The accounting regime for Spanish credit institutions was set by the Circular 4/2004 on financial and reserved information standards, and on financial statements. This Circular follows the International Financing Reporting Standards (IFRS) adopted in the EU.

In Annex IX of the Circular 4/2004 the general credit risk management framework is developed, focusing on those aspects in relation to accounting. In particular, this Annex covers, among others, policies on concession, modification, assessment, monitoring and control of operations, including their accounting classification and estimation of allowances for credit losses.

  • In this context, the Bank of Spain (BdE) published in May 2016 the Circular 4/2016 which aims to update the Circular 4/2004, mainly its Annex IX, adapting it to the recent banking and accounting regulatory developments (e.g. international accounting standards approved by the IASB, such as IAS 39 and IFRS 9; BCBS’ Guidelines on credit risk management and their coverage; Implementing Regulation of the Commission concerning reporting with supervisory purposes; etc.)
  • Furthermore, as a result of the amendment of Circular 4/2004, this Circular will amend the Circular 1/2013 regarding the Central de Información de Riesgos (CIR), to adapt its information requirements.
  • Once IFRS 9 will be adopted in the EU, those criteria introduced in this Circular for strengthening the credit risk management, the adequate classification of transactions, the soundness of provision’s estimation and the adequate treatment of real guarantees will remain in force. All without prejudice of a future amendment of Annex IX to adapt coverage criteria to the model of expected loss that will be introduced within IFRS 9.

This document prepared by the R&D area of Management Solutions analyses the new framework defined by the Circular 4/2016, specifying those new aspects compared to the existing framework. Moreover, the main implications arising from the implementation of the new framework are explained.

Executive summary

The Circular 4/2016 introduces amendments regarding the credit risk management framework, classification of operations, provisions for credit losses, foreclosed real estate assets and other aspects, such as intangible assets and transmission of equity instruments.

Scope of application

  • The general credit risk management framework, the criteria for the classification of transactions and the criteria for the valuation of forborne real estate assets will be applied to all activities.
  • The alternative solutions for the estimation of allowances and the references for the valuation of foreclosed real estate assets will be applied to businesses in Spain.
  • Similar methodologies shall be applied to foreign dependent institutions, but taking into account local particularities.

Main content

  • General credit risk management framework: approval of transactions; forbearance; credit risk assessment, monitoring and control; collateral and valuation.
  • Classification of transactions: normal risk; normal risk under special surveillance; doubtful risk by late payment reason; doubtful risk by different reasons that late payment; failed risk.
  • Allowance for loss: allowance for loss for both the specific and generic risk attributable to the holder; allowance for loss for country-risk.
  • Foreclosed real estate assets: valuation of foreclosures; internal methodologies; impairment calculation.
  • Other aspects: financial statements; intangible assets; transmission of equity instruments; amendments to the Circular 1/2013 (CIR).

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