On April 27, the Banco de España approved Circular 4/2016, amending Circular 4/2004 on the financial information of credit institutions. The new circular is the greatest reform of Annex 9 of Circular 4/2004 to date. It completely reformulates it and contains guidelines for institutions on risk management.

Although the system's basic structure is the same, there are some significant changes. We highlight the following new developments:

(i) Credit institutions can use internal models for estimating hedging of a general nature.

(ii) Risk classification is redefined with the removal of the substandard category and the addition of a normal risk under special monitoring.

(iii) Statistical provisions are removed while general and specific provisions remain.

(iv) The “unique calendar” is replaced by many calendars depending on the type of borrower and the purpose of the transaction. 

(v) The accounting treatment of insolvency, restructuring and refinancing loans is stricter, although the basic principles are kept in place: insolvency loans are always doubtful (or nonperforming), and restructuring and refinancing loans cannot be reclassified as normal loans unless they meet the minimum criteria. 

(vi) More details are provided about the requirement to restructure adjudicated assets.