Financial Sector Assessment Program: Detailed Assessment of Compliance with the Basel Core Principles for Effective Banking Supervision

In recent years, the IMF has released a growing number of reports and other documents covering economic and financial developments and trends in member countries. Each report, prepared by a staff team after discussions with government officials, is published at the option of the member country.


In recent years, the IMF has released a growing number of reports and other documents covering economic and financial developments and trends in member countries. Each report, prepared by a staff team after discussions with government officials, is published at the option of the member country.

I. Introduction

1. This assessment of Spain’s implementation of the Basel Core Principles for Effective Banking Supervision (BCPs) was undertaken, in the context of a wider Financial Sector Assessment Program (FSAP), by a team from the International Monetary Fund (IMF), using the methodology recommended by the Basel Committee on Banking Supervision.1 The assessment was carried out on the basis of a review of the legal and regulatory framework and intensive discussions with representatives from the Bank of Spain (BE), the Dirección General de Supervisión (DGS within the BE), the bankers’ association, management and staff of large commercial and savings banks (cajas), and analysts from credit rating firms. The BE was especially well prepared for the assessment and the team received excellent cooperation from all those it met. The documents examined included the BE’s self-assessment of compliance with the BCPs, regulations, and financial stability reports.

II. Market Structure and Trends

2. The Spanish financial sector is characterized by a dominant banking system2 and sizeable insurance and capital markets. Financial sector assets are estimated at about twice nominal GDP. About 80 percent of these assets are accounted for by banks and 15 percent by insurance companies.

3. At end-2004, credit institutions were 346 and comprised 136 commercial banks, 47 saving banks (cajas), 83 cooperatives, 79 specialized credit institutions, and the state-owned Instituto de Crédito Oficial (ICO). The system is well intermediated by international standards, with total loans and deposits of the resident private sector roughly equivalent to 115 and 75 percent of GDP, respectively, in 2004. Commercial banks and cajas are the most important players, jointly accounting for more than 90 percent of system assets. The system has experienced widespread liberalization and consolidation over the past 20 years, including the formation of the two largest Spanish banks, BSCH and BBVA after a series of mergers.3 The elimination of geographical restrictions on the operations of the cajas in 1988 triggered their expansion within the same and to other regions.

4. The savings banks (cajas) have been a major force in the extension of services and in creating a highly competitive environment. They have close ties with the communities and they support social, cultural, and educational projects. The savings banks have a large network of branches and a strong regional identity, and have increased their share of customer deposits from one-third in 1980 to more than one-half in 2004. On the asset side, the share of savings banks in total credit to the private sector has also been increasing and is concentrated in lending to individuals and to small- and medium-size enterprises. Commercial banks dominate the investment and pension fund businesses, and have a larger portfolio of corporate loans.

5. Savings banks operate as non-profit entities with no share capital. They rely on retained profits to meet their capital needs, though they can borrow from the market on the same footing as banks. Their ownership structure also means that they cannot be bought by banks, though they can sell branches or other assets. They can merge with one another upon approval by the autonomous communities and can also buy other financial institutions including banks.

6. The banking system continues to display a strong financial position, supported by the favorable macroeconomic environment. The quality of bank assets improved further in 2004, with NPLs reaching 0.8 percent of gross loans—an historic low. Profit margins, while satisfactory, are compressed by high competition and the steady increase in loan provisions since the introduction of statistical (dynamic) provisioning in July 2000.4 Banks are overall well capitalized, with Basel ratios surpassing 12 percent for both commercial banks and cajas. In the face of the strong expansion of credit, banks have increasingly resorted to the domestic and international capital markets for alternative sources of funding, notably through asset securitization and the issuance of medium- and long-term debt.

