The Council of Ministers has approved the Draft Law on the Organization, Supervision and Solvency of Credit Institutions, a rule that reinforces the level of demand on the financial sector in matters of prudential regulation. With this, Spanish regulations incorporate international agreements adopted in response to the 2008 financial crisis and as a preventive measure. The Draft Law (PL) completes and absorbs the Royal Decree Law 14/2013 of November 29 that regulated the most urgent matters in this regard. It will be sent to the Cortes for processing by way of urgency.

The so-called “Global Regulatory Framework to Strengthen Banks and Banking Systems” of the Basel Committee on Banking Supervision, better known as Basel Accord III, was the most relevant international response to the regulatory deficiencies detected with the crisis. The central axes of this agreement were transformed in the middle of last year into harmonized regulations of the European Union through regulations and directives that today are fully translated into Spanish regulations.

The approved PL today is organized in three blocks. The first addresses the legal regime of credit institutions which includes the requirements for authorization, suitability, good repute and corporate governance. The second deals more specifically with the prudential supervision and solvency of credit institutions, as well as the sanctioning regime. The third and last one modifies the Securities Market Law to adapt it to the European standard; adapts the preferred participation system, adapts the regulation of financial conglomerates and modifies the composition of the Management Committee of the Deposit Guarantee Fund.

At first block the loss of the condition of credit institution by the financial credit institutions, since they cannot capture deposits or other repayable funds and that was already established in the royal decree law of last November. There will, however, be a transitional period in which they can maintain this condition until a singular regime for this activity is approved. Regarding corporate governance and remuneration the novelties are as follows:

  • Limits are imposed on the number of boards in which a director may participate (two more if executive functions are exercised and up to four if executive functions are not exercised).
  • The simultaneous exercise of the positions of chairman of the board of directors and chief executive officer is prohibited (exceptionally it will be authorized by the Bank of Spain).
  • Variable remuneration is limited to 100% of fixed remuneration unless the shareholders' meeting authorizes up to the maximum limit of 200%.
  • Part of the total variable remuneration, to be determined by the entity, must be subject to clauses of reduction or even recovery of remunerations already satisfied.
  • The obligation for entities to have a remuneration committee and an appointments committee is also introduced, weighting this obligation by the size, nature and scope or complexity of its activities.
  • Entities are required to publish the total remuneration received annually by all members of their board of directors.

At Second block and with regard to supervision, the main novelties are:

  • The express obligation of the Bank of Spain to present at least once a year a Supervisor Program that collects the content and the form that the supervisory activity and the actions to be undertaken will take by virtue of the results obtained. This program will include preparing a stress test at least once a year.
  • The obligation of credit institutions to publish annually the so-called Annual Bank Report, a document where data such as the number of employees, taxes to pay or public subsidies received, among others, are collected on a consolidated basis.

Within this block all the new solvency requirements that are left to national decision. For these purposes, the big news is capital buffers, which allow supervisors to demand higher capital levels than those established in the Regulation (EU). Specifically, five types of mattresses are defined:

  • Capital conservation buffer for unexpected losses. It will apply from January 1, 2016 and will be 2.5% in 2019.
  • Specific countercyclical capital buffer which aims to avoid the procyclical effect of prudential regulation. It will be applied from January 1, 2016 and its level will be up to 2.5%.
  • Capital buffer for entities of global systemic importance and other entities of systemic importance. It will be applied from January 1, 2016 and will be between 1% and 3.5%, depending on the more or less systemic nature of the entity to which it is applied.
  • Mattress against systemic risks. It can reach levels of 5% and the supervisor decides discretionally when and to what extent to demand it, in order to reduce the risks derived from the effect of the evolution of the economy on the financial system.

These mattresses are a complement to the direct application Regulations, by virtue of which the ordinary level 1 capital is raised (common equity tier 1, made up of capital and reserves) up to at least 4.5% of risk-weighted assets as of 2015. Likewise, a definition of capital stricter to guarantee the real ability to absorb capital losses. Lastly, there is a greater demand regarding the requirements of liquidity, enough to cover needs in stress scenarios, and a new ratio of leverage to be applied from 2018.

In the third and last block, the most notable is the change in the composition of the Management Committee of the Deposit Guarantee Fund, being an institution included within the scope of fiscal consolidation. It will be made up of 11 members, a representative from the Ministry of Economy and Competitiveness, one from the Ministry of Finance and Public Administrations, four appointed by the Bank of Spain and five by the representative associations of the affiliated credit institutions (three from banks, one from savings banks and one of credit cooperatives). The presidency will be maintained by the deputy governor of the Bank of Spain.

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