Given its participation in the Single Supervisory Mechanism (SSM), Banco de España qualifies as a national competent authority (NCA), which implies that credit institutions considered as significant are supervised by the ECB, while less significant institutions are directly supervised by Banco de España and, indirectly, by the ECB. Of the 117 significant institutions supervised by the ECB, 12 are Spanish (as at 2 January 2019). These 12 significant institutions represent more than 90 per cent of deposit assets in Spain.i Relationship with the prudential regulator
Banco de España no longer sets the country's monetary and exchange rate policy, except in its role as a member of the ESCB, but it remains in control of, inter alia, the following functions:
- management of currency and precious metal reserves not transferred to the ECB;
- supervision of the solvency and behaviour of credit institutions (pursuant to the distribution of competencies set forth by the SSM);
- promotion of the stability of the financial system and of national payment systems, without prejudice to the functions of the ECB; and
- minting and circulation of coins and other types of legal tender.
Banco de España continuously monitors and analyses credit institutions, assesses the reports and regular information received from them, and conducts on-site inspections. There is close interaction between Banco de España and the entities subject to its supervision. Provisioning rules are straightforward, transparent and verified by Banco de España.
Banco de España's responsibilities include the verification of maximum rates and charges for banking services rendered by credit institutions. It also verifies the customer protection rules and keeps several registries of public banking information, including the register of institutions, registers of senior officers and shareholders, auditors' reports and a special registry of the articles of association of supervised institutions. It also receives confidential information from institutions on their financial situation and their shareholders.
Banco de España may issue general or specific recommendations to and requirements of entities (i.e., requiring adequate provisioning for less solvent obligors and improvements in the quality control over assets). It may also initiate disciplinary proceedings against institutions and their boards of directors or managers, or may even intervene and replace directors to remedy deficiencies or non-compliance.
Banco de España has powers to enforce compliance with the organisational and disciplinary regulations applicable to credit institutions operating in the Spanish financial sector. These powers are exercised not only over credit institutions and other financial institutions subject to its oversight, but also over directors and managers, who can be penalised for very serious or serious infringements when they are attributable to wilful misconduct or negligence. Sanctions can also be imposed on the owners of significant shareholdings in credit institutions and on Spanish nationals who control a credit institution in an EU Member State.
Additionally, as a consequence of the CRR/CRD IV package and the entry into force of RDL 14/2013, the supervisory powers of Banco de España and CNMV have been widened and strengthened to ensure appropriate enforcement of the new banking and supervisory discipline. Likewise, RDL 14/2013 has amended Law 13/1994, of 1 June 1994 (the rule setting out the competences and regime applicable to Banco de España) to allow it to issue technical guidelines and answer binding questions on supervisory regulation.
Finally, according to the regime set forth by the Recovery and Resolution Regulations, Banco de España is the pre-emptive resolution authority, while executive resolution powers are vested in the FROB (see Section III.iv).ii Management of banks
The board of directors of a credit institution (with at least five members) has prominent powers to administer and manage the operations and financial matters of the entity. Members of the board and senior management must have good commercial and professional reputations, appropriate experience and the ability to carry out proper governance of the entity.
A new suitability regime was established in 2014. Although it was in line with the regime applicable up to then (which was repealed), the new regime brought some novelties. For instance, Banco de España is entitled under the Credit Institutions Solvency Law to determine the maximum number of positions that may be held simultaneously by a director, general manager or the holder of a similar position in view of the particular circumstances of an institution and the nature, size and complexity of its activities. Save in the case of directors appointed pursuant to a replacement measure, directors, general managers and holders of similar positions in institutions that are significant in size, or that are more complex or of a special nature, may not hold more than four non-executive positions simultaneously, or one executive position at the same time as two non-executive positions (for these purposes, the positions held within the relevant credit institution's corporate group are counted as one).
