Introduction

Applicable regulatory framework

As a Spanish credit institution, BBVA is subject to Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013, on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms ("CRD IV Directive”) amended by Directive (EU) 2019/878 (“CRD V Directive”).

The major regulation governing the solvency of credit institutions is (EU) Regulation No. 575/2013 of the European Parliament and of the Council of 26 June 2013, on the prudential requirements for credit institutions and investment firms amending (EU) Regulation No 648/2012 ("CRR" and in conjunction with Directive CRD IV and any implementing measures of CRD IV, "CRD IV"), which is complemented by several binding Regulatory Technical Standards that are directly applicable to all EU member states, without the need to implement national measures. This Regulation has been amended by Regulation (EU) 2019/876 (“CRR2”) and Regulation 2020/873 (“Quick Fix”).

The CRD IV Directive was transposed to Spanish national law by means of the Royal Decree- Law 14/2013 of November 29 ("RD-L 14/2013"), Law 10/2014 of June 26, Royal Decree 84/2015 of February 13 ("RD 84/2015"), Bank of Spain Circular 2/2014 of January 31 and Circular 2/2016 of February 2 ("Bank of Spain Circular 2/2016").

During 2021, Directive 2019/878 has been transposed into the Spanish legal system through the publication of Royal Decree-Law 7/2021, of April 27 (amending Law 10/2014), Royal Decree 970/2021, of November 8 (which modifies RDL 84/2015) and Circular 5/2021, of September 22 (which modifies Circular 2/2016).

In the Macroprudential field, Royal Decree 102/2019 was published in March 2019, establishing the Macroprudential Authority of the Financial Stability Board, establishing its legal regime. The aforementioned Royal Decree also develops certain aspects related to the macroprudential tools contained in Royal Decree-Law 22/2018. Among them, it provides that the Bank of Spain may adopt measures such as the countercyclical buffer for a particular sector, industry limits on exposure concentration, or the establishment of limits and conditions on the granting of loans and other transactions. These measures are developed in Bank of Spain Circular 5/2021, of September 22.

Regulatory developments in 2021

In the area of prudential regulation, in 2021 it is remarkable the following:

  • The publication by the European Commission of the proposal for the fully implementation of the Basel III, which represents the last step of the regulatory reform that began after the financial crisis. The European Commission has proposed to the European Parliament and the Council a series of amendments to banking regulation known as the "2021 banking package" to strengthen the resilience of European Union banks against possible future economic shocks, contribute to the recovery of the pandemic and the transition to climate neutrality. The main objective of the reform is to achieve a simpler, more comparable and risk-sensitive framework. To this end, amendments to the Capital Requirements Regulation (CRR) and the Capital Requirements Directive (known as the CRD) are proposed. The European Commission proposes that the new rules begin to apply from January 1, 2025, for which the debate with the European Parliament and the Council is now beginning
  • The decision of the European Central Bank (hereinafter ECB) not to extend beyond September 2021 the recommendation to limit the distribution of dividends that prompted credit institutions for the first time in March 2020.
  • The entry into force of the guides on the definition of default (applicable from January 1, 2021), the full application of Regulation 2019/876 (CRR2) and the updating of the guides on internal governance, of the guides on sound remuneration policies and of the guidelines on the assessment of the suitability of the members of the management body and key function holders (these updates apply from December 31).
  • In Spain, in April 2021 it was approved Decree-Law 7/2021 which transposes capital directive (CRD V) and resolution directive (BRRD2) to the Spanish national law. In the prudential area, changes have been included in the Pillar 2 definition and requirements, the macroprudential buffers and the remuneration regime.
  • Regarding regulations related to macroprudential standards, during the year 2021, the Basel Committee on Banking Supervision has published its final report on the methodology for the identification of Global Systemic Banks (G-SIBs), proposing a continuous review of this methodology instead of doing it every three years. Additionally, the European Commission has published a public consultation on the macroprudential framework and, in turn, has asked the opinion of the European Banking Authority, the European Systemic Risk Board and the European Central Bank on a future review of the framework.

