since initiation in 2008; the current version appears workable. - Wave of mergers and crisis management needs slowed IAC implementation and bank-by-bank evaluation; effective implementation in the system, particularly new banks, cannot be fully assessed at this point. ### Principle 8 — Credit risk: essential criteria and findings - Principle summary: Supervisors must be satisfied banks have a credit risk management process that accounts for the institution’s risk profile, with policies/processes to identify, measure, monitor and control credit risk (including counterparty risk). Includes granting loans, evaluating quality, and ongoing portfolio management. - EC1: Board and senior management oversight - Requirement: Supervisor determines Board approves and periodically reviews credit risk strategy and significant policies; senior management implements strategy and develops policies/processes. - Findings: - Article 6.4 of Law 13/1985; Article 2 of Royal Decree 1245/1995; Article 66 of Royal Decree 216/2008 require Board to establish risk measurement and control over credit risk. - Annex IX of Circular 4/2004: policies, methods, procedures must be Board-approved, fully documented, relate risk to borrower’s ability to repay, establish realistic repayment plans, minimum collateral re-assessment requirements, set financing terms for connected entities similar to market terms, establish LTV limits. - BdE maintains a credit registry permitting monitoring of credit trends and loan quality. - Verification of EC1 requirements is a primary BdE supervisory emphasis via SABER: 1) reviewing Board minutes/reports; 2) meeting management responsible for credit risk; 3) reviewing loan granting/monitoring files. - EC2: Appropriate credit risk environment, approval, administration, reporting, problem asset identification, limits - Findings: - Order EHA/2899/2011 requires credit institutions to assess borrower’s ability to repay before lending, including employment, income, financial situation, BdE credit registry history; value collateral conservatively; rely on cash flow, not solely collateral. - Supervision reviews loan documentation, borrower record/credit history, internal loan portfolio reports, loan provisions; ensures loan review function is separate from loan granting. - Borrower files are reviewed to ensure adequate information to support borrower’s repayment ability; Board policies and risk management systems are reviewed. - EC3: Arm’s length credit decisions; conflicts of interest - Findings: - Annex IX of Regulation 4/2004 requires documenting, granting and analysis policies that set conditions and financing terms to related entities similar to those for comparable entities. - BdE examines organizational structure for credit approval to ensure compliance; monitors loans to Directors, related companies and economic group via governing body minutes, monthly BdE credit registry submissions, and quarterly reporting of related exposures. - EC4: Supervisor access to credit and investment portfolio information and officers - Findings: - Article 43 bis, Law 26/1988: BdE may require any information needed to verify compliance. - Article 9.2 of Law 13/1985: BdE may require consolidated supervision entities to provide information to verify consolidation, analyze consolidated group risk, and assess adequacy of risk management processes; BdE may inspect books, documentation and records. - Additional criteria (selected) - AC1: Lending policy must prescribe that major exposures exceeding a certain amount/percentage of capital or exposures especially risky be decided by senior management; Annex IX of Regulation 4/2004.1.f requires rules/procedures for granting exceptions to policy; BdE inspects Board-approved documents, separation of duties, authorization limits and responsibilities. - AC2: Counterparty credit risk policies/processes required; BdE treats counterparty risk as a specific category within general credit risk, particularly for trading portfolios and derivatives; onsite exams focus on models for counterparty risk, credit quality criteria for treasury assets, and adequacy of risk limits. - AC3: Supervisor determines banks monitor total indebtedness of entities to which they extend credit; banks must report all credit to BdE central credit registry which permits calculation of overall debt of any counterparty via monthly information; Rule 102; Circular 3/2008 provides instructions on aggregating borrowings and definition for borrowers to be combined. ### Assessment of Principle 8 - Assessment: Compliant - Comments: (none beyond assessment provided) ### Principle 9 — Problem assets, provisions and reserves: essential criteria and findings - Principle summary: Supervisors must be satisfied banks establish and adhere to adequate policies/processes for managing problem assets and evaluating adequacy of provisions and reserves. - EC1: Policies/processes for identifying and managing problem assets; periodic review and classification/provisioning/write-offs - Findings: - CBE 4/2004-Annex IX requires policies, methods and procedures for credit granting, analyzing and reviewing outstanding credits and identifying impaired credits, including sovereign debt. - Impairment loss calculation models required as part of credit risk measurement, taking into account default experience and business cycles. - Rule 29 of CBE 4/2004: methodology must consider impairment inherent in any financial asset portfolio and impairment influenced by business cycles. - Annex IX distinguishes impairment categories: normal, substandard, doubtful (nonperforming), write-off (loss). - BdE guidelines for provisioning doubtful loans: 25 percent when loan is six months delinquent, to 100 percent when loan is 12 months delinquent. - Collateral valuation considered: minimum original cost for borrower or current appraisal discounted by specific hair-cut (example: residential real estate valuation discounted 20 percent). - Generic provision computed based on historical loss rate for classification categories. - Substandard loans reviewed individually and provisions determined case-by-case or as a group when common characteristics evident. - One-time provisioning requirement by MoF for stock of real estate related loan portfolio as of 12/31/2011 to close perceived provisioning gap: - collective impairment assessment of 7 percent for the “normal” construction and real estate developer portfolio; - for land development loans classified substandard or doubtful, 60 percent provision required; - for housing under development, 50 percent provision required. - Banks must review impairment computations at preparation of financial statements. - EC2: Supervisor confirms adequacy of classification and provisioning policies/processes; external experts may be used - Findings: - BdE monitors credit quality via onsite/offsite activities and credit registry tracking. - BdE inspects banks at least once every three years; loan portfolio reviews conducted more often; for larger banks ongoing by resident inspection staff. - BdE has resident inspectors in the 16 largest banks. - External auditors produce annual reports on loan portfolios based on BdE standards and provide them to BdE. - Largest 200 borrowers are reviewed by a specialized group to centralize classification and avoid differing classifications of same borrower. - BdE reviews how borrowers are classified by different banks via credit registry and follows up on variances. - EC3: Classification and provisioning take into account off-balance sheet exposures - Findings: - Annex IX of Circular 4/2004 sets specific rules for review/classification of off-balance sheet exposures and commitments and provisioning requirements. - EC4: Policies/processes ensure provisions/write-offs reflect realistic repayment and recovery expectations - Findings: - Section 1.d of Annex IX (CBE 4/2004) specifies classifications must be based on realistic repayment schedules attuned to borrower’s primary income sources and useful life of collateral. - BdE reviews compliance