The Credit Institutions Solvency Law obliges credit institutions to put corporate governance arrangements in place that are sound and proportionate in view of the risks taken by the institution. In addition, the following obligations are established:
- the board of directors may not delegate functions related to corporate governance arrangements, the management and administration of the institution, the accounting and financial reporting systems, the process for the disclosure of information and the supervision of senior management;
- the chair of the board of directors must not hold the position of managing director simultaneously, unless this situation is justified by the institution and authorised by Banco de España;
- a website must be maintained on which the information required by the Credit Institutions Solvency Law is published and on which the institution explains how it complies with its corporate governance obligations;
- the obligation to draft and keep an up-to-date general viability programme that considers all the measures that will be taken to restore the viability and financial soundness of institutions in the event that they suffer any significant damage;
- the obligation to establish a nomination committee comprising non-executive directors and in which, at a minimum, one-third of its members, and in any case its chair, are independent directors. This committee must decide on a target figure for the representation of the gender currently underrepresented on the board of directors;
- the board must actively participate in the management and valuation of the assets, and regularly approve and review the risk policies and strategies of the institution; and
- Banco de España will be entitled to determine which institutions must establish a risk committee or, as the case may be, those institutions that may establish combined audit and risk committees to perform the functions of the risk committee.
Significant time has been devoted to Spanish remuneration policies during the past few years, as has been the case at both European and international levels. In particular, the Credit Institutions Solvency Law includes the provisions of the CRR/CRD IV package relating to the obligation for credit institutions to put in place remuneration policies that are consistent with their risks. In a nutshell, these provisions relate to:
- the obligation to make a clear distinction between the criteria used for setting fixed remuneration and variable remuneration;
- the obligation that the remuneration policy applicable to members of the board of directors of a credit institution is subject to the approval of the general shareholders' meeting or equivalent body under the same terms as those applicable to listed companies;
- the principles that will apply to variable elements of remuneration (inter alia, the variable component must not exceed 100 per cent of the fixed component save in cases of approval of the general shareholders' meeting granted in accordance with the procedure laid down in the Credit Institutions Solvency Law, in which case, it may reach up to the 200 per cent; at least 50 per cent of the variable remuneration is awarded in instruments; at least 40 per cent of the variable remuneration (either paid in cash or in instruments) is deferred for a period of between three and five years; the variable remuneration is paid or vests only if it is sustainable according to the financial situation and results of the institution; or 100 per cent of the variable remuneration is subject to explicit ex post risk adjustments – malus and clawback arrangements), with special attention in this regard to credit institutions that benefit from public financial assistance; and
- the obligation to establish a remuneration committee or, if Banco de España so determines, a joint nomination and remuneration committee.
Finally, as previously mentioned, credit institutions (other than credit cooperatives and savings banks) are incorporated as banks and have the legal form of limited liability companies. As such, general corporate rules will fully apply to them (i.e., they must have a suitable structural organisation, compliance and internal audit functions and risk assessments, and certain separate and delegated committees within the board, including an internal audit committee). These rules are primarily contemplated in Royal Legislative Decree 1/2010, of 2 July, approving the Spanish Companies Law.iii Regulatory capital and liquidity
Spain's capital and liquidity requirements legislation has traditionally incorporated capital adequacy requirements in line with international standards as set out by the Basel Committee on Banking Supervision. According to these, a banking group should be adequately capitalised overall (in terms of both volume and capital quality), and there should be an adequate distribution of capital and allocation of risk, with sufficient buffers to allow ordinary growth.
Several laws, decrees and regulations on own funds, capital requirements and liquidity of individual credit institutions and consolidated groups have been approved through the years, most of them to implement the Basel I, Basel II and Basel III Accords. These regulations have been followed by specific circulars and guidelines issued by Banco de España determining the technical specifications and control of minimum funds.
Nonetheless, the entry into force of the CRR/CRD IV package and of the Credit Institutions Solvency Regulations has led not only to a deep change (at both the European and the Spanish level) in the regulation of solvency and liquidity of credit institutions but, more generally, to a fundamental step forward in the creation of the banking union. Since 1 January 2014, the nuclear regime for credit institutions solvency is condensed in the CRR (which is directly applicable in EU Member States). Where needed, the Credit Institutions Solvency Regulations supplement this regime in Spain.