7. On the international front, the large Spanish banks have reduced exposure to Latin America, and their international strategy appears more focused on EU countries recently. Following the 2002 Argentine crisis, the Spanish banks reduced their risk exposures to Latin America to about one-quarter of overseas assets. Nevertheless, the region is considered a strategic business segment given close cultural ties and the recent rebound in local economic conditions. Business expansion in Europe has focused primarily on Germany, Portugal, and, more recently, the United Kingdom, which now accounts for one-third of overseas assets.5

8. Spain is scheduled to adopt Basel II by 2007. This is inducing progress in risk-management practices among banks and cajas. The majority of large Spanish banks which make up the bulk of the system’s assets are expected to use the internal ratings based approach. Among cajas, there is an ongoing project to implement a common risk management tool developed by the Spanish Confederation of Savings Banks (CECA), so as to facilitate cost sharing. In most cases, models are suggesting large excesses of current capital and loan loss provisions. This has presented the authorities with the challenge of ensuring that models are thoroughly evaluated and validated to ensure capital positions supporting risk profiles are not weakened in the implementation of Basel II. Some large banks and cajas have already validating their models.

III. General Preconditions for Effective Banking Supervision

A. Macroeconomic Soundness and Stability

9. The Spanish economy has experienced steady economic growth, outstripping that of the euro zone in the past five years. Real GDP growth was 3.1 percent in 2004, sustained by strong domestic demand—particularly private consumption and construction. The composition of growth has become increasingly unbalanced, however, with the external sector deducting 1.9 percentage points from growth in 2004.

10. Buoyant domestic demand has been associated with a boom in house prices and a sharp increase in household indebtedness. House prices have virtually doubled in real terms since 1997. Private and official analysts now acknowledge overvaluation on the order of 25 to 35 percent. Mortgage credit has grown at a rapid pace in recent years, partly fueled by the longer maturities offered by financial institutions and the low real interest rates recorded since Spain’s adoption of the euro.

11. A persistent inflation differential relative to the euro area has eroded competitiveness. The cumulative headline (core) inflation differential since EMU qualification in 1997 amounts to about 7 percentage points, outstripping relative productivity gains. Although there is no clear consensus on the causes of the inflation differential, contributing factors include: the international convergence of nontraded goods prices as income levels converge; the high sensitivity of the Spanish price index to oil price shocks; wage indexation; and the elimination of credit constraints. The inflation differential has also contributed to the compression of export margins, and to the widening of the external current account deficit to 5.3 percent of GDP in 2004. To address the loss of competitiveness, the government has recently launched a package of measures aimed at boosting productivity through increasing labor market productivity, greater competition in industry, and the adoption of advanced technologies.

12. Monetary policy conditions in the euro area have been accommodative, from Spain’s perspective, contributing to negative short-term real interest rates in Spain the past three years. In these circumstances, relatively tight fiscal policy (a small general government surplus in 2004) has helped contain inflation to around 3 percent in 2004 (against a euro-area average of 2.4 percent).

B. Public Infrastructure and Institutional Arrangements for Regulation and Supervision

13. The regulation and supervision of financial institutions and securities markets is performed by three main agencies. Oversight of credit institutions is the responsibility of the Bank of Spain, although regional governments retain some regulatory and supervisory powers over the cajas operating in their jurisdictions; securities markets are supervised by the Comisión Nacional del Mercado de Valores (CNMV);6 supervision of insurance companies is under the mandate of the Dirección General de Seguros within the Ministry of Economy and Finance (ME). As many nonbank financial intermediaries are owned by banks, however, the Bank of Spain plays an indirect supervisory role at the consolidated group level.

14. At the national level the legal framework for regulation and supervision of credit institutions (CIs) involves the Ministry of Economy and Finance (ME) and the Bank of Spain (BE). In addition, the Autonomous Communities have some regulatory and supervisory powers over saving banks and credit cooperatives that do not include solvency or financial stability issues, in line with rulings by the Tribunal Constitutional handed down over many years. The laws clearly articulate the responsibilities among the BE and the ME with respect to the supervision of the solvency, performance, and compliance with specific regulations governing CIs. Additionally, each CA operates under its own legal framework. In general, these frameworks provide CAs with licensing and sanctioning authority and power to oversee the activities of saving banks (cajas) and cooperatives headquartered in their respective jurisdiction, particularly with regards to corporate governance, consumer protection, transparency and dividend policies supporting social contributions (obra social).

