New criteria set out by the Bank of Spain will have a binding nature for supervised financial entities
On 30 April 2013 the supervisory body of the Bank of Spain sent a formal communication to the financial entities subject to its supervision containing the criteria to be used with regard to the definition, documentation, follow-up and review of credit refinancing and restructuring transactions (the Communication).
These criteria set forth by the Bank of Spain are a step further to Circular 4/2004 and Circular 6/2012 regarding financial information and models on financial statements applicable to banks and other credit entities (please see Client Alert 1043 of 10 June 2010, ‘The Spanish Central Bank Proposes to Toughen Risk Management Principles and Provision Requirements to Financial Entities’).
The Bank of Spain has produced the criteria as a reaction to the heterogeneity observed among financial entities with regard to the accounting treatment of such refinancing and restructuring transactions. The Bank of Spain has been able to gather such evidence as a result of the obligation it introduced in its Circular 6/2012, of 28 September, in which it requested financial entities to provide information on refinancing transactions in the notes to their financial statements.
The objective of the Communication is two-fold: (i) to reinforce debt restructuring policies by introducing criteria ensuring a rigorous treatment of risk by financial entities; and (ii) to make sure that the differences existing among financial entities regarding refinancing operations respond to genuine differences of their business models rather than to different interpretations of Circular 4/2004 and other applicable regulations.
The Communication has a binding nature upon the supervised financial entities. Such entities shall moreover subject their current accounting treatment of restructuring and refinancing transactions to an individual review under the criteria set out in the Communication and shall submit a report to the Bank of Spain’s Inspection Services presenting their conclusions before 30 September 2013.
Debt refinancing and restructuring policies
In the Communication, the Bank of Spain acknowledges that debt refinancing and restructuring constitute adequate credit risk management instruments, which shall be deployed by financial entities according to the following criteria:
- The decision to grant refinancing or restructuring shall be based on an individual analysis of the current income sources of the debtor, which is meant to enable financial entities to determine the debtor’s real repayment capacity on the basis of its recurring, sufficient and verifiable income. Such income shall be sufficient to cover both the refinanced or restructured debt, as well as any other debt previously assumed by the debtor. In addition to the criteria set out in Circular 4/2004, financial entities shall take into account the debtor’s payment records as well as any previous experiences with the debtor, particularly those relating to past debt refinancing or restructuring.
- The terms and conditions of any debt refinancing or restructuring transaction shall be based on a realistic repayment scheme agreed in accordance to the debtor’s payment capacity and the general economic situation. In this sense, such transactions shall be preferably structured by means of periodic