Circular 3/2008 dated May 22 of the Bank of Spain and its amendments 9/2010 dated December 22 and 4/2011 dated November 30 (hereinafter, the Solvency Circular) represent the final development of legislation on the capital base and supervision on a consolidated basis, within the scope of Spanish credit institutions.
This legislation established by Law 13/1985, dated May 25, on Investment ratios, bank capital and reporting requirements of financial intermediaries and other financial system regulations, and in Spanish Royal Decree 216/2008, dated February 15, on Financial institutions' own funds, constitutes as a whole the transposition to Spanish credit institutions of Community Directives 2006/48/EC, of June 14, relating to the taking up and pursuit of the business of credit institutions and 2006/49/EC, of June 14, on the capital adequacy of investment firms and credit institutions, of the European Parliament and of the Council.
In accordance with Rule 109 of the Solvency Circular, financial institutions have to publish a document called “Information of Prudential Relevance” including the contents stipulated in chapter 11 of this circular. This report has been drawn up in keeping with these stipulations.
In accordance with the policy defined by the Group for drawing up the Information of Prudential Relevance, the content of this report refers to December 31, 2012 and was approved by the Group’s Audit and Compliance Committee, at its meeting held on April 2, 2013, having previously been reviewed by the External Auditor. This review has not revealed any material discrepancies concerning compliance with the reporting requirements laid down in the Bank of Spain Solvency Circular.
Regulatory environment in 2012
Legal changes in Spain
Laws have been published throughout 2012 affecting credit institutions, relating to the restructuring of the balances affected by impairment of assets linked to the real-estate sector, the regulation of the framework of restructuring and resolution of banks and the regulatory development of asset management companies. Below we highlight the main legal documents published in this area:
- Royal Decree-Law 2/2012: This Royal Decree-Law essentially structures the new provision requirements aimed exclusively at covering the impairment in balances caused by the assets linked to real estate activity.
- Law 8/2012 (repealing Royal Decree-Law 18/2012): This law governs additional coverage requirements to those under Royal Decree-Law 2/2012 derived from the impairment of finance linked to real-estate activity classified as in a normal situation.
Law 9/2012 (repealing Royal Decree-Law 24/2012): This law is part of Spain's program of assistance for the recapitalization of the financial sector and implements the Memorandum of Understanding signed with the European authorities. In general, Law 9/2012 establishes the system of restructuring and resolution of credit institutions, as well as the legal development of asset management companies. Starting in January 2013 it also modifies the definition and requirements on the question of "principal capital" (a capital measure included in Royal Decree-Law 2/2011).
Circular 7/2012 on Principal Capital: Pursuant to Law 9/2012, starting on January 1, 2013 the principal capital requirements to be complied with by credit institutions were modified and a requirements of 9% of total risk-weighted exposure was established. The definition of capital was in line with that established by the EBA in its Recommendation EBA/REC/2011/1.
Note: All figures have been rounded to present the amounts in million euros. As a result, the amounts appearing in some tables may not be the arithmetical sum of the preceding figures.Legal changes in the Community area
European Commission / European Parliament / European Council
In 2012, the EU has made progress in the process of negotiating the new solvency regulations to comply with Basel III, known at the European level as the "CRDIV package". The CRDIV package is composed of a regulation (CRR) that will be directly applicable in the different Member States and a Directive (CRD) that each national authority will have to transpose to its legislation. The CRDIV package is expected to be approved in 2013.
In addition we can highlight the following milestones in regulation at European level:
- In March, the European Commission published the green paper on the shadow banking system. This is a first step towards a detailed examination of the problems represented by the credit intermediation system made up of entities and activities that are outside the international banking system.
- In June the European Commission published the proposed legislation establishing the framework for the recovery and resolution of credit institutions. This framework contains a broad catalog of measures to be adopted; in the first instance, to prevent credit institutions from reaching a situation of inviability that puts at risk the stability of the financial system; and in second place, for an orderly resolution of entities that are not viable.
- In October, the European Commission published the conclusions of the Liikanen group. The Liikanen group is a high-level consultative body whose main objective has been to analyze the need for structural reforms in the system. The group's report sets out recommendations in various areas, among them the structural separation of negotiation activities.
- In December, an agreement was reached for the European Central Bank to act as sole banking supervisor starting in March 2014.
European Banking Authority
In accordance with the functions it has attributed to it, the European Banking Authority has in 2012 developed technical guides and standards for regulation.
With respect to Recommendation EBA/REC/2011 issued by EBA at the end of 2011; this Recommendation established that the banks subject to the Recommendation should maintain in June 2012 a Core Tier I level of 9% and an additional capital buffer for sovereign risk. The EBA has monitored compliance with this recommendation and has also expressed its intention to maintain it until the final adoption of the CRDIV package. At this moment, this requirement will be replaced by an amount equivalent in nominal terms.
Legal changes in the international area
BIS
In 2012 the Basel Committee has continued to monitor and complete the legal reforms known as Basel III. For these purposes the Basel Committee has carried out an analysis (Level I and II) and has presented the first conclusions with respect to the level of implementation of the agreement at international level. The framework has also been complemented with the publication of the methodology for identifying systemic banks at a local level (D-SIBs).
The current solvency of the BBVA Group and its capacity to generate capital internally ensures compliance of the new Basel III requirements in the timetable of implementation established.
The Basel Committee continues committed to the continuous improvement of the solvency legislation governing banks and their supervision. The principles for banking supervision in 2012 have also been defined and legal initiatives have been put forward to modify substantially the market risk frameworks, securitizations and major risks.
FSB
The regulatory work of the FSB has mainly focused on subjects related to the identification of systemic banks, vigilance and regulation of shadow banks and improvements in disclosure.
Systemic banks: With respect to systemic banks, in November the FSB has updated the list of systemic banks and issued for consultation purposes guides designed to standardize the development of recovery/resolution plans to which the banks in question are subject. For these purposes it should be noted that BBVA has formed part of this group of systemic banks at a global level.
Shadow banking: In November FSB published for consultation recommendations aimed at improving the supervision and regulation of shadow banking. The consultation documents issued by FSB are focused mainly on:
- Analyzing and mitigating risks associated with other shadow banks
- Mitigating risks and reducing procyclicality related to REPO markets and security lending
The work of FSB is complemented with that carried out by the IOSCO on Money Market and Securitization Funds. Still pending is tackling the interactions between the financial system and shadow banking, which is expected to be addressed in 2013.
Disclosure: In October the FSB published the Enhanced Disclosures Task Force (EDTF), which includes recommendations on information to be disclosed to the market. In general it establishes recommendations to give users more information on:
- The model of business and main risks derived from it.
- The bank's liquidity position, sources of finance and preparedness to cover potential future needs.
- The calculation of risk-weighted assets and changes to the level of capital and risk-weighted assets.
- The relationship between a bank's market risks and its balance sheet.
- Policies of granting loans and modifications to these policies that could have an effect on the default rate.