15. The Bank of Spain oversees the banking system. Its main responsibilities include (a) defining prudential and accounting regulations; (b) evaluating risks in the banking system as well as in individual institutions (c) enforcing the legal and prudential framework; and (d) implementing bank resolutions. The BE carries out these responsibilities through periodic onsite inspections, offsite review of the financial information submitted by credit institutions, and regular communication with bank management. Commercial bank licenses are granted and removed by the Ministry of Economy and Finance upon the recommendation of the Bank of Spain.

C. Market Discipline and Governance

16. The legal and regulatory framework for transparency and governance of publicly traded institutions has improved significantly in recent years. Following the recommendations of the Comisión Aldama and EU directives on transparency and corporate governance,7 the Spanish authorities issued a number of laws and regulations between 2002 and 2004. The new regulatory framework details the fiduciary duties of managers of firms with publicly traded financial instruments, and includes specific aspects related to the governance of the cajas, notably with a view to shielding these institutions from unwarranted political interference.

17. Recent regulatory initiatives include accounting and reporting norms consistent with International Financial Reporting Standards (IFRS) and the adoption of Basel II guidelines. IFRS came into effect in Spain in June 2005 following the decision of the European Commission to adopt them.8 Implementation of Basel II is expected by 2007; preparations in Spain are well under way.

18. The BE is taking a conservative, comprehensive, and measured approach to the implementation of international standards to minimize the potential for undue reduction of current capital or provisioning requirements. Potential reductions in required capital could result from the application of less strict accounting rules. Moreover the new accounting principles required adapting the former statistical provisioning requirements, which resulted in less demanding generic provisions. Within the framework of Basel II, the BE has been using various tools to smooth implementation, including applying minimum risk parameters for specific asset portfolios, running of models in parallel with current regulations for a two-year period, and practical use tests for risk management and capital allocation.

D. Problem Credit Institution Resolution

19. Current arrangements provide an effective framework for timely and orderly resolution of problem credit institutions. The BE relies mostly on moral suasion and the legal sanctions’ regime to effect prompt corrective actions when problems emerge. The sanctions’ regime qualifies legal infractions as light, serious, and very serious. Penalties are tailored to the severity of infractions and range from private warnings to the revocation of banking licenses. The BE may impose sanctions to address light and serious infractions and recommend penalties to the ME in the case of very serious infractions. The revocation of a license rests with the Council of Ministers.

20. In addition to sanctions, the law establishes an extraordinary resolution mechanism, which may be activated in concert or apart from the sanctions. In exceptionally grave cases, this mechanism enables the BE to appoint an official with veto powers over all the institutions’ operations (“interventor”) or to replace management and the board of directors.

21. In addition to its standing facilities, the BE can provide emergency liquidity assistance to financial institutions, within the operational framework of the European System of Central Banks (ESCB). In the ESCB’s operational framework, the European Central Bank (ECB) lacks an explicit mandate to provide discretionary liquidity support to solvent institutions if their collateral is ineligible for open market operations and overnight standing facilities. Rather, national central banks are responsible for financial stability, including providing liquidity assistance to the credit institutions operating in their jurisdiction. If such assistance were to have significant euro area-wide implications the ECB’s Governing Council is to be consulted.

22. Like other central banks, the BE has deliberately kept some ambiguity about its emergency lending policies. It has not provided general guidance on the conditions and circumstances under which decisions to extend discretionary liquidity support are made. Presumably, this ambiguity aims at limiting moral hazard. It is recommended, however, that the BE set clear internal objectives, criteria, and rules to guide such operations—even if they are not publicly disclosed—so as to avoid potential sources of inefficiencies, such as intervention delays, pressures from interest groups, procedural ambiguities, and lack of accountability. Since joining the euro system, Spain has not undertaken any emergency liquidity operations.

23. The deposit insurance framework follows EU standards. The system comprises three funds operating under the same rules and procedures—for commercial banks, savings banks, and credit cooperatives—covering up to €20,000 per depositor. An umbrella agency administers the investment and use of the funds in accordance with statutory rules. The funds are governed by a board whose eight members are selected by the ME, four in representation of the BE, and four of the respective member institutions. The Deposit Guarantee Fund (FGDs) have a broad mandate; in addition to paying off insured deposits in failed institutions, they can contribute to the recapitalization of distressed banks under exceptional circumstances—under least-cost resolution rules—and at the direction of the BE.