with provisioning guidelines and requires corrections for noncompliance; inspection reports substantiate extensive BdE provisioning review. - EC5: Policies/processes and resources for early identification of deteriorating assets and collection on past due obligations - Findings: - Adequacy of identification policies/procedures is critical in developing BdE’s risk matrix (SABER). - BdE rates credit risk in the matrix and apportions supervisory resources accordingly. - Supervisory files show BdE actively reviews, reclassifies loans and requires additional provisions. - EC6: Supervisor receives periodic, detailed information or has access regarding classification and provisioning - Findings: - Banks must submit Confidential Returns as required by CBE 4/2004-Title II with credit information at individual borrower level filed quarterly; consolidated report filed quarterly. - BdE credit registry contains information on all borrowers with outstanding debt over 6,000 Euros and how classified at various banks. - EC7: Supervisor power to require increases in provisions/reserves or overall financial strength - Findings: - Article 47.a of the Banking Law of 1946 assigns BdE responsibility to make recommendations concerning credit practices and policies. - Articles 4(f) and 5(k) make insufficient provisions a violation and enable BdE to take action to ensure books reflect bank’s condition. - BdE letters concluding supervisory activities may require increased provisions; supervisory enforcement actions follow if corrections not implemented. - EC8: Supervisor assesses adequacy of classification and provisioning for prudential purposes and can require remedial measures - Findings: - BdE empowered to require provisions in conformity with CBE 4/2004 and Law 26/1988 when provisions are inadequate. - Numerous follow-up letters reference loans reclassified by inspectors and amounts of additional provision required. - EC9: Mechanisms for periodic assessment of value of risk mitigants (guarantees, collateral); valuation to reflect net realizable value - Findings: - Annex IX CBE 4/2004 Sections 1.h and 1.i require prudence in appraisal values; banks must use professional judgment and not rely completely on appraisals, consider liquidity in stress situations. - Banks required to establish minimum frequency for collateral review and update appraisals linked to market changes. - For impairment estimation with residential real estate collateral, valuation refers to appraisal and original cost as a limit. - Crisis experience showed valuation process did not rebuild provisions early enough, prompting a one-off systemic provision build-up program. - Due diligence in creating banks from conglomerated savings banks identified need for significant provisioning in new banks. - EC10: Criteria for assets to be identified as impaired - Findings: - Laws, regulations or the supervisor establish criteria for assets to be identified as impaired (e.g., loans identified as impaired when there is reason to believe amounts due will not be collected in accordance with contractual terms). *Source: _cr12142 - Section 3.5 on Capital Planning of the ICAAP requires banks to make capital needs* ### Annex IX, Section 7.d CBE 4/2004 requires banks to identify assets as impaired when: ### _cr12142 - Annex IX, Section 7.d CBE 4/2004 requires banks to identify assets as impaired when: ### Impairment identification criteria (Annex IX, Section 7.d CBE 4/2004) - Assets are identified as impaired when: - 1. There are reasonable doubts about their full repayment (principal and interest) under contractual terms or - 2. Any part of the principal, interest or contractually agreed expenses is past-due more than three months. - Spain follows IFRS standards. - EC11 ### EC11 — Board reporting and supervisory verification - The supervisor determines that the Board receives timely and appropriate information on the condition of the bank’s asset portfolio, including: - classification of credits, - the level of provisioning, and - major problem assets. - Description and findings re EC11: - The scope of onsite inspections includes reviews of reports to the Board of Directors and management to verify the nature and extent of the information provided. ### EC12 — Individual valuation, classification and provisioning for large exposures - The supervisor requires that valuation, classification and provisioning for large exposures are conducted on an individual item basis. - Description and findings re EC12: - Paragraph 9 of Rule 29 of CBE 4/2004 stipulates that the objective evidence of impairment shall be determined individually for all loans that are significant. - Inspectors verify compliance during onsite inspections. - Confirmation is also made through sampling the BdE credit registry. ### Additional criteria AC1 — Delinquency and restructuring - Loans are required to be classified when payments are contractually a minimum number of days in arrears (eg 30, 60, 90 days). Refinancing of loans that would otherwise fall into arrears does not lead to improved classification for such loans. - Description and findings re AC1: - Loans are classified as impaired after 90 days delinquency. - A restructuring or extension will not remove the loan from past-due status or result in a reclassification to standard until there is reasonable certainty that the borrower will be able to make payments or quality collateral provided and all interest payments are current. - Other classifications are made based on individual loan characteristics. ### Assessment of Principle 9 — Provisioning and implementation comments - Assessment: Largely Compliant - Comments: - The BdE approach to provisioning is conservative and the use of a dynamic provisioning element provided an additional cushion to support the initial effects of the crisis. - As the market conditions deteriorated in the prolonged crisis, conservativeness of banks’ provisioning was not homogeneous, particularly regarding the valuation of real estate collateral. - Although BdE established detailed loan classification and provisioning requirements and supervisory efforts focus on loan portfolio review, the system results required supplementation by broader government action. - A large catch-up provision for the system and large amounts of provisioning and capital support required in the conglomeration of savings into commercial banks indicates that provisioning did not lead to prompt adjustments in light of the crisis. - BdE is currently reviewing its framework for the valuation of real estate collateral; its implementation should be important for full compliance with this CP. - As dynamic/generic provisioning is expected to fade from use as a supervisory tool in the new EU common regulatory framework, provisioning levels on an ongoing basis will need to be adjusted to ensure adequacy of credit loss estimation. ### Principle 10 — Large exposure limits (overview) - Supervisory objective: ensure banks have policies/processes to identify and manage concentrations and supervisors set prudential limits on exposures to single counterparties or groups of connected counterparties. ### EC1 — Definition of “group of connected counterparties” - Laws or regulations explicitly define, or the supervisor has the power to define, a “group of connected counterparties” to reflect actual risk exposure. - Description and findings re EC1: - The definition of “group” in company law is contained in Article 42.1 of the Commercial Code of 1885: a “group” exists when several companies form a decision-making unit, established when institutions have, directly or indirectly, control over others. - Article 1.1.g) of RD 216/2008 defines that entities or individuals, whatever the nature of their activities, which act as a decision making unit, shall be considered a group. - CBE 8/2008, Article 102, expands the concept for large exposures application, adding individuals and companies where a decision-unit is identified, even when there is no majority in voting rights. - Article 63.3 of RD 216/2008; and