In the area of resolution, in 2021 it is remarkable the following:

  • Modification of the CRR2 and the BRRD2 regarding the resolution area (known as the Daisy Chain proposal) through a separate proposal for a Regulation (“Proposal for a Regulation amending Regulation (EU) No 575/2013 and Directive 2014/59 /EU as regards the prudential treatment of global systemically important institution groups with a multiple point of entry resolution strategy and a methodology for the indirect subscription of instruments eligible for meeting the minimum requirement for own funds and eligible liabilities”).

  • In Europe, the reform of the European Stability Mechanism Treaty was signed, allowing it to act as a security mechanism for the Single Resolution Fund from the beginning of 2022. The European Banking Authority has developed several level 2 and 3 regulatory texts related to the BRRD2 and the Single Resolution Board (SRB) has published various guides to improve the resolvability of financial institutions.
  • In Spain, the approval of Royal Decree-Law 7/2021 that transposes the capital directives (CRD V) and resolution directives (BRRD2) into Spanish law. In the resolution part, the inclusion of adjustments in the hierarchy of creditors in the event of liquidation and the calibration and subordination of the MREL requirement stand out.

In the area of sustainable finance, in 2021 it is remarkable the following:

The year 2021 has been key to beginning to integrate ESG criteria into decision-making and risk management of financial institutions and for accelerating the development of regulatory frameworks aimed at promoting sustainability.

At a global level, it should be noted that the International Financial Reporting Standards (IFRS) Foundation has announced the creation of an International Sustainability Standards Board (ISSB) to develop international standards for the disclosure of information related to sustainability. In addition, the Basel Committee of Banking Supervisors is developing principles for the management and supervision of these risks, which have been reflected in a consultation.

For its part, Europe has managed to position itself as the pioneer region in this area, giving rise to the adoption of important legislative measures such as the European taxonomy of sustainable activities, the Sustainable Finance Disclosure Regulation (SFDR) and, more recently, the proposal for the Corporate Sustainability Reporting Directive (CSRD).

Additionally, the European Commission presented in July 2021 a new strategy for sustainable finance, which establishes new initiatives to face climate change and other environmental challenges. These initiatives have materialized in the Basel III implementation proposal presented by the European Commission in October 2021.

Moreover, the preliminary reports of the European Platform for Sustainable Finance have been published on:

  • (i) the extension of the taxonomy to intermediate economic activities in terms of sustainability, with the aim of supporting activities that allow the transition to a sustainable economy; and
  • (ii) a social taxonomy that would complete the European taxonomy of “green” activities.

For its part, the ECB published in September the results of the first stress tests in which climate risks have been measured in different activities, and it plans to carry out the first supervisory stress tests on banks by 2022 based on climate risks.

At the national level, Law 7/2021, of May 20, on climate change and energy transition, provides the regulatory and institutional framework aimed at facilitating and guiding the decarbonisation of the Spanish economy in 2050, as established by the European Union and the commitment made by signing the Paris Agreement. This regulation establishes obligations both for the financial and business sector and for supervisors

In the field of disclosure, article 32 of this Law requires the publication (both in the management report and in Pillar 3) of an annual report on climate change, the content of which will be developed by means of a decree-law (RDL) within a period of two years. This report can be found in section 8 of this document.

In the areas of disclosure and supervisory reporting, the main regulatory developments that occurred during 2021 were as follows:

Supervisory Reporting

The regulators have continued with the process of reviewing and updating the reporting framework, highlighting the following publications:

  • Implementing Technical Standards on supervisory reporting requirements, which amend Commission Regulation 2021/451 with regard to COREP, asset encumbrance, ALMM and G-SII reporting.

    The European Banking Authority (EBA) published the final version of the document in December. The proposed date of application is December 1, 2022.

    The purpose of these technical standards is to implement in the reporting the regulatory changes referring mainly to securitizations, the non-deductibility of software from CET1 capital and the additional liquidity monitoring metrics (ALMM), as well as to introduce the measures of proportionality contained in the CRR2.

