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Banking Supervision

The supervisory model

Financial institutions are subject to a special regulatory and supervisory scheme that is much stricter than other economic sectors, due to the fact that it receives significant amounts of public funds by intermediating between deposits and loans, and due to the positive effect of a solvent and well-managed financial system on financial stability and economic activity in general.

Article 7 of the Law of Autonomy of the Banco de España establishes that it is responsible for promoting the smooth functioning and stability of the financial system and is responsible for supervising, in accordance with the prevailing provisions, the solvency, conduct and compliance of the specific regulations of credit institutions.

The supervisory model of the Banco de España is aimed at guaranteeing the effectiveness and efficiency of this function, ensuring that credit institutions are adequately capitalised, that they comply with the regulations in force and prudently manage and control their business and risks. 

The basic objective of the supervisory process of the Banco de España is to determine and keep the risk profile of each institution updated, as well as adopting the necessary measures to correct it where necessary. This risk profile aggregates the possibility of a credit institution developing solvency, profitability or liquidity problems in the future, into a single variable.

In order to achieve its objective, the Banco de España carries out three types of supervisory procedures:

  1. Remote monitoring and analysis.
  2. Supervisory visits.
  3. Continuous monitoring in situ .

The supervision process also comprises four different activities:

  1. Auditing, including the valuation of assets and liabilities.
  2. Financial analysis.
  3. Review of general regulatory compliance.
  4. Review and evaluation of risks and solvency.

The method used by the Banco de España is called Supervision of the Banking Activity By Risk Approach (SABER), which provides a uniform and structured framework for rating entities. The elements analysed are represented in a risk matrix, in which the rating, based on the knowledge and opinion of institutions at any given time, takes into account all the relevant supervisory procedures. It is not an automatic rating system, since the different ratings of the risk matrix, in addition to considering objective figures, always include a subjective judgement from the assessment of numerous qualitative aspects such as management and control, which are not quantifiable.

The SABER method helps to ascertain which institutions are more likely to develop problems in the future, in order to dedicate additional supervisory resources and prevent future crises. Special attention is paid to those institutions with a supervisory risk profile above a certain rating. The supervision framework for the different institutions is based on the supervisory risk profile and systemic importance of institution, and includes the supervisory strategy and intensity of supervision that must be applied. The supervisory framework is updated as required and always once a year.

The supervisory model of the Banco de España is explained in detail in the following document.

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