Articles 102.3 and 102.4 of CBE 3/08 determine that BdE may stipulate that specific groups of customers be considered as a single unit, even though they do not belong to the same economic group and this status shall apply from that point onward. ### EC2 — Prudent limits on large exposures and scope - Laws, regulations or the supervisor set prudent limits on large exposures to a single counterparty or a group of connected counterparties. “Exposures” include all claims and transactions, on-balance sheet as well as off-balance sheet. Supervisor confirms senior management monitors these limits on a solo and consolidated basis. - Description and findings re EC2: - Article 101 of CBE 3/08 defines large exposures as exposures against a client (group definition, see EC1) that exceeds 10 percent of the bank’s regulatory capital. - The value of any individual such large exposure cannot exceed 25 percent of the bank’s regulatory capital. - If the client is a credit entity (or the group includes at least one credit entity), this limit will be the largest of 25 percent of regulatory capital or 150 million Euros. - Article 102.5 determines that such exposures and limits are to be calculated aggregating on and off balance exposures. - Article 5.1 determines that such limits will need to be observed both on a solo and a consolidated basis. - Exceptions to the limits are those in the EC Directives, as transposed by RD 216/2008 (Article 64) and Article 103 CBE 3/2008: Exposures eligible to 0 percent RW, exposures to foreign governments and central Banks that are not subject to a 100 percent RW, when denominated in a currency common to the lender and the borrower, investment in insurance up to 40 percent of the bank’s capital, etc. - Articles 105.1 and 105.2 state that the Board must approve and periodically review the policies for large exposure management and control. ### EC3 — MIS for identification and aggregation of exposures - The supervisor determines that a bank’s management information systems identify and aggregate on a timely basis exposure to individual counterparties and groups of connected counterparties. - Description and findings re EC3: - Article 63.3, RD 216/2008 determines that banks must continuously monitor the concentration of risks by internal control and measurement mechanisms that allow identification and registration of all large exposures, and monitoring and control according to Board policy, including linkages between participations, mutual guarantees and commercial dependence between clients. - CBE 4/2004 Article 72.3 determines that banks must have sufficient information to assess concentration risk. - Article 122 of CBE 3/08 establishes that banks must send quarterly the supervisory reports RP60 and RP61, which contain detailed information on large exposures, composition of client groups, and occasional breaches of limits. - The largest 20 borrowers must be informed, even if they don’t reach the 10 percent threshold to be considered “large exposure.” ### EC4 — Policies/processes to establish thresholds and Board reporting - The supervisor confirms that a bank’s risk management policies and processes establish thresholds for acceptable concentrations of credit and require that all material concentrations be reviewed and reported periodically to the Board. - Description and findings re EC4: - Article 105.2 of CBE 3/08 determines that policies and processes must be adequate to measure and control concentration risk derived from large exposures, economic sector concentration, geographical region, or concentration to groups which depend on the same economic activity or the same raw materials. - Policies must evaluate use of risk mitigation techniques and seek adequate diversification according to the market and business model, monitoring concentration and adopting corrective actions to prevent excessive concentration. ### EC5 — Supervisory information, review of concentrations and remedial powers - The supervisor regularly obtains information that enables concentrations within a bank’s portfolio (sectoral, geographical, currency) to be reviewed and has the power to require remedial actions when concentrations present significant risks. - Description and findings re EC5: - See EC3 and EC4. - Banks send detailed supervisory reports quarterly, and BdE can require additional information when needed. - Article 67 of CBE 4/2004 includes quarterly information on sectoral and geographic concentration. - CBE 3/95 on the CIR includes monthly information provided by banks on their exposures, including economic sector and location. - Article 9 (1-k) and 103 of CBE 3/08 determine that excesses over large exposure limits are to be deducted from regulatory capital. - Article 11 of Law 13/1985 establishes that banks that breach these limits need to take immediate action to return to compliance. - BdE can impose limits on distribution of profits, require additional capital, order reinforcement of control or reduction of risks, operations, or close branches (11–1). - For economic sector concentration, the supervisor’s main tool is the ICAAP process, which establishes two options for a Pillar II capital add-on for sector concentration: a simplified option that uses a sector concentration index (Indice de concentración sectorial—ICS) and a general option for banks under IRB. ### Additional criteria — Definitions (Principle 10) - Banks are required to adhere to the following definitions: - ten per cent or more of a bank’s capital is defined as a large exposure; and - twenty-five per cent of a bank’s capital is the limit for an individual large exposure to a private sector non-bank counterparty or a group of connected counterparties. - AC1: See EC2. ### Assessment of Principle 10 — Findings and recommendations - Assessment: Largely Compliant - Comments: - Since the last FSAP, BdE implemented CEBS guidelines on large exposure regimes and improved monitoring and supervision of concentration risks. - BdE has extensive information on large exposures and concentration, provided by quarterly information and the CIR database. Information is input into the SIA, which analyses the economic and financial situation of the largest borrowers and grades such borrowers for supervisory use. - External auditors are required to verify compliance with large exposures and concentration rules (long report). - BdE has been strengthening monitoring and control of concentration risk; the ICAAP process has included concentration risk in determination of additional Pillar 2 capital. - The consolidation of Cajas de Ahorros into commercial banks increased sectoral (real estate) and geographical concentration; economic sector concentration was a significant factor in recent distressed bank cases. - The application of Pillar II and the ICAAP process incorporating sector concentration is recent; assessors are not confident current framework (ICAAP + internal controls) is sufficient to cover concentration risk given high sector/geographical concentration. - Recommendations and suggested enhancements: - BdE should pay special attention to developing tools to deal with and adequately factor in sectoral risk concentration within ICAAP and internal controls. - BdE should issue guidance/regulation specific to sector concentration (similar to what exists regarding large exposures), possibly including more detailed requirements in CBE 3/2008 (Capítulo Noveno) and internal controls (Capítulo Décimo). - Banks should be required to pursue adequate diversification and include impact of stress tests in management of concentration risk (factoring in effects of economic downturn in specific sectors, major decline in values of assets and collateral, etc). - Enhanced bank requirements could include identification, monitoring and management of exposures where apparently uncorrelated borrowers are exposed to a secondary common risk factor (for instance, many loans to different employees of a company, sector or local government). - Reporting and disclosure of concentration by region