  • Implementing Technical Standards amending Regulation 2018/1624 on the provision of information regarding resolution plans in the context of the BRRD2.

    The EBA published the final version of the document in August. The changes introduced are minimal and their purpose is to align with the changes introduced by BRRD2 on MREL.

Disclosure

In the area of Pillar 3, the main regulatory developments that occurred during 2021 were as follows:

  • Implementing Technical Standards which amend Regulation 637/2021 on disclosure of information regarding interest rate risk in the banking book.

    In November, the EBA published the final version of the document, which contains the tables and instructions to disclose the information regarding interest rate risk in the banking book (IRRBB) in the Pillar 3 report.

    These standards have not been adopted by the European Commission or published in the OJEU yet. However, given that the requirement to publish this information (contained in article 448 CRR2) is applicable from June 28, 2021, the EBA recommended using the tables contained in this document disclosing the methodology used to calculate the information.

  • In November, the Basel Committee on Banking Supervision (BCBS) releases a technical amendment to its G-SIB assessment methodology review process (“G-SIB assessment methodology review process technical amendment finalisation”). In it, the three-year cycle for the review of the methodology is replaced by a process of monitoring and continuous review.

    Related to the above, in January 2022 it has launched its annual exercise to identify which entities are considered to be of global systemic importance (G-SII) based on data as of December 2021. It is an exercise of collection of data on various indicators that are used to determine global systemic importance.

    In Europe, these indicators must be disclosed both by entities considered G-SII and those that, not being G-SII, have an exposure measure greater than EUR 200 billion, as established in the EBA Guidelines on the disclosure of systemic importance indicators (EBA/GL/2020/14). These guidelines establish the table format that must be used to carry out the disclosure, stating that disclosed information must be identical to that presented to the BCBS.

    The BCBS annual exercise of January 2022 introduces changes to the indicators. However, given that the EBA guidelines have not yet been modified to include the new table format and taking into account the need to align with the BCBS, the disclosure is made in this report using the new indicators established by the BCBS.

  • Implementing Technical Standard son public disclosure and reporting of MREL and TLAC.

    These standards have been published in DOUE in May 2021 (Regulation 2021/763). The application date for the reporting requirements is June 28, 2021 for MREL and TLAC, while different dates are established for the public disclosure: June 1, 2021 for TLAC and January 1, 2024 at the earliest for MREL.

    Given that at the date of publication of this report BBVA is not considered a G-SII, all related to TLAC does not apply to it.

  • Implementing Technical Standard on prudential disclosures on ESG risks.

    In accordance with article 449a CRR2, the EBA has published in January 2022 the final document that establishes the formats and tables to be used to disclose the information related to environmental, social and governance (ESG) risks. Its application will be gradual starting in Pillar 3 of 2022 (to be published in 2023).

Crypto assets

Crypto assets is another area that has attracted a lot of attention from international organizations and national regulators during 2021.

At a global level, the Basel Committee on Banking Supervision published in June a preliminary proposal for the prudential treatment of bank exposures to crypto assets, although it has already announced that it is necessary to have a definitive standard, it will continue working on this new framework during 2022.

At the national level, the National Securities Market Commission (Comisión Nacional del Mercado de Valores, CNMV in Spanish) has issued a Circular to regulate the advertising of crypto assets, which will come into force at the beginning of next year. Meanwhile, in Turkey, the Central Bank issued a new regulation in April that prohibits financial institutions from developing business models that involve the use of crypto assets to make payments.

Content of the 2021 Prudential Relevance Report

Article 13 of the CRR establishes that the parent entities of the European Union are subject, based on their consolidated situation, to the disclosure requirements set by Part Eight of CRR.

This report provides the prudential information of BBVA Consolidated Group as of December 31, 2021 which has been prepared in accordance with the precepts contained in Part Eight of the CRR, complying with the guidelines published by EBA and the applicable implementing technical standards.

The EBA main implementing technical standards (ITS) and guidelines that are applicable as of December 31, 2021 are highlighted below.