24. The application of the current deposit insurance framework has been limited, but effective, in practice. In the last 15 years, it has been used in cases affecting six banks and seven savings banks. In the case of banks, various resolution mechanisms have been applied. In the case of savings banks, deposit insurance operations have been exclusively to provide support to the institutions in the form of long-term low interest loans; no payouts to depositors were necessary. For cooperatives, there are no reported cases of rescue operations by their FGD.

25. The ownership structure of cajas presents additional challenges in applying recapitalization mechanisms. This is because—under least-cost resolution rules—it may not be effective for the FGD to recapitalize a caja, under circumstances where the investment does not legally entail any participation in the ownership of the recapitalized institution.

E. Main Findings

26. Bank supervision is effectively carried out by the BE and there is a high degree of compliance with the Basel Core Principles. The BE has developed an effective risk-based supervisory prudential framework. This framework is underpinned by its long-standing professional credibility, recognized technical expertise and operational independence. These attributes enable the BE to have experienced supervisory personnel who maintain close supervision and effective communication with the industry. However, enhancements in some specific areas would be advisable.

27. The dual legal framework governing cajas poses the risk of potential conflicts in the exercise of supervisory and sanctioning authority. The laws articulate the responsibilities among the BE and the ME with respect to the regulation and supervision of the solvency, performance, and compliance with specific regulations governing credit institutions. At the same time, each CA operates under its own legal framework, which generally provides for licensing, supervisory and sanctioning authority to oversee the activities of saving banks (cajas) and cooperatives headquartered in their respective jurisdictions, particularly with regards to corporate governance, consumer protection, transparency and dividend policies supporting social contributions (obra social). Nonetheless, there are circumstances where -due to legal ambiguity- overlapping national and regional legal frameworks may cause conflicts, particularly in the application of supervisory authority on prudential issues. In practice, coordination between the BE and the Autonomous Communities supervisory bodies appears to have worked smoothly overall. Looking to the future, eventual changes in the legal regime should clearly preserve the sole and exclusive roles of the BE in prudential oversight of financial institutions, avoid any possible inconsistency in the division of responsibilities, and enhance coordination of the supervisory bodies. This would help ensure that Spanish financial supervision is consistent with the present trend observed in European and international markets towards avoiding fragmentation and enhancing harmonization.

28. The BE’s limited regulatory powers should be expanded. The current legal framework establishes the ME as the principal agency charged with issuing financial regulatory rules. The ME has delegated to BE the authority to issue regulations on specific areas, such as accounting standards and financial statements, certain solvency standards that are already largely specified in laws, and financial disclosure. Notwithstanding this delegation and the good cooperation among the agencies, there is a risk that the BE may be unable to respond adequately should there be conflicting interests between the institutional goals of the BE and the government, which could undermine BE’s supervisory independence. Consequently, the authorities should introduce changes to the current legal framework for banking supervision in order to transfer most regulatory powers currently under the ME to enable BE to promulgate prudential rules. Further, the authorities should consider granting the BE license revocation authority in appropriate circumstances.

29. The Law of Discipline and Intervention (LDI) assigns sanction authority to the ME and BE on the basis of the severity of infractions: the ME imposes sanctions on the gravest offenses at the proposal of the BE, and the BE imposes sanctions in less severe cases. While the current framework appears to be working well, it is recommended to consider providing increased sanctioning power to the BE to bolster its effectiveness in promoting safe and sound practices. This may be of particular importance when addressing serious infractions that require the suspension of executives and directors from serving in leadership positions of credit institutions. For instance, while current law appears to allow the BE to suspend or remove bank officers responsible for serious violations for one year, the BE may only propose more severe sanctions (suspensions or removals greater than one year) to the ME.

30. There is room to strengthen supervisory tools. Given the BE’s limited regulatory and sanctioning authority, it would be desirable to further strengthen moral suasion. One alternative is to issue additional BE guidelines on best banking practices, particularly those that foster effective risk management. Such guidelines may help strengthen the effectiveness of the BE’s moral suasion by making supervisory expectations on sound bank practices more explicit and transparent to the industry. Explicit standards would help reinforce communication between the BE and supervised institutions, particularly when the BE is proposing prompt corrective measures.