and sector can be improved. - Supervisors should be able to require prudential exposure limits on a case by case basis, culminating in a monitorable plan where the bank commits to reduce its concentration risk to an acceptable level. - SREP guidance can be strengthened regarding concentration risk to ensure deeper understanding of the adequacy of ICAAP capital coverage for concentration risk. - Future BCP assessment updates must include review of this CP to ascertain the effectiveness of supervision of concentration. ### Principle 11 — Exposures to related parties (overview) - Supervisory objective: prevent abuses from exposures to related parties, ensure arm’s length terms, effective monitoring, risk control/mitigation, and standard write-off policies. ### EC1 — Definition of “related parties” - Laws or regulations explicitly provide, or the supervisor has power to provide, a comprehensive definition of “related parties.” - Description and findings re EC1: - Rule 62 of CBE 4/2004 provides a detailed definition of “related parties,” which include associated entities, legal entities and individuals related to them, or that control them, or have significant influence, act in concert to exert control, share one or more council or board member, controlled entities, pension funds for the entities employees or for related companies, any key personnel in senior management and their families, entities where such persons may have control, significant influence or voting power. - This definition is taken in conjunction with the discretionary capacity of the BdE to declare a “single interest unit” (see EC1 CP 10). ### EC2 — Arm’s length terms for exposures to related parties - Laws, regulations or the supervisor require that exposures to related parties may not be granted on more favourable terms (ie for credit assessment, tenor, interest rates, amortisation schedules, requirement for collateral) than corresponding exposures to non-related counterparties. - (Description and findings re EC2 in source content are present but truncated beyond the EC2 heading.) *Source: _cr12142 - Annex IX, Section 7.d CBE 4/2004 requires banks to identify assets as impaired when:* ### Annex IX of CBE 4/2004, Section I.1, establishes that credit risk policies and ### _cr12142 - Annex IX of CBE 4/2004, Section I.1, establishes that credit risk policies and ### Related-party lending: legal framework and supervisor requirements (EC3–EC7) - Annex IX of CBE 4/2004, Section I.1: credit risk policies and processes must define the policies for related party lending; conditions and terms for lending to related parties must be similar to those applicable to loans to non-related parties in the same risk category. - Article 67-2 of CBE 4/2004: banks must only disclose that such transactions were carried in market terms when they can prove it. - Supervisor requires prior Board approval for transactions with related parties and write-off of related-party exposures exceeding specified amounts or otherwise posing special risks; Board members with conflicts of interest must be excluded from the approval process. - Specifics and gaps: - No general legal/regulatory requirement that all related party lending needs prior Board approval. Exception: lending to senior management and board members—Article 119.1 of CBE 3/08 requires Board approval excluding the interested party/member and prior approval of BdE. - The BdE operation will be tacitly considered approved if the BdE does not communicate with the entity in 15 days. - For lending to senior management, prior authorization of the Board and BdE is required. - Many rules and guidance focus on “altos cargos” (senior management) rather than the broader definition of related party in Rule 62 of CBE 4/2004. - Identification, monitoring and limits: - No specific limits set by laws, regulations or the supervisor on exposures to related parties in general. - CBE 3/2008, Article 102: aggregation of large exposures (for the calculation of the 25 percent large exposures limit) includes most related exposures, i.e., senior management of the entity and companies controlled by them, but not all related party exposures as defined in Rule 62 of CBE 4/2004. - Half-yearly: banks must inform BdE a list of people who should qualify as related parties to whom loans have been extended (Article 119.2 of CBE 3/08). - Monthly: information on all loans is also provided through CIR; BdE monitors loans to senior management and related companies (Article 102ª.2. CBE 3/2008). - Internal controls regulation (Regulation 72 CBE 4/2004) requires banks to follow with maximum attention intra-group operation risks. - General credit risk policy (CBE 3/2008 Article 105): lending must be based on solid criteria and lending procedures must be clearly established; related party should be considered in the management of concentration risk. - Annex IX CBE 4/2004 - I.1.f: the credit policy approved by the Board must detail which circumstances exceptional credit transactions could take place. - Oversight and reporting: - No specific legal requirement that banks have independent credit review processes for related party exposures, except for senior management lending. - Exceptions to policies, processes and limits are not consistently required to be reported to senior management or the Board for all related party categories. - BdE has access to information (CIR, SIA) used in supervision and onsite inspections to verify treatment of such exposures. - Assessment and rating: - Assessment of Principle 11: Largely Compliant. ### Observed weaknesses, risks, and supervisory recommendations (from the report commentary) - Weaknesses and risks: - The broad definition of related party exists, but many requirements and guidance focus on senior management only, leaving other related party linkages less covered. - Conflicts of interest in related party lending are not fully covered by the framework; detection is difficult given complex organizational structures and indirect linkages. - Related party lending was an important source of lower quality credit that contributed to the savings banks crisis (exposures to non-consolidated real estate enterprises and to public entities/organizations linked to governance bodies of Cajas owners). - New commercial banks created from Cajas reform have shareholder entities with no identifiable ownership and close links to local political and business environments; this raises particular related-party risk. - Recommendations / supervisory actions suggested: - BdE should strengthen attention to related party lending to ensure the ownership and organizational structures of new commercial banks are adequately covered. - BdE’s discretionary capacity under Article 63.3 of RD 216/2008 and Articles 102.3 and 102.4 of CBE 3/08 may need to be more fully exercised in such cases. - A more stringent framework for related exposures may need to be established. ### Country and transfer risk: policy and monitoring requirements (Principle 12, EC1–EC2) - Annex IX of CBE 4/2004: banks must have policies, methods and processes applicable to lending activities and off-balance-sheet risks, including identification of deterioration and measurement of needed coverage for credit risk, based not only on client but also on country risk. - Article 8 of Annex IX: details the definition of country and transfer risk. - Exposures are identified and monitored on an individual country basis. - Implementation of Pillar 2 and stress testing guidelines includes identification, monitoring and mitigation of country risk (see CP 7). - Supervisor confirms banks are required to monitor and evaluate developments in country risk and in transfer risk and apply appropriate countermeasures. - Supervisor confirms banks must have information systems, risk management systems and internal control systems that accurately monitor and report country exposures and ensure adherence to established country exposure limits. *Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12142.pdf* ### Annex IX CBE 