Considered for the purpose of calculating the minimum capital requirements, under the solvency regulations, are the elements and instruments corresponding to Tier 1 capital, which is defined as the sum of ordinary Tier 1 capital (CET1) and additional Tier 1 capital (AT1) as defined in Part Two, Title I, Chapters I to III of the CRR, as well as their corresponding deductions, in accordance with articles 36 and 56, respectively.
Also considered are the elements of Tier 2 capital defined in Part Two of Chapter IV, section I of the CRR. In addition, it considers the deductions to be those defined as such in section II of the same Chapter.
In line with the stipulations of the solvency regulation, the level of ordinary Tier 1 capital essentially comprises the following elements:
a) Capital and share premium: this includes the elements described in article 26 section 1, articles 27, 28 and 29 of the CRR and the EBA list referred to in article 26 section 3 of the CRR.
b) Accumulated gains: In accordance with article 26, section 1, letter c), the gains that may be used immediately and with no restriction to cover any risks or losses are included.
c) Other accumulated income and other reserves: The reserves of consolidated companies (including the associated exchange-rate differences), the valuation adjustments associated with the available-for-sale portfolio and the balance of the equity account that contains remunerations based on capital instruments will be classified mainly under this heading.
d) Minority shareholdings: The holdings representing minority interests and corresponding to ordinary shares in the companies belonging to the consolidated group are included for the part that has actually been fully paid up, based on the limits established in the CRR.
e) Temporary benefits: the net income referring to the perimeter of credit institutions, deducting the amount corresponding to interim and final dividend payments, is included, as set out in article 26, section 2 of the CRR.
Capital is, moreover, adjusted mainly through the following deductions:
f) Additional value adjustments: The adjustments originated by the prudent valuation of the positions at fair value are included, as set out in article 105 of the CRR.
g) Intangible assets: these are included net of the corresponding liabilities for taxes, as set out in article 36, section 1, letter b) and article 37 of the CRR.
h) Deferred tax assets: these are assets for deferred taxes that depend on future returns, excluding those deriving from temporary differences (net of the corresponding liabilities for taxes when the conditions established in article 38, section 3 of the CRR are met), as per article 36, section 1, letter c) and article 38 of the CRR.
i) Expected losses in equity instruments: the losses arising from the calculation of risk-weighted exposures through the method based on internal ratings are included, as set out in article 36, section 1, letter d) of the CRR.
j) Profit or losses for liabilities valued at fair value: those derived from changes in asset quality, in accordance with article 33, letter b) of the CRR.
k) Direct and indirect holdings of own instruments: the shares and other securities booked as own funds that are held by any of the Group’s consolidated institutions are considered, together with those held by non-consolidated institutions belonging to the economic group, as set out in article 33, section 1, letter f) and article 42 of the CRR.
l) Securitization: securitizations that receive a risk weighting of 1.250% are included, as set out in article 36, section 1, letter k), subsection ii) of the CRR.
m) Temporary adjustments of ordinary Tier 1 capital: this includes unrealized profit and losses valued at fair value, as set out in article 467 and 468 of the CRR.
n) Qualifying deductions of ordinary Tier 1 capital: this includes the deductions that exceed the additional Tier 1 capital, as described in article 36, section 1, letter b) of the CRR.
The application of some of the above deductions (mainly intangible assets and LCFs) shall be carried out gradually over a transition period of 5 years in general (phased in), as set out in the current regulation.
Other deductions that may be applicable could comprise significant stakes in financial institutions and assets for deferred taxes arising from temporary differences that exceed the 10% limit of the CET1, and the deduction for exceeding the overall 17.65% limit of the fully loaded CET1 according to article 48, section 2 of the CRR.
In addition, the Group includes as total eligible capital the additional Tier 1 capital instruments defined in articles 51 and 484 of the CRR, including the corresponding adjustments, in accordance with article 472 of the CRR:
o) Equity instruments and issue premiums classified as liabilities: This heading includes the perpetual contingent convertible securities that meet the conditions set out in article 52, section 1 of the CRR.
p) Elements referred to in article 484, section 4 of the CRR: This section includes the preferred securities issued by the Group.
q) Temporary adjustments of additional Tier 1 capital: This includes the adjustments considered in article 472 of the CRR as measures established for gradual adoption of the new capital ratios.
Lastly, the entity also includes in its capital resources the eligible Tier 2 capital. This is largely made up of the following elements:
r) Subordinated debt received by the Group: understood as that which, for credit seniority purposes, comes behind all the common creditors. The issues, moreover, have to fulfill a number of conditions which are laid out in article 63 of the CRR.
s) Instruments and elements issued or considered acceptable as capital before December 31, 2011: Tier 2 capital includes the subordinated debt received by the Group that does not meet the conditions set out in article 63 of the CRR, but is acceptable in the transitional regulatory capital under article 484 of the CRR.
t) Qualifying capital instruments included in the consolidated Tier 2 capital, issued by affiliates and held by third parties: these instruments are included as set out in articles 87 and 88 of the CRR.
u) Surplus resulting between value adjustments for asset impairment plus allowances for losses calculated as per the IRB method on the losses they are expected to incur: the aforementioned surplus includes the part that is below 0.6% of the risk-weighted exposures calculated according to the IRB method.
It will also include the book balances of generic allowances referring to securitized exposures which have been excluded from the risk-weighted exposures calculation under the IRB method, for the part not exceeding 0.6% of the risk-weighted exposures that would have corresponded to these securitized exposures, had they not been excluded. There is no treatment defined for the surplus of allowances over expected loss in portfolios assessed under the IRB approach above the 0.6% limit.
The book balance for generic allowances for losses reached in keeping with the accounting regulations and which corresponds to those portfolios to which the standardized approach is applied, for an amount up to 1.25% of the weighted risks that have been the basis for the coverage calculation, is also considered as eligible additional capital.
Generic allowances for losses for those securitized assets that have been excluded from the risk-weighted exposures under the standardized approach are also eligible up to a limit of 1.25% of the weighted risks that would have corresponded to them, had they not been excluded. The surplus over the 1.25% limit is deducted from exposure.
Annex VI to this report presents the Group’s issues of perpetual contingent convertible securities and issues of preference shares, which as explained above, form part of additional Tier 1 capital.
This annex also details the Group’s issues of subordinated debt as of December 31, 2015, calculated as Tier 2 capital.