One of the most interesting changes deriving from the entry into force of the Credit Institutions Solvency Law is the inclusion of capital buffers (i.e., additional capital requirements to those envisaged under the CRR), the regime of which is further developed by RD 84/2015 and Circular 2/2016. Failure to comply with capital buffers entails restrictions on distributions and payments relating to components of Common Equity Tier 1 (such as shares) or Additional Tier 1 capital (such as contingent convertible bonds) and on the payment of variable remuneration, and the obligation to submit a capital conservation plan that must be approved by the competent supervisor.
In particular, the various capital buffers provided for in the Credit Institutions Solvency Regulations are as follows:
- capital conservation buffer (2.5 per cent of the institution's risk exposure): a non-discretionary buffer, the application of which has been phased in from 1 January 2016 to 31 December 2018, and that from 1 January 2019 is set at its fully loaded level of 2.5 per cent;
- countercyclical capital buffer: a specific buffer for each institution or group, which is calculated as the weighted average of the countercyclical buffer percentages applicable in each of the territories in which an institution has exposures. The percentage applicable to risk exposures in Spain is set by Banco de España and ranges between zero and 2.5 per cent. Banco de España has decided to maintain the countercyclical buffer applicable to risk exposures in Spain for the first quarter of 2019 at zero per cent (as it was set up for the immediately preceding quarters);
- buffers for global systemically important institutions (G-SIIs) and other systemically important institutions (O-SIIs): buffers specifically applicable to certain institutions by reason of their systemic importance. The identification of institutions as G-SIIs or O-SIIs is decided by Banco de España, which must annually review the classification it has carried out. Banco de España also has to set the buffer to be maintained by each type of institution, which in the case of G-SIIs will range from 1 to 3.5 per cent, and which in the case of O-SIIs may not exceed 2 per cent. These buffers are applicable from 1 January 2016, although in the case of both G-SIIs and O-SIIs, they must be fulfilled in tranches in the following four years. The only credit institution identified by Banco de España as a G-SII for 2019 is Banco Santander, which belongs to Subcategory A. The capital buffer it needs to meet in 2019 is equivalent to 1 per cent of its total risk exposure (on a consolidated basis). Besides this, Banco de España has already confirmed that Banco Santander will maintain its status as a G-SII for 2020, and that the G-SII capital buffer applicable to the entity in that year will amount to 1 per cent of its total risk exposure on a consolidated basis. The following credit institutions have been classified as O-SIIs by Banco de España for 2019: Banco Santander, BBVA, CaixaBank, Bankia and Banco Sabadell; and
- systemic risk buffer: a buffer that may be set by the Banco de España to cover non-cyclical systemic or macroprudential risks where there is a risk of disruption in the financial system with the potential to have serious negative consequences for the financial system and the real economy.
Regarding liquidity, the Credit Institutions Solvency Law states that Banco de España will assess business models, corporate governance procedures and systems, supervision and evaluation findings, and all systemic risks.iv Recovery and resolution
The Recovery and Resolution Regulations have updated the Spanish legislation on the recovery and resolution of credit institutions that was introduced in 2012 with the entry into force of Law 9/2012 to adapt it to the EU legislation on this matter.
The Recovery and Resolution Regulations foresee three phases (as described below) that correspond to the various stages in the deterioration of an institution's financial situation. The rules governing each of these phases are based upon the following two main principles:
- the separation of supervisory and executive resolution functions. The resolution powers in the pre-emptive resolution phase are entrusted to Banco de España as regards credit institutions, and the CNMV as regards investment firms, while the FROB holds the resolution powers in the executive phase; and
- public resources cannot be used to fund recovery and resolution proceedings, the cost of which must be borne first by the shareholders of the institution under resolution, second by certain creditors, and finally by the credit institutions and investment firms sector (if needed).