  • Guidelines on materiality, proprietary information, and confidentiality, and on the frequency of disclosure of information according to Article 432, sections 1 and 2, and Article 433 of Regulation (EU) No. 575/2013 (EBA/GL/2014/14). These guidelines detail the process and the criteria to be followed regarding the principles of materiality, proprietary information, confidentiality and the right to omit information, and provide guidance for entities to assess the need to publish information more frequently than the annual one. These guidelines were adopted by the Executive Commission of the Bank of Spain in February 2015.
  • Guidelines on reporting and disclosure of exposures subject to measures applied in response to the COVID‐19 crisis (EBA/GL/2020/07). These guidelines were adopted by the Executive Commission of the Bank of Spain on 23 June 2020.
  • Guidelines amending the EBA/GL/2018/01 guidelines on the uniform disclosure of information pursuant to Article 473a of Regulation (EU) No 575/2013 (CRR) with regard to transitional provision to mitigate the impact on own funds caused by the implementation of IFRS 9, aiming to guarantee compliance with the Quick Fix made to the CRR in response to the COVID-19 Pandemic (EBA/GL/2020/12). These guidelines are applicable since 11 August 2020 until the end of the transitional period contemplated in articles 468 and 473a of CRR (31 December 2024 and 31 December 2022, respectively).

  • Implementing technical standards on public disclosures by institutions of the information referred to in Titles II and III of Part Eight of Regulation (EU) No 575/2013 (EBA/ITS/2020/04). These standards implement the changes introduced by CRR2.

    In these technical implementation standards, the EBA, following the mandate of the European Commission in article 434a of the CRR2, implements the changes introduced by aforementioned regulation, integrating in a single document most of the disclosure requirements to the market that were disseminated in various guidelines published to date

    Additionally, these regulations also aim to unify, as far as possible, public information with the information reported to the Supervisor through integration in regulatory reporting and has meant in some cases the simplification of standard tables that could contain similar information, maintaining only those tables that contain more complete and relevant information, such as those referring to the credit quality of the exposures.

    Likewise, together with the aforementioned ITS, the EBA publishes for informative purposes a document called mapping tool that interrelates the quantitative information of most of the standard tables required in Pillar 3 with the regulatory reporting, which has been taken into account in the preparation of this report. The implementation of these standards may produce variations in the content and the way in which the information is presented with respect to previous periods.

  • Guidelines on sound remuneration policies under Directive 2013/36/EU (EBA/GL/2021/04). These guidelines were adopted by the Executive Commission of the Bank of Spain in December 2021. These guidelines were adopted by the Executive Commission of the Bank of Spain in December 2021.

Annex VII contains the list of main changes to the tables with respect to December 2020 derived from the adaptation to the regulations in force as of December 31, 2021.

Additionally, Annex VIII of this report contains the correspondence of the articles of Part Eight of the CRR on disclosure of information that are applicable at the date of the report with the different sections of the document where the required information is found.

The aforementioned annex, together with the rest of the annexes and the tables contained in this report, are included in an editable format in order to facilitate their treatment, following the recommendations of the EBA Guidelines. This document is called "Pillar 3 2021 - Tables and Annexes", available in the Shareholders and Investors / Financial Information section of the Group's website

The Prudential Relevance Report (IRP - Pillar 3) of the BBVA Group, corresponding to the year ended December 31, 2021, has been prepared in accordance with the requirements of Part Eight of the CRR and approved by the Audit Committee (in its meeting held on March 1, 2022), applying the rules for the preparation of financial information of the BBVA Group and in compliance with the "General Policy for disclosure of economic-financial, non-financial and corporate information" approved by the governance bodies of Banco Bilbao Vizcaya Argentaria, SA. Likewise, it should be noted that the data disclosed in the IRP - Pillar 3, have been prepared in accordance with the internal processes and controls described in the "Standard for the preparation of periodic public information of Banco Bilbao Vizcaya Argentaria, SA and BBVA Group". The aforementioned policies and regulations guarantee that the information disclosed in the IRP Report - Pillar 3 is subject to the control framework defined by the Group, as well as to an appropriate level of internal review.

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