Legislative Framework
As a Spanish credit institution, BBVA is subject to Directive 2013/36/EU of the European Parliament and of the Council dated June 26 2013 on access to the activity of credit institutions and investment firms (“Directive CRD IV”) amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC by means of which the EU began, as of January 1 2014, to implement the capital reforms agreed within the framework of Basel III, thus establishing a period of gradual implementation for certain requirements until January 1 2019. The major regulation governing the solvency of credit institutions is Regulation (EU) No 575/2013 of the European Parliament and of the Council dated June 26 2013 on prudential requirements for credit institutions and investment firms amending Regulation (EU) No 648/2012 (“CRR” and, jointly with Directive CRD IV and any other CRD IV implementation measure, “CRD IV”), which is complemented by several binding Regulatory Technical Standards that apply directly to EU member states, there being no need to implement national measures. Directive CRD IV was transposed to Spanish national law by means of Royal Decree-Law 14/2013 dated November 29 (“RD-L 14/2013”), Law 10/2014, Royal Decree 84/2015 dated February 13 (“RD 84/2015”), Bank of Spain Circular 2/2014 dated January 31 and Circular 2/2016 dated February 2 (“Bank of Spain Circular 2/2016”).
In order to strike a balance between risk sensitivity, simplicity and comparability, the Basel Committee is reforming the Basel III framework. The main amendments are focused on internal models, the standard credit risk method, the market risk framework, operational risk and capital floors in the advanced measurement approach based on the standardized approach. This reform is expected to be completed in the coming months.
In Europe, on November 23, 2016 the European Commission published a new reform package amending both the prudential banking regime (CRR) and the resolution regime (Bank Recovery and Resolution Directive, “BRRD”). This revision includes the implementation of international standards in European legislation (regulation later than 2010 adopted by the Basel Committee and the total loss absorbing capacity “TLAC”), the final design of the Minimum Requirement for own funds and Eligible Liabilities (“MREL”) along with a package of technical improvements. At the same time, a proposal has also been put forward to harmonize the hierarchy of senior debt creditors within the European Union. Publication of this proposal is just the first step in the European legislative process.
As regards Pillar 3, in January 2015 the Basel Committee approved a revision of the framework (“Revised Pillar 3 Disclosure Requirements”, hereinafter, “RPDR”) In order for all European institutions to implement the Basel revision in such a way as to meet CRR requirements on this matter, on December 14 2016 the European Banking Authority (“EBA”) published its final guidelines on regulatory disclosure (“Guidelines on Revised Pillar 3 Disclosures Requirements”, hereinafter “GRPDR”). The implementation date for these guidelines is the close of the financial year 2017. However, it is recommended that global systemically important banks (“G-SIB”) should undertake a partial implementation at the close of the financial year 2016.
Following this recommendation, BBVA Group, committed to transparency and aiming to improve comparability between banks and information consistency, has decided to implement in the Prudential Relevance Report, the guidelines included in the RPDR.
Additionally, as of December 31, 2016, BBVA Group has adopted the GRPDR recommendation in which EBA modifies and/or supplements the Basel framework, adapting ten standard disclosure templates about credit risk, counterparty credit risk and market risk.
The index of charts and the index of tables contain the list of standard templates issued by Basel and EBA.
Capital Composition
The new regulations require institutions to have a higher and better quality capital level, increase capital deductions and review the requirements associated with certain assets. Unlike the previous framework, the minimum capital requirements are complemented with requirements for capital buffers and others relating to liquidity and leverage. Own funds under CRD IV mainly comprises of the elements described in section 2.1 herein.
The main features of the elements making up the capital requirements and risk-weighted assets are detailed in greater depth in section 2.4 of this document.
In this regard, article 92 of CRR establishes that credit institutions must maintain at all times, at both individual and consolidated level, a total capital ratio of 8% of their risk-weighted assets (commonly referred to as the Pillar 1 requirement). At least 6% of the total capital ratio must comprise Tier 1 capital, of which 4.5% must in any case comprise Common Equity Tier 1 (CET1), and the remaining 2% may be completed with Tier 2 capital instruments.