Prior to any breach of the solvency, regulatory or disciplinary rules, or the declaration by the competent authority of any of these three phases, an institution must draw up and periodically update a recovery plan elaborating on the measures and actions to be taken to restore its financial position should it deteriorate significantly. The plan must be approved by the institution's board of directors and reviewed by the relevant supervisor.
Early intervention measures can be adopted by the relevant supervisor when an institution or a parent of a consolidated group of institutions breaches, or is likely to breach, solvency, regulatory or disciplinary rules, provided that it is foreseeable that the institution will be able to overcome the situation by its own means. These measures include requiring the removal of one or several members of the governing body of the institution, convening a general meeting and proposing items on its agenda, or requiring the board of directors of the institution to draw up a plan for restructuring the institution's debt or requiring changes to be made to its business strategy.Pre-emptive resolution phase
The pre-emptive resolution authority must draw up, approve and maintain a resolution plan for each individual institution or consolidated group that falls under its remit. Among other measures, it must consult the resolution authorities from those jurisdictions in which an institution or group has established a significant branch.
When drawing up the report, the pre-emptive resolution authority must determine whether the individual institution or consolidated group is resolvable (as this term is defined in Article 15.1 of the Recovery and Resolution Directive). Should any obstacles to the resolution of the institution be identified, the 'non-resolvable' institution must propose measures to remove them. These measures have to be approved by the relevant pre-emptive resolution authority. If it does not consider the proposed measures to be sufficient, it may request the relevant institution to adopt alternative measures (in particular, any of those foreseen in Article 17.5 of the Recovery and Resolution Directive as transposed into Spanish law).Executive resolution phase
An institution will be resolved when all of the following circumstances have been met:
- it is non-viable (as this term is defined in the Recovery and Resolution Law, mirroring the definition included in the Recovery and Resolution Directive) or it is reasonably foreseeable that it will become so in the near future;
- there is no reasonable prospect that private sector measures, supervisory measures (such as the early intervention measures), or the conversion or redemption of capital instruments will prevent the institution from becoming non-viable within a reasonable period of time; and
- for reasons of public interest, it is necessary or advisable to proceed with the institution's resolution rather than liquidating it or winding it up in the applicable insolvency proceedings.
The FROB has the power to initiate the resolution process. The opening of the execution phase of the resolution will normally entail the replacement of the institution's board of directors, managing directors or similar officers (although the FROB may maintain them) with the person or persons appointed by the FROB to manage the institution under its supervision. The resolution tools available to the FROB are:
- the sale of the institution's business;
- the transfer of assets or liabilities to a bridge entity;
- the transfer of assets or liabilities to an asset management company; and
- internal recapitalisation (the Spanish bail-in tool).
In contrast to Law 9/2012, the use of a bail-in as a resolution tool is now specifically envisaged in the Recovery and Resolution Law. Moreover, the scope of this tool has been broadened in comparison to that of the measure that was foreseen in Law 9/2012 (the redemption or conversion of subordinated debt instruments). The Spanish bail-in tool, which came into force on 1 January 2016, allows all an institution's liabilities (including senior debt) not expressly excluded by the Resolution and Recovery Law (or by an express decision of the FROB) to be amortised or converted into capital to recapitalise the institution. This tool may be used to recapitalise the institution so that it resumes its activities and market confidence in it is restored, or to convert into capital or reduce the principal amount of the credits or debt instruments transferred through the use of the resolution tools referred to previously. When using the Spanish bail-in tool, the FROB will require the body, or person or persons in charge of the management of the institution under resolution to submit an activities reorganisation plan containing the necessary measures to restore the long-term viability of the institution, or of a portion of its business, within a reasonable time frame.
Finally, the Recovery and Resolution Law has created a National Resolution Fund financed by the credit institutions and investment firms themselves which, under certain circumstances, will finance the resolution measures adopted by the FROB (briefly, when there are losses arising from a resolution process that have not been covered entirely by the eligible liabilities).