4/2004.is very detailed on country risk. In addition, regulations 67 and ### _cr12142 - Annex IX CBE 4/2004.is very detailed on country risk. In addition, regulations 67 and ### Country risk (Principle 12 — EC3, EC4) - Provisions against country risk set in regulation CBE 4/2004, annex IX, 9-12; banks must classify exposures per country risk in 6 categories in crescent order of risk; exposures to group six countries are considered of remote recovery and must be written off. - Classification criteria must be verifiable and based on payment history, external and internal debt situation, economic situation, monetary and balance of payment indicators, vulnerability, market indications, external ratings, etc. - Item 30 of the Annex establishes minimum levels of provision for country risk: - Group 5, 83,50 percent - Group 4, 22,80 percent - Group 3; 10,10 percent - Provisions for interbank exposures with a maturity shorter than 3 months in countries 3 or 4 may be reduced in half provided there is no overdue payment or refinanced transaction. - BdE has a specialized Country Risk Unit in the General Associate Directorate of International Affairs that continuously analyzes and monitors political and economic developments (special focus on Latin America), makes internal country-risk assessments, and checks bank country classifications against its assessment; supervisors require revisions when discrepancies are found. - Supervisor obtains and reviews sufficient timely information on country risk and transfer risk of individual banks (see EC2 and EC3). ### Market risk (Principle 13 — EC1–EC4, AC1) - Legal/regulatory framework: - CBE 3/2008 requires banks to have well defined trading portfolio risk policies, approved by senior management. - CBE 4/2004, Rule 72, paragraph 8 requires banks to establish limits for risk assumed in trading accounts and approve market-risk models by senior management. - CBE 3/2008, Rule 84 requires independent model/data validation roles. - Supervisory activities: - Onsite inspections review policies, risk management systems, organization, risk tools, audit coverage, internal controls, limits, and Board/senior management involvement. - Inspectors evaluate price risk (VAR), concentrations in illiquid or complex products, and products marked-to-model; specific guidance provided for measurement and relating risk to bank profile. - Trading accounts must be marked-to-market and repriced on a daily basis; model values must be confirmed and tested; internal audit must review risk management and compliance with limits. - BdE ensures booking timeliness, proper recordkeeping, exception reporting, daily mark-to-market confirmation, and adequacy of pricing for positions without market prices. - Stress testing and models: - CBE 3/2008 requires stress testing with senior management review; tests must be performed at adequate frequency and backtested. - BdE has expert staff to review models and stress testing; onsite inspections ensure compliance with the June 2006 BCBS paper on stress testing. - Independent verification of market data and independent model testing required. ### Liquidity risk (Principle 14 — EC1–EC6, AC1–AC2) - Framework and guidelines: - Banks required to establish internal policies and controls to assess liquidity short-, medium- and long-term, including off-balance-sheet positions and funding structure; BdE currently does not impose quantitative limits; guidelines reflect BCBS. - BdE monitors funding gaps for one-week, one-month and three-month buckets and expects banks to cover these if wholesale market close to the bank. - Annual IAC report: banks report ratios and monitoring metrics provided to key management; loan-to-deposit ratios and cash flow gaps are collected and monitored. - Strategy, governance and monitoring: - CBE 3/2008 requires Board to ensure adequate liquidity risk management policies tailored to bank risk. - BdE monitors liquidity using the SABER approach; liquidity risk is scored into the supervisory risk matrix. - Liquidity included within ICAAP; banks file IAC with their liquidity assessment; BdE includes IAC information in its liquidity assessment. - Measurement and contingency: - Banks must report cash and securities flows, off-balance-sheet liabilities, contingent risk sources, and concentration indicators; ICAAP requires evaluation of liquidity risk in relation to other risks and inclusion in internal capital needs. - Banks expected to conduct stress tests for market crises or idiosyncratic crises and develop contingency plans; CBE 3/2008 requires contingency plans based on stress test outcomes and discussion with BdE. - Foreign currency: - Liquidity is monitored in Euros; no requirement to segregate FX liquidity risk, but banks with significant foreign currency risk (more than 5 percent of assets/liability) are required to monitor such positions and BdE monitors internal reports closely; plans to institute standard reporting format for banks with significant exposure. - Supervisory intensity: - Supervisors have weekly or more frequent meetings and calls with banks to discuss investors’ perceptions and market situation; assessors recommend continued intense monitoring aimed at sustainability and resilience. - Regulatory note: - Spain in 2011 introduced regulation requiring a higher level of common equity capital for banks that rely on wholesale funding. ### Operational risk (Principle 15 — EC1–EC8, AC1) - Legal and supervisory requirements: - CBE 3/2008, X and rule 105.2.d.(vi) requires policies/processes to evaluate and manage operational risk, including low-frequency/high-severity events; written emergency and business continuity plans required. - CBE 3/2008, Chapter VIII establishes specific capital requirements related to operational risk; Rules 98.2 and 97.2 include measurement process requirements for standard and advanced methods. - Rule 108 includes supervisory review of ICAAP. - Business continuity and recovery: - Continuity plans must include map of critical processes reviewed at least every three years, include core applications, updated documentation, yearly tests with recorded problems tracked, backup procedures with no data loss, geographically separated primary and secondary data centers, Recovery Time Objective must be lower than 12 hours, defined scenarios and activation criteria, and multi-location availability of plans. - IT and outsourcing: - Spanish banks must have IT policies and investments commensurate with operations; BdE has a specialized IT team of 31 people (4 specialists in a division doing IT inspection). - IT requirements include security units, updated internal security regulation, access control, regular security checking, prevention of confidential data copying, maintained firewalls, supervision of outsourced activities by security unit, separation of development/test/production environments, automatic reconciliations, and application/infrastructure mapping. - Circular 3/2008, Rule 105.4 sets outsourcing requirements: general services may be outsourced only if conditions met; internal controls cannot be outsourced; contracts must grant BdE unfettered access; outsourcing remains responsibility of Board/senior management and must be included in contingency plans; BdE may impose additional restrictions case by case. - Monitoring and reporting: - Rule 122 of CBE 3/2008 includes annual supervisory returns related to operational risk (RP41, RP 43), including operational loss data; part of operational risk information is publicly disclosed per rule 115 CBE 3/2008; monitoring is constant for institutions with ongoing onsite supervision. - Legal risk: - R216/2008, Rule 58.2 explicitly includes legal risk in operational risk definition; legal risk is a separate input in BdE’s operational risk matrix in SABER. - Group-wide application: - Requirements applied on solo and consolidated basis; CBE 4/2004, Rule 72.9 establishes specific managerial control requirements and information over custody activities. ### Interest rate risk in the banking book (IRR — Principle 