F. Core Principles Assessment

31. This assessment of compliance with the Basel Core Principles has been made on a qualitative basis using the methodology prescribed by the Basel Committee. A five-part assessment system has been used: compliant; largely compliant; materially noncompliant; noncompliant; and not applicable. To achieve a compliant assessment with a principle, all “essential” criteria generally must be met without any significant deficiencies. A largely compliant assessment is given if only minor shortcomings are observed and these are not seen as sufficient to raise serious doubts about the authority’s ability to achieve the objective of that principle. A materially noncompliant assessment is given when the shortcomings are sufficient to raise doubts about the authority’s ability to achieve compliance, but substantive progress had been made. A noncompliant assessment is given when no substantive progress towards compliance has been achieved, or if insufficient information was available to allow a reliable determination that substantive progress had been made towards compliance. An assessment of not applicable is rendered for a principle deemed by the assessors to not have relevance.

Table 1.

Detailed Assessment of Compliance with the Basel Core Principles

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Table 2.

Summary Compliance with the Basel Core Principles

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C: Compliant.

LC: Largely compliant.

MNC: Materially non-compliant.

NC: Non-compliant.

NA: Not applicable.

IV. Recommended Action Plan and Authorities’ Response to the Assessment

A. Recommended Action Plan

32. The system in Spain for banking regulation and supervision is of high quality, and only three BCPs have been assessed “largely compliant” rather than “fully compliant.” The authorities might usefully consider taking steps toward full observance of the BCPs.

Table 3.

Recommended Action Plan to Improve Compliance with the Basel Core Principles

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B. Authorities’ Response to the Assessment

33. The Spanish authorities wish to thank the members of the IMF assessment team for all their work to produce this report. They welcome the assessment recognizes that the Spanish supervisory system has a high degree of compliance with the Basel Core Principles and that Bank supervision is effectively carried out by the BE.

34. On a number of issues, however, the Spanish Authorities do not agree with the experts’ view, in particular regarding the recommendation to change the current division of competences between the Ministry of Economy and Finance and the Bank of Spain to, supposedly, strengthen the supervisory tools of the Bank of Spain; and the observations and recommendations on the role of the Autonomous Communities in the supervision of the Cajas.

35. On BCP 1(3) (“A suitable legal framework for banking supervision, including provisions relating to authorization of banking establishments and their ongoing supervision”), the Spanish authorities do not agree with the experts’ view, which considers the current legal framework only “largely compliant” because, according to the experts’ view, it leaves room for a possible conflict of interests between the institutional goals of the BE and the government. The Spanish authorities consider, first, that the current legal framework has demonstrated its efficacy along the years due to the good cooperation between the ME and the BE and, second, that it is better suited to achieve the goal of effective banking supervision. Currently, the competences of the ME and the BE are clearly delimited: the Ministry of Economy and Finance elaborates prudential rules which are then passed by parliament (laws) or approved by either the council of ministers (royal decrees) or the Minister himself (ministerial orders) depending on their normative rank. Therefore, it is the government through the ME who creates the legal framework for banking supervision and there are good reasons for that. Firstly, because the ME is the only institution which has an overview of the three financial sub-sectors: banking, insurance and securities, whose regulations are closely interlocked. Secondly, the ME is also the institution responsible for negotiating the EU normative for financial services through its presence in Council discussions of Level 1 Directives and Regulations, and its presence in the level 2 Committees (Banking Advisory Committee, European Securities Committee and the European Insurance and Occupational Pensions Committee). Finally, it is justified that the ME is in charge of issuing financial regulation because it can balance the need for an efficient supervision of credit institutions and the economic needs of the market, so as to avoid overregulation. On the other hand, the role of the BE is to enforce those prudential rules and is completely independent on this matter. Its supervisory independence concerns, therefore, the enforcement of the rules and is not at risk. To a limited extent, the BE can also issue prudential and accounting regulations through Circulares when explicitly empowered to do so by normative of higher rank (laws, royal decrees or ministerial orders). These Circulares usually cover the more technical details of the prudential and accounting regulation and allow the BE to respond to changes in the market through the adaptation of those technical details. Therefore, the Spanish authorities consider that the institutional framework does comply with BCP 1(3).

