33. Capital base and capital management
Capital base
Bank of Spain Circular 3/2008, of May 22, 2008, and its subsequent amendments on the calculation and control of minimum capital base requirements (“Circular 3/2008“), regulate the minimum capital base requirements for Spanish credit institutions –both as individual entities and as consolidated groups– and how to calculate them, as well as the various internal capital adequacy assessment processes they should have in place and the information they should disclose to the market.
The minimum capital base requirements established by Circular 3/2008 are calculated according to the Group’s exposure to credit and dilution risk, counterparty and liquidity risk relating to the trading portfolio, exchange-rate risk and operational risk. In addition, the Group must fulfill the risk concentration limits established in said Circular and the internal Corporate Governance obligations.
Circular 3/2008 implements Spanish regulations on capital base and consolidated supervision of financial institutions, as well as adapting Spanish law to the relevant European Union Capital Requirements Directives (CRD), in compliance with the accords by the Committee on Banking Supervision of the Bank for International Settlements in Basel.
Within the framework of recommendations, in December 2010 the Committee on Banking Supervision published “Basel III: A global regulatory framework for more resilient banks and banking systems”, to assist the financial sector when coping with the effects of financial or economic crises. The European Union worked from this point forward to incorporate the Basel recommendations to a new capital regulation, and after two years of negotiations, “CRD4” was published in the European Union Official Bulletin on June 27, 2013, This regulation replaces 2006/48 and 2006/49 (CRD2 and CRD3) Capital and common regulation (575/2013). This regulation came into effect on January 1, 2014. From this date onwards, any regulation that rules against the European directive will not be effective. To this extent, the Royal Decree-Law 14/2013 was published to adapt Spanish Law to European Union regulation on supervision and solvency of financial institutions.
The BBVA Group is ready to comply with the significant modifications in the capital regulatory framework for financial entities (BIS III according to CRD4), such as those envisioned to affect insurance entities (“Solvency II”), therefore meeting the new and more demanding requirements, showing greater solvency and stability.
As of December 31, 2013, nevertheless, Circular 3/2008 was still the current regulation in place and the Bank’s capital exceeded by more than 68% the minimum capital base level required by said regulation.
The Group’s bank capital in accordance with the aforementioned Circular 3/2008, considering entities scope required by the above regulation, as of December 31, 2013, 2012 and 2011 is shown below:
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| Capital Base | Millions of Euros | ||
|---|---|---|---|
| 2013 (*) | 2012 | 2011 | |
| Basic equity | 38,730 | 36,393 | 35,508 |
| Common Stock | 2,835 | 2,670 | 2,403 |
| Parent company reserves | 41,371 | 38,149 | 33,656 |
| Reserves in consolidated companies | (3,380) | 1,042 | 1,552 |
| Non-controlling interests | 2,069 | 2,025 | 1,669 |
| Other equity instruments | 2,905 | 3,074 | 5,189 |
| Deductions (Goodwill and others) | (8,534) | (10,903) | (10,837) |
| Attributed net income (less dividends) | 1,464 | 335 | 1,876 |
| Additional equity | 4,515 | 4,461 | 5,944 |
| Other deductions | (1,573) | (5,272) | (5,303) |
| Additional equity due to mixed group (**) | 1,857 | 1,275 | 1,070 |
| Total Equity | 43,529 | 36,858 | 37,218 |
| Minimum equity required | 25,888 | 26,353 | 26,563 |
The changes in 2013 in basic capital balances shown in the above table are a result of the earnings for the period and the decrease in deductions (mainly CNCB Goodwill), partially offset by the negative impact of exchange rate differences. The decrease in “Other deductions” is mainly driven by the decrease in value of participations that are deducted (also affected by the sale of the CNCB participation).
In addition to that established in Circular 3/2008, Spanish financial groups and entities must comply with the capital requirements set forth by Royal Decree-Law 24/2012 of August 31 to reinforce the Spanish financial system. This standard was issued for the purpose of reinforcing the solvency of the Spanish financial entities. It thus established a new minimum requirement in terms of core capital on risk-weighted assets which is more restrictive than the one set out in the aforementioned Circular, and that must be greater than 9%. As of December 31, 2013, the BBVA Group’s ratio exceeded the corresponding minimum requirement by approximately €7,000 million and stood at 11,16% (provisional figure).
As of December 31, 2013 the BBVA Group also complied with the recommendations made by the EBA about minimum capital levels calculated based on June 2012 requirements, keeping an excess of €2,886 million over the required limit.
Capital management
Capital management in the BBVA Group has a twofold aim:
- Maintain a level of capitalization according to the business objectives in all countries in which it operates and, simultaneously,
- Maximize the return on shareholders’ funds through the efficient allocation of capital to the different units, a good management of the balance sheet and appropriate use of the various instruments forming the basis of the Group’s equity: shares, preferred securities and subordinate debt;
this capital management is carried out in accordance with the criteria of the Bank of Spain Circular 3/2008 and subsequent amendments both in terms of determining the capital base and the solvency ratios. Prudential and minimum capital requirements also have to be met for the subsidiaries subject to prudential supervision in other countries.
The current regulation allows each entity to apply its own internal ratings-based (IRB) approach to risk assessment and capital management, subject to Bank of Spain approval. The BBVA Group carries out an integrated management of these risks in accordance with its internal policies (see Note 7) and its internal capital estimation model has received the Bank of Spain’s approval for certain portfolios.