16 — EC1–EC3, AC1–AC4) - Legal and supervisory framework: - Law 26/1988 requires banks to establish comprehensive risk management systems. - Royal Decree 216/2008, Article 67 addresses the need to include IRR in risk management processes; CBE 3/2008, standard 105 d addresses IRR. - BdE reviews IRR management in annual risk matrix and as part of ICAAP. - Measurement, limits and stress testing: - BdE reviews internal IRR measurement methodologies, management reports and adequacy of risk limits via onsite and offsite activities. - CBE 3/2008, standard 105 2c requires written documentation of stress test programs; BdE adopted guidelines based on CEBS guidelines. - IRR must include a 200 bp stress shock; banks must report stress test results semi-annually to BdE. - Results are included in ICAAP reports and analyzed/discussed with banks. - Reporting and independence: - Banks file semiannually internal stress test results with BdE; IAC reports include internal IRR reports and assessment of IRR impact on capital. - Board must approve and periodically review IRR strategies and policies; banks required to have specific risk management department and internal audit; BdE verifies independence between risk management and risk taking. ### Internal control and audit (Principle 17 — EC1–EC8, AC1–AC4) - Governance and responsibilities: - Royal Decree 216/2008 requires Board or designee to approve and periodically review risk management and internal control functions, establish transparent reporting lines, and ensure independent internal audit and compliance functions reporting periodically to the Board. - Royal Decree 1245/1995 requires strong corporate governance and internal control procedures; BdE monitors compliance during onsite inspections and review of bank reports. - Internal controls and organizational structure: - Controls must address organizational structure, accounting policies/processes, checks and balances (segregation of duties, dual control), and safeguarding of assets. - BdE assesses suitability of Board composition, adequacy of risk management complexity, capital plans, and Board responsibility for regulatory compliance in SABER. - Internal audit and compliance functions: - Internal audit must ensure policies/processes are complied with and review sufficiency of controls; BdE reviews annual internal audit action plans; internal audit must have sufficient resources, independence, access, methodology, risk-based audit plan, and authority to assess outsourced functions. - ICAAP guide requires banks to report organizational structure and reporting lines for internal audit and assess suitability relative to bank risk. - Compliance function requirements: Royal Decree 216/2008 Article 66; BdE reviews compliance function and incorporates results into risk matrix; compliance addressed in ICAAP reports. - Supervisory powers: - BdE has power under Law 26/1988, Article 31 to intervene or remove directors/management to address unsafe/unsound practices threatening solvency or reliability of financial statements. - Board composition and committees: - Royal Decree 1245/1995 and the Code of Corporate Governance require majority of directors be independent and external with appropriate qualifications; audit committee composition rules for listed banks require majority non-executive directors and presided by a non-executive director. - Notifications and fit & proper: - Laws/regulations require banks to notify supervisor of material adverse developments and changes; fit and proper criteria applied during licensing and onsite inspections. ### Abuse of financial services / AML-CFT (Principle 18 — EC1–EC12, AC1) - Institutional responsibilities and coordination: - Law 10/2010 establishes AML/CFT compliance supervision as responsibility of SEPBLAC (FIU), executive service of the Commission for the Prevention of Money Laundering (CPBCIM), chaired by the Deputy MoE; CPBCIM includes BdE, SEPBLAC, law enforcement, MoE and other supervisors; a BdE–SEPBLAC sub-committee provides guidance, approves inspection plans and supervisory requirements. - Until 2010 SEPBLAC was part of the central bank; SEPBLAC retains close relationship with BdE. - Royal Decree 925/1995 remains in effect where not in conflict with Act 10/2010. - BdE conducts compliance inspections and shares results with SEPBLAC; joint inspections and coordination occur; MOU of February 2008 (under revision to reflect Law 10/2010) formalized cooperation and exchange practices. - Regulatory requirements for banks: - Law 10/2010 implements EU AML/CFT Directives and requires: - Customer due diligence procedures, reporting of suspicious transactions, internal control and risk management for AML, naming of a compliance officer, development of compliance manuals submitted to SEPBLAC review, annual external review of internal controls by an approved expert, and staff training programs. - Act 10/2010 specifics (Chapter and Article references): - Article 3: KYC prior to entering business. - Article 4: Ultimate beneficial owner. - Article 5: Nature and circumstances of business. - Article 6: Permanent updating. - Article 7: Refrain from business if appropriate KYC cannot be conducted. - Article 14.2: Senior management approval for PEPs. - Article 25: Documents must be kept for ten years minimum. - Article 26.1 and 26.3: Written approval and maintenance of procedures and manuals. - Article 28: Annual external expert review of internal controls; report provided to BdE and SEPBLAC. - Article 29–30: Training programs and hiring practices to ensure high ethical standards; Article 30 protects confidentiality of staff reporting suspicious activity. - Article 31: Extends AML/CTF requirements to branches and subsidiaries in third countries. - Article 48: BdE required to report to CPBCIM any violations of Act 10/2010; BdE empowered to share information with judicial authorities. - Correspondent banking and enhanced due diligence: - Act 10/2010 Article 13 requires banks to gather sufficient information on respondent banks, understand their customer base and supervision, document responsibilities on KYC, and not establish relationships with shell banks; relationships cannot be established if due diligence cannot be accomplished. - Reporting and protection: - Law 10/2010, Article 18 requires banks to report suspicious activities to SEPBLAC; BdE has access to suspicious activity reports during inspections and SEPBLAC informs BdE of significant reports. - Article 18.4 allows employees to report directly to FIU if bank does not; Article 46 ensures confidentiality of the reporter to SEPBLAC; Article 23 states staff will not assume liability for reporting suspected AML issues. - Enforcement and sanctions: - Law 10/2010, Chapter VIII sets sanctioning process: violations classified as very grave, grave and minor (Articles 51–53); very grave violations require Council of Ministers approval; grave violations approved by MoE; minor by General Director of the Treasury. - Very grave violations may be subject to fines up to 1.5 million Euros or 5 percent of bank capital whichever is greater; fines for grave violations up to the maximum of one percent of capital or 150,000 Euros. - Assessors were provided a list showing a total of 24 sanctions imposed since 2007, ranging from 90,000 to 2,350,000 euros. - Supervisory access and cooperation: - BdE and SEPBLAC exchange inspection plans and reports; SEPBLAC conducts offsite analysis of suspicious transactions and cash/exchange reports, may perform targeted inspections or refer cases to judicial authorities; BdE follows up on deficiencies and coordinates with SEPBLAC. - Article 48 of Act 10/2010 empowers SEPBLAC to exchange information with other FIUs; Royal Decree 1298/1986, Article 6 enables BdE to share information with foreign supervisors. ### Supervisory approach (Principle 19 — EC1–EC5) - Supervisory model and risk-based approach: - Bank of Spain Supervisory Model (SABER) published in 2009 establishes the framework focusing on capitalization, regulatory compliance and prudent