Regulatory environment in 2015
Legal changes in the Community area
In December 2010, the Basel Committee on Banking Supervision proposed a set of reforms to reinforce the international capital and liquidity standards applicable to credit institutions, which make up the Basel III framework.
Within the framework of Basel III, the European Union has implemented, among others, Directive 2013/36/EU of the European Parliament and of the Council, dated June 26, 2013, relating to the activity of credit institutions and prudential supervision of credit institutions and investment firms (“Directive CRD IV”), which has been transposed to the different Member States, and Regulation (UE) 575/2013 of the European Parliament and of the Council, dated June 26, 2013, on prudential requirements for credit institutions and investment firms (“CRR” and jointly with Directive CRD IV, “CRD IV”), which applies directly in all Member States.
As a Spanish credit institution, BBVA is subject to compliance with CRD IV and CRR. CRD IV has been transposed to Spanish law through: (i) Royal Decree-Law 14/2013, dated November 29, on urgent measures for adapting Spanish law to European Union regulations on supervision and solvency of financial institutions; (ii) Act 10/2014, dated June 26, on the regulation, supervision and solvency of credit institutions; (iii) Royal Decree 84/2015, dated February 13, which implements Act 10/2014; and (iv) Bank of Spain Circulars 2/2014 and 2/2016.
The new regulations require institutions to have a higher and better quality capital level, increase capital deductions and review the requirements associated with certain assets. Unlike the previous framework, the minimum capital requirements are complemented with requirements for capital buffers and others relating to liquidity and leverage.
The capital base under the CRD IV primarily comprises the following elements (in line and with the same lettered scale as the one described in section 2.1 herein):
Table 1. Details of the Capital Base according to CRD IV
| Total Eligible Capital |
|---|
| a) Capital and share premium |
| b) Retained earnings |
| c) Other accumulated earnings (and reserves) |
| d) Minority interests |
| e) Net attrib. profit and interim and final Group dividends |
| Ordinary Tier 1 Capital before other reglamentary adjustments |
| f) Additional value adjustments |
| g) Intangible assets |
| h) Deferred tax assets |
| i) Expected losses in equity |
| j) Profit or losses on liabilities measured at fair value |
| k) Direct and indirect holdings of own instruments |
| l) Securitizations tranches at 1250% |
| m) Temporary CET1 adjustments |
| n) Admisible CET1 deductions |
| Total Common Equity Tier 1 regulatory adjustments |
| Common Equity Tier 1 (CET1) |
| o) Equity instruments and share premium classified as liabilities |
| p) Items referred in Article 484 (4) of the CRR |
| Additional Tier 1 before reglamentary adjustments |
| q) Temporary adjustments Tier 1 |
| Total reglamentary adjustments of Additional Tier 1 |
| Additional Tier 1 (AT1) |
| Tier 1 (Common Equity Tier 1+Additional Tier 1) |
| r) Equity instruments and share premium |
| s)Amount of the admissible items, pursuant to Article 484 |
| t) Admissible shareholders' funds instruments included in consolidated Tier 2 issued by subsidiaries and held by third parties |
| - Of which: instruments issued by subsidiaries subject to ex-subsidiary stage |
| u) Credit risk adjustments |
| Tier 2 before reglamentary adjustments |
| Tier 2 reglamentary adjustments |
| Tier 2 |
| Total Capital (Total capital = Tier 1 + Tier 2) |
The most relevant aspects affecting the elements making up common equity and risk-weighted assets will be detailed in greater depth in section 2.1 of this document.
In this regard, article 92 of CRR establishes that credit institutions must maintain at all times, at both individual and consolidated level, a total capital ratio of 8% of their risk- weighted assets (commonly referred to as the Pillar 1 requirement). At least 6% of the total capital ratio must comprise Tier 1 capital, of which 4.5% must in any case comprise common Tier 1 capital (CET1), and the remaining 2% may be completed with Tier 2 capital instruments.
Notwithstanding the application of the Pillar 1 requirement, CRD IV contemplates the possibility that competent authorities may require that credit institutions maintain more capital than the requirements set out in the Pillar 1 to cover risks other than those already covered by the Pillar 2 requirement (this power of the competent authority is commonly known as Pillar 2).
In addition, since January 1, 2016 and in accordance with CRD IV, credit institutions must comply at all times with the combined requirement of capital buffers, which must be covered with CET1 in addition to that established for complying with the requirements of Pillar 1 and Pillar 2.
The combined requirement of capital buffers consists of: (i) a capital conservation buffer; (ii) a specific anticyclical capital buffer; (iii) a buffer for global systemically important financial institutions (the “G-SIB buffer”); (iv) a buffer for other systemically important financial institutions (the “D-SIB buffer”); and (v) a buffer against systemic risks.
The combination of (i) the capital conservation buffer, (ii) the specific anticyclical capital buffer and (iii) the greater of (a) the buffer for systemic risks, (b) the G-SIB buffer and (c) the D-SIB buffer (in each case as applicable to each institution) (1), comprise an institution’s combined requirement for capital buffers.
As regards BBVA, the European Central Bank (ECB), following the Supervisory Review and Evaluation Process (SREP) conducted in 2015, has required that BBVA maintain a CET1 phased-in ratio of 9.5% at both individual and consolidated level.
The ECB’s decision establishes that the required CET1 ratio of 9.5% includes: (i) the minimum CET1 ratio required by Pillar 1 (4.5%), (ii) the ratio required by Pillar 2 and (iii) the capital conservation buffer (which is 0.625% in phased-in terms and 2.5% in fully-loaded terms).
Additionally, and given that BBVA was included in 2015 on the list of global systemically important financial institutions, in 2016 BBVA will apply, at consolidated level, a G-SIB buffer of 0.25%, with the total minimum requirement for phased-in CET1 in 2016 at the consolidated level being established at 9.75%.
However, since BBVA has been excluded from the list of global systemically important financial institutions in 2016 (which is updated every year by the Financial Stability Board (FSB)), as of January 1, 2017, the G-SIB buffer will only apply to BBVA in 2016 (notwithstanding the possibility that the FSB or the supervisor may in the future include BBVA on that list).
Moreover, the supervisor has informed BBVA that it is included on the list of other systemically important financial institutions, and a D-SIB buffer of 0.5% of the fully- loaded ratio applies at the consolidated level (it will be implemented gradually from January 1, 2016 to January 1, 2019). However, BBVA will not have to meet the D-SIB buffer in 2016, since the capital requirement for 2016 under the G-SIB buffer is greater than that for the D-SIB buffer. The D-SIB buffer shall therefore only apply starting in January 1, 2017.
As of December 31, 2015, the fully-loaded CET1 ratio stood at 10.3%, strengthening the Group’s capital position. The phased-in CET1 ratio according to the new CRD-IV rules stood at 12.1% as of December 31, 2015.
In order to provide the financial system with a metric that serves as a backstop to capital levels, irrespective of the credit risk, a measure complementing all the other capital indicators has been incorporated into Basel III and transposed to the Solvency Regulations. This measure, the leverage ratio, can be used to estimate the percentage of the assets financed with Tier 1 capital.
Although the book value of the assets used in this ratio is adjusted to reflect the bank’s current or potential leverage with a given balance-sheet position, the leverage ratio is intended to be an objective measure that may be reconciled with the financial statements.