36. Further on BCP 1(3) and also on BCP 22, the Spanish authorities do not share the assessors’ view that recommends granting the BE license revocation authority and delegating from the ME to the BE further sanctioning authority for the gravest infractions. According to the Spanish legal system, the power to license and sanction credit institutions belongs to the public administration. Those duties are determined by law and have to be exercised by the public administration in conformity with legal provisions and public interest. The Bank of Spain is an independent body in charge of the supervision of credit institutions and the conduct of monetary policy within the framework of the Monetary Union. However it does not belong to the Spanish public administration. The Spanish legal system allows the delegation of public duties to non public bodies, such as the Bank, when it helps to achieve more efficiently the principles and objectives established in the Constitution (ie, market freedom, economic stability). As a result, the Bank of Spain has been vested with the power to impose sanctions for light and serious infringements, while the power to impose sanctions for very serious infringements is the Ministry of Finance’s remit. However, the role of the Bank in those cases is of paramount importance since it proposes the actual sanction that will be imposed by the Minister. The system just described, where the Ministry of Finance grants licenses to credit institutions and imposes very serious sanctions does not prevent the Bank of Spain from acting independently when supervising credits institutions. Therefore, the current state of affairs does not demand any change in the system to better serve the principles included in the Constitution and the efficient supervision of credit institutions there of. Therefore, the Spanish authorities consider that the observance of BCP 1(3) should be considered as “compliant.”

37. On the assessment of BCP 1(1) (“An effective system of banking supervision will have clear responsibilities and objectives for each agency involved in the supervision of banks”), the Spanish authorities do not agree with the notion put forward by the assessors that there is a risk of potential conflicts in the exercise of supervisory and sanctioning authority between the BE and the CAs. There is no possibility for overlapping of the national and regional legal frameworks. The basic national regulation obliges all the cajas. Sanctions, in particular, are regulated in the LORCA (ley 31/1985, de 2 de agosto, de regulatión de las normas básicas sobre órganos rectores de las cajas de ahorro). The first final disposition of the LORCA defines what is basic in the field of prudential supervision and direction of the activity of the Cajas. The ME and the BE are thereby entrusted with the functions of discipline, inspection and sanctioning of the cajas on matters of their competence and, in particular, those regarding monetary and financial policy, solvency and safety. According to repeated rulings of the Tribunal Constitutional the following functions are considered “basic” and therefore reserved to the State: supervision of solvency and financial stability of the Cajas. In particular, supervision of the following: the level of own resources, the solvency and liquidity ratios, insolvency provisions and the rules for risk concentration.

38. Other aspects of the supervision of the cajas should be considered basic as long as (1) they are needed to ensure the effectiveness of the state competences, (2) they are connected with the State’s general economic policy, (3) they have an effect in the monetary sector, or (4) they are of a nature that requires the existence of only one decision center.

39. Moreover, the supervision of the instrumental aspects related to the exam of the solvency of the Cajas is also considered basic; that is, rules on accounting (in order to have knowledge of their financial situation) and rules related to the compulsory provision of information to the relevant state agency.

40. CAs can only establish additional measures in matters of their competence, i.e, those that are not reserved to the State. There is therefore no possibility of conflict as the supervision and sanction on solvency matters belongs exclusively to the State. Therefore, the Spanish authorities believe that the observance of this criterion should be considered as “compliant”.

41. The Spanish authorities also wish to refute the statement made by the assessors regarding the additional challenges that the ownership structure of the Cajas poses for the application of recapitalization mechanisms in times of trouble. The FGD (Fondo de Garantía de Depósitos), according to Articles 10 and 11 of Royal Decree 2606/1996, has many ways to take preventive and reorganization measures in case of crisis:

42. The FGD is able to recapitalize a caja through financial aid: concession of low interest, long-term loans; concession of non-refundable aid, subscription of subordinated debt or acquisition by the FGD of damaged or non profitable assets

43. The FGD can force a restructuring of the capital of the Caja: application of own resources to absorb losses, facilitating its merger with another, more solvent, caja or transferring its business to another credit institution.