risk management using onsite/offsite reviews, regulatory filings, and cooperation with other supervisors. - SABER uses a risk matrix covering major banking risks with a numerical risk rating score (1–4) to prioritize supervisory focus; the risk matrix is updated continuously and serves as the basis for supervisory prioritization. - Implementation features: - Permanent onsite presence at 16 banks representing the largest and/or riskiest; mixed onsite/offsite activities with offsite analysts participating in inspections. - Increased use of the IAC report as a risk measuring tool; ICAAP process and IAC instructions inform banks and inspectors. - System-wide monitoring and coordination: - Financial Stability Division assesses system-wide trends, developments and risks; Offsite Analysis Division produces accounting data and indicators to support individual supervision; BdE coordinates and shares information with other financial regulators and exchanges information with other regulators to share issues of concern. - Compliance verification and notifications: - BdE monitors compliance with prudential regulations via supervisory activities and compliance inspections; Law 26//1988, Article 61.1 requires banks to promptly notify BdE of substantive changes to capital structure; changes in articles of association must be communicated within 15 days unless prior MoF approval required; opening branches abroad and purchases of significant participations are subject to prior BdE authorization. *Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12142.pdf* ### Chapter II RDL 1245/1995. ### _cr12142 - Chapter II RDL 1245/1995. ### Supervisory approach and legal framework - Banks must communicate to the BDE any deficit of eligible own funds to applicable regulations. Article 75, Royal Decree 216/2008. - The supervisory approach is intrusive, involving frequent communication with banks and permanent onsite inspection staff at the large banks. - Assessment highlights: - Principle 19: Compliant. ### Information systems supporting supervision (EC6) - Primary tools and capabilities: - Data Analysis System (SAD): facilitates analysis of information filed by banks at individual and consolidated levels and enables peer group comparisons. - Central Credit Registry: access to individual borrowers and economic groups; grouping by sectors or regions; includes related party loans, loan classifications and allows comparison between bank classifications of the same borrower. - SIA: collects and analyzes financial information on approximately the 200 largest borrowers; borrowers classified and provisioned on a centralized basis. - SIGAS: supervisory information system where information on supervisory activities is maintained individually for each institution. - Additional criterion AC1: - BdE prepares a forward-looking risk matrix; Risks are rated as growing, stable or decreasing and allow projection of supervisory activities based on risk trends. ### Supervisory techniques (Principle 20) - Overall assessment: Compliant. - Supervisory activity mix and resources: - Offsite monitoring, onsite inspections and onsite continuous supervision tailored by institution risk profile. - Resources distributed approximately as 25 percent on offsite, 30 percent onsite and 30 percent on permanent onsite supervision at the large banks. - Planning and execution: - Internal Circular of October 26, 2011 provides guidance on planning supervisory activities and annual plans; used with BdE Supervision Model to form a comprehensive planning and control system. - On-site work objectives (EC3): - Verify corporate governance, determine reliability of information, obtain additional information for risk assessment, monitor bank follow-up on supervisory concerns. - BdE conducts targeted and full scope onsite inspections; targeted inspections used for risk-specific or horizontal reviews (example: commercial real estate). - External auditors supplement BdE work by reporting on compliance with regulations, loan classification and provisioning and accuracy of regulatory reports. - Off-site work objectives (EC4): - Regular review and analysis of financial condition using prudential reports and Central Credit Registry; special requests to banks for management reports or targeted data. - Offsite analysts are integrated within supervisory teams; risk matrices and supervisory risk profiles updated as needed. - Contact with bank governance and management (EC5–EC6): - BdE maintains frequent contact; for 16 banks BdE has a constant onsite presence; reviews earnings, credit, IRR, exchange, liquidity and market risks and internal audit and corporate governance. - BdE assesses Board composition, risk oversight, adequacy of risk management systems, organizational structure, internal audit scope and policies/procedures implementation. - Internal audit and reporting (EC7–EC8): - ICAAP reporting requires banks to address internal audit coverage, main conclusions, deficiencies, corrective actions and addressees of internal audit reports; BdE reviews and confirms via onsite inspections. - Communication with banks: inspectors communicate findings during and at conclusion of inspections; official communications are letters from the Director General for Supervision approved by the Executive Committee. The process for communication is not fully documented; lists of deficiencies may be left informally by inspectors but are not recognized as official documents. - Additional criterion AC1: - Inspectors do not meet regularly with Boards except when necessary; meetings with senior management are regular; continuous onsite presence increases interactions. ### Supervisory reporting (Principle 21) - Overall assessment: Compliant. - Legal authority and reporting requirements: - Law 26/1988 and Circular 4/2004 give BdE authority to establish accounting rules, reporting formats and require submission of supervisory information on solo and consolidated basis. - CBE 4/2004 and CBE 3/2008 set standards consistent with international accounting standards and Basel II where applicable. - Valuation, frequency and content: - Valuation guidance consistent with IFRS and EU rules; includes policies, methods and procedures for documenting deterioration, recognizing losses and estimating provisions. - Banks must file monthly statements including schedules on assets and off-balance-sheet items; quarterly submissions include profit and loss and details on problem assets and provisions. - Data comparability and access (EC5–EC7): - Uniform reporting formats and calendar year basis enable meaningful peer comparisons; BdE can require more frequent or detailed reports. - Article 43 Law 26/1988 and Law 13/1985 establish BdE supervisory domain over consolidated entities and permit requests for information and review of books. - Rule 72.11 of CBE 4/2004 grants BdE full access to bank records equivalent to external auditors. - Enforcement and verification: - Failure to submit accurate and timely reports is a violation (Articles 4i and 5i Law 26/1988); directors are assigned responsibility and personal liability for accuracy. - Financial Information Department verifies data; onsite and offsite staff and external auditors also verify reports. - BdE usually relies on its own staff; occasionally requests banks to hire external auditors for special reports. - External experts and auditors: - External auditors must promptly report material shortcomings; RDL 1/2011 requires auditors to communicate without delay (within 10 days) in writing to the BdE on significant audit events. - Assessment of external experts’ scope and monitoring is in practice limited; BdE can request special reports from banks. ### Accounting and disclosure (Principle 22) - Overall assessment: Compliant. - Responsibilities and legal framework: - Senior management and the Board are responsible for reliable financial records and external audit access. - Article 1.1 Law 26/1988 subjects Board members and management to sanctions; Article 4 Law 26/1988 makes failure to maintain accurate