Notwithstanding the application of the Pillar 1 requirement, CRD IV contemplates the possibility that competent authorities may require that credit institutions maintain more shareholders’ equity than the requirements set out in the Pillar 1 requirements to cover risks other than those already covered by the Pillar 1 requirement (this power of the competent authority is commonly known as Pillar 2).
Furthermore, in accordance with CRD IV, credit institutions must comply with the “combined requirement of capital buffers” as of 2016. The “combined requirement of capital buffers” has incorporated five new capital buffers: (i) the capital conservation buffer, (ii) the buffer for global systemically important banks (the “G-SIB buffer”), (iii) the countercyclical capital buffer peculiar to each bank, (iv) the buffer for other systemically important financial institutions (the “D-SIB buffer”) and (v) the buffer against systemic risks. The “combined requirement of capital buffers” must be met with Common Equity Tier 1 capital (“CET1”) in addition to that which is provided to meet the minimum capital required by “Pillar 1”.
Both the capital conservation buffer as well as the EISM buffer (where appropriate) will apply to credit institutions as it establishes a percentage over 0%.
The buffer for global systemically important banks applies to those institutions on the list of global systemically important banks (“G-SIBs”), which is updated annually by the Financial Stability Board (“FSB”). Given that BBVA has been excluded from the list of global systemically important financial institutions in 2016, as of January 1, 2017, the G-SIB buffer will not apply to BBVA in 2017 (notwithstanding the possibility that the FSB or the supervisor may in the future include BBVA on that list).
The Bank of Spain has extensive discretionary powers as regards the countercyclical capital buffer peculiar to each bank, the buffer for other systemically important financial institutions (which are those institutions considered to be systemically important local financial institutions “D-SIB”) and the buffer against systemic risks (to prevent or avoid systemic or macroprudential risks). The European Central Bank (“ECB”) can issue recommendations in this respect pursuant to the entry into force on November 4 2014 of the Single Supervisory Mechanism (“SSM”).
In December 2015, the Bank of Spain agreed to set the countercyclical capital buffer that applies to credit exposures in Spain at 0% as of January 1 2016. These percentages will be reviewed every quarter, as the Bank of Spain has decided to keep the countercyclical capital buffer at 0% for the first quarter of 2017.
As far as BBVA is concerned, after the supervisory review and evaluation process (“SREP”) conducted in 2016, the ECB has required that BBVA, as of January 1 2017 maintain (i) a CET1 phased-in ratio of 7.625% at consolidated level and 7.25% at individual level; and (ii) a phased-in total capital adequacy ratio of 11.125% at consolidated level and 10.75% at individual level.
The ECB’s decision establishes that the total capital adequacy ratio of 11.125% at consolidated level includes: (i) the minimum CET1 ratio required by Pillar 1 (4.5%); (ii) the minimum Tier 1 additional capital adequacy ratio (“AT1”) level required by Pillar 1 (1.5%) (iii) the minimum Tier 2 ratio required by Pillar 1 (2%) (iv) the CET 1 ratio required by Pillar 2 (1.5%) (v) the capital conservation buffer (which is 1.25% in phased-in CET 1) and (vi) the D-SIB buffer (which is 0.375 in phased-in CET 1 terms and 0.75%).
BBVA maintains a fully loaded CET 1 ratio of 10.90% at consolidated level to December 31 2016, strengthening the Group’s capital position, with a phased-in ratio of 12.18%.
Leverage ratio
In order to provide the financial system with a metric that serves as a backstop to capital levels, irrespective of the credit risk, a measure complementing all the other capital indicators has been incorporated into Basel III and transposed to the Solvency Regulations. This measure, the leverage ratio, can be used to estimate the percentage of the assets financed with Tier 1 capital.
Although the book value of the assets used in this ratio is adjusted to reflect the bank’s current or potential leverage with a given balance-sheet position, the leverage ratio is intended to be an objective measure that may be reconciled with the financial statements.