44. The FGD can also subscribe cuotas participativas.

45. The fact that these preventive measures do not entail participation in the ownership of the recapitalized Caja does not pose a problem, given that the FGD can influence management actions through the action plan agreed between the Caja and the FGD and approved by the BE.

46. The fact that the Deposit Guarantee Scheme for Cajas (FGDCA) has historically had a better patrimonial situation compared to that of Banks is also noteworthy. The reason is the smaller incidence of crises in this group of credit institutions (only 14 interventions, all of them in the period comprised between 1983 and 1991). Along the years, the FGDCA has mostly taken preventive actions, focused on the monitoring of those Cajas with below average own resources or structural problems. The aid given to the Cajas has, in the majority of cases, taken the form of zero interest loans or the subscription of perpetual subordinated debt. Also, most of the aid given was conditioned to the realization of a merger with another Caja which could help to overcome any deficiency. Taking all this into account, the Spanish authorities consider that the possible questions raised by the special ownership structure of the Cajas are adequately addressed by the current deposit insurance framework.

47. On BCP 13, the Spanish authorities consider that, inside the current normative, there already are criteria that define what the entities must do to identify, measure, monitor, and control “Other risks.” credit risk in particular, these criteria are extremely detailed in Annex IX of Circular 4/2004. That is, in Spain there are more than “best practices” guidelines, since those “best practices” have been elevated to a normative rank. Regardless of that, the BE, through its different publications and public interventions, has made recommendations in this field, including the ones attached to the requests made to the entities. Therefore, the Spanish authorities consider the observance of this criterion should be considered as “compliant.”

48. On BCP 17 and regarding the comment included that refers to the management contact with smaller to mid-sized institutions where the interval between on-site inspections may be relatively lengthier, the Spanish authorities wish to point out that the supervisory practice of the BE does not only rely on inspections and is characterized by continuous contact and very frequent meetings with the entities’ managers.

49. On BCP 24, the practice of the BE relies on parent credit institutions providing information on its subsidiaries, thereby allowing for remote inspections. However, this does not rule out direct contact and the exchange of information with other supervisors.


The BCP assessment was conducted by Messrs. Jorge Cayazzo (MFD) and Saul Carpio (U.S. Office of the Comptroller of the Currency). The assessment took place from June 22 to July 1, 2005.


For purposes of this report the term banking system is generally used to denote commercial banks, saving banks (cajas), and credit cooperatives.


BSCH is the result of the 1999 merger of Banco Santander and Banco Central Hispanoamericano, while BBVA, is the result of the merger between Banco Bilbao Vizcaya and Argentaria Caja Postal, in 2000.


Under statistical provisioning, a provision for loan loss coverage of credit risk is required in addition to other loan provisions to mitigate risks that may be expected to accompany the next economic downturn.


This reflects BSCH acquisition of Abbey National in 2004, thereby becoming the eighth largest financial institution in the world (fourth in Europe) by market capitalization.


The Bank of Spain retains supervision of the book-entry public debt market.


The Special Commission to Foster Transparency and Security in the Markets and in Listed Companies (Aldama Commission) was established in June 2002 and issued its recommendations in January 2003. The Commission’s report emphasizes the need to balance increased self-regulation of issuers with greater transparency, notably through requiring regular reporting on corporate governance structures. The first set of reports were published on July 1, 2005.


In November 2004 the European Commission endorsed IAS 39 with the exception of certain provisions on the use of the full fair value option and on hedge fund accounting.


A high risk is defined as a risk that exceeds 10 percent of own funds.


A qualifying holding is defined as the direct or indirect possession of at least 10 percent of capital or voting rights in a company or the possibility of exerting a marked influence on the management of the company (at least 20 percent of the directors may be appointed by the institution in possession of the holding—Rule 10.2b of CBE 5/1993).


The current generic provision includes the former anti–cyclical provision, which was reformed to comply with the principles of the international accounting standards recently adopted in Spain.