records sanctionable. - Royal Decree 1/2011 and Regulation 1517/2011 and ICAC Audit Technical Standards govern statutory audits; audits must comply with EU-adopted international audit standards. - Valuation, disclosure scope and enforcement: - CBE 4/2004 and CBE 3/2008 require management narratives, balance sheet notes, profit and loss, capital reconcilement and cash flows; Pillar 3 disclosures follow Basel II. - CBE 4/2004 Rule 72 and Rule 64.1 cover internal accounting, management control and allow branches from other EU countries to apply head office accounting principles with communications of differences. - RDL 1/2011 and Article 25.2d Audit Regulation 1517/2011 grant BdE authority to access auditors’ working papers for supervisory purposes. - Additional criteria: - BdE holds annual meetings with major audit firms and ongoing communications. - Article 19.2 RDL 1/2011 requires a seven-year rotational requirement for audit partners and a two year cooling off period. - Banks must have a written disclosure policy (CBE 4/2004). ### Corrective and remedial powers (Principle 23) - Overall assessment: Largely Compliant. - Early intervention and written requirements (EC1): - BdE issues written communications to Boards: (1) Letter of Recommendation (non-binding) and (2) Letter of Requirements (binding); both signed by the Director General for Supervision after Executive Committee approval. - Article 23.1 (f) Law 13/1994 empowers BdE to make recommendations and require corrective action. - Article 11 Law 13/1985 empowers BdE to impose requirements for noncompliance with capital adequacy, organizational or internal control deficiencies. - Article 75 Royal Decree 216/2008 requires banks failing capital adequacy to immediately inform BdE and submit a restoration plan. - Resolution and coordination (EC2): - BdE determines when resolution is needed; FROB or DGS lead liquidating or restructuring processes with BdE participation. - Title III LDI and Article 31 LDI permit intervention or temporary replacement of Board or management in grave situations; liquidations/withdrawal of license proposed by MoE and must be approved by Council of Ministers except certain cases. - Article 7 Royal Decree-law 16/2011: BdE controls 6 of 12 members of the DGS; DGS may lend financial assistance under an action plan approved by BdE. - Article 7 Royal Decree-law 9/2009: BdE may temporarily replace the Board and appoint FROB if satisfactory solution not implemented. - Range of supervisory tools (EC3–EC5): - BdE may initiate sanctioning procedures, impose less serious and serious sanctions and propose very serious sanctions to the Minister of Economy (MoE); revocation of banking licence corresponds to the Council of Ministers. - Article 11 Law 13/1985 authorizes BdE to require: - banks to hold capital in excess of minimums; - strengthening of internal controls and policies; - higher provisions, adjust risk weights, change strategies, alter business lines; - restrict growth or business lines; - restrict compensation. - Article 6.1 and 11.1 Law 13/85 and 76 RD 216/2008 grant BdE power to require banks retain all profits when bank capital falls 20 percent below the minimum required or core capital falls below 50 percent of total. - Articles 32 to 38 Law 26/1988 address management intervention and replacement of Board of Directors. - Articles 4 to 6 Law 26/1988 rank violations by gravity (very grave, grave, minor) and set corresponding infractions. - Application of penalties to individuals (EC6): - Article 1 Law 26/1988 and Articles 12–13 Law 26/1988: fines and sanctions can be imposed on both banks and individuals; Article 31 Law 26/1988 allows temporary removal of directors when safety and soundness at stake. - Identified limitations and recommendations: - The supervisory process is deliberate and has reduced need for sanctions, but: - The need for flexible actions applied at an earlier stage is emphasized given Pillar 2 implementation, current crisis dynamics and integrated global markets. - The current process is primarily linear, granting banks multiple opportunities for correction; recommended augmentations include earlier actions to protect asset values and capital (restrict dividends, cancel doubtful lending commitments, impose stringent funding requirements). - Suggest linking issuance of letters of requirement or initiation of enforcement action to risk-based benchmarks such as the risk matrix measurements and assigned risk ratings. - Consider developing a more detailed enforcement action program and adopting BCBS “Supervisory Guidance on Dealing with Weak Banks” options. ### Consolidated supervision (Principle 24) - Overall assessment: Compliant. - Scope and powers: - BdE performs consolidated supervision and gains in-depth knowledge via mandatory solo and consolidated reporting, permanent on-site supervisory teams and cooperation with foreign supervisors. - Article 6 Law 13/1985 and Article 5 RD 216/2008 require solvency regulations be complied with on a consolidated basis; Circular 3/2008 details legal solvency requirements and mandatory reporting. - RDL 2/2011 introduced a new requirement of a core capital ratio to be complied with on a consolidated basis. - Non-banking activities and group-wide risk assessment: - Article 43.1 LDI extends control powers to nonfinancial institutions of the banking group when required. - The supervisory model incorporates all types of risks assumed by banks and groups into each bank’s risk profile. - Cross-border cooperation and access: - BdE has MoUs with domestic sectoral supervisors and with foreign supervisors (UE (8) and non-EU (12)), participates in supervisory colleges and crisis management groups. - BdE can require information from all entities in the group, check accuracy and impose prudential standards on a consolidated basis. ### Home-host relationships (Principle 25) - Overall assessment: Compliant. - Information exchange and supervisory colleges: - BdE adopted CEBS guidelines on supervisory colleges and exchanges essential information with host supervisors through bilateral MoUs and participation in colleges. - Guideline references emphasize exchanging all information necessary for performance of key activities and coordination under the consolidating supervisor. - Licensing and continuous authorization oversight: - RD 1245/1995 Articles 7, 13 and 17 require BdE authorization for cross-border branches or creating/buying foreign credit institutions and involve consultation with foreign supervisors. - Article 30.bis LDI and Article 13.2, 17 RD 1245/1995 permit denial of applications if effective consolidated supervision cannot be exercised. - BdE may require guarantees or additional information in authorization processes for non-EU controllers. - On-site access and supervisory visits: - Article 43.bis.1 Law 26/1988 grants BdE inspection powers over groups including entities and offices inside or outside Spain; entities must provide BdE with registers, documents, databases and programs. - In practice, on-site access for home supervisors to foreign subsidiaries is negotiated case-by-case under MoUs; BdE has had on-site access to foreign subsidiaries of the two largest banking groups in agreement with foreign supervisors. - Host supervisor responsibilities: - Subsidiaries established in Spain of foreign banks are subject to the same prudential requirements as domestic banks; branches from EU entities operate under home-country supervision with limited host powers, while branches from third countries are subject to the same Spanish regime as domestic banks. - Communication and crisis coordination: - BdE has developed a website for exclusive use of host supervisors to obtain and share information and has adopted Article 10.quarter Law 13/1985 related to establishment of supervisory colleges. - BdE maintains bilateral MoUs and consults home/host supervisors during supervisory and authorization processes. *Source: _cr12142 - Chapter II RDL 1245/1995.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12142.pdf_