The basic purpose of banking supervision is to safeguard the stability of the financial system, in order to prevent the vital role of the banking sector in the economy from suffering significant shocks or even collapsing. The competent authority therefore focuses on the solvency and conduct of supervised institutions.
This framework establishes the reasonable scope of banking supervision, which has two facets:
- The objective is to minimise the effects of individual crises; this does not imply that the existence of poorly managed or inefficient institutions can be avoided, as responsibility for the proper functioning of banks falls directly and exclusively on their managers.
Accordingly, the supervisory function consists of designing and applying systems to analyse institutions, which help to forestall potential crises and to reduce their number, importance and cost.
- The objective of financial stability requires more than just reducing individual crises and preventing one or several crises from generating a chain of default that could affect the system. It is essential to ensure the smooth operation of payment systems and to establish proper protection against risks of contagion. Consequently, the minimisation of "systemic risk" is certainly a concern (and supervisory task) of the utmost importance, to which the greatest effort is devoted.
A bank recovery and resolution regulation (Directive 2014/59/EU) was passed at European level in 2014, bringing new approaches, tools and authorities to the achievement of the above objectives.
In any event, efficiency is strengthened through the response of institutions to competitive forces. This is why banking supervision cannot be interventionist, but must be respectful of market mechanisms and the autonomy of directors and managers in business matters.
In view of its legal mandate, the Banco de España's supervision, currently exercised under the Single Supervisory Mechanism’s framework, is designed to verify compliance with the specific banking provisions for which it is responsible, among which should be highlighted, along with those relating to the financial situation and solvency of the institutions, those relating to customer protection and transparency vis-à-vis the market.
In this context, it is important to point out that there are other provisions that do not affect credit institutions alone, and which other authorities are responsible for supervising, in particular:
- Tax authorities with powers in relation to tax provisions.
- The National Securities Market Commission (CNMV), with powers in relation to the operating rules of such markets.
- The Directorate General of Insurance, responsible for provisions relating to insurance contracts and pension funds.
- The Commission for the Prevention of Money Laundering and Monetary Offences and its bodies, the Executive Service and Secretariat, with powers in these areas.
The supervisory functions are specified and limited in light of the objectives mentioned above, distinguishing it from other bodies which may have parallel functions. These include:
- Management and administration of the institutions. Although directors and managers are responsible for the progress, successes and failures of the institution, the supervisor carries out the necessary analysis and verifications to obtain a reasonable awareness of their solvency and situation. The supervisor therefore uses the most appropriate procedures in light of the situation of each institution, taking into account its size, complexity, risk profile and the possibility that potential difficulties in the institution or default thereby may spread to the financial system.
Such activities do not involve, nor could they involve, exhaustive review of the operations carried out by the institution. That task is only entrusted, exceptionally, to legally appointed administrators, in accordance with the provisions of the supervision and resolution legislation, in particularly serious cases.
- External auditing of accounts. The external auditor is required to check and report whether the annual accounts give a true and fair view of the net worth, financial position and net profit of the company audited. It states its opinion in a report filed at the Mercantile Registry, to ensure that it has adequate publicity and to secure the relevant effects vis-à-vis third parties. The BE also carries out data verification tasks during its on-site inspections as part of the continuous supervision of credit institutions and consolidated groups, but its work is focused on the achievement of the objectives described above, not on supplying information to third parties on the conclusions reached. In fact, with the exceptions expressly provided for, all the data and information in its possession is secret and may not be divulged to third parties (see article 82 of Law 10/2014, of 26 June).
- Internal auditing and risk control. Internal auditors review the different areas of the institution, ensuring that the internal controls established by the directors and managers, including the internal rules and procedures in force, are correctly applied. In turn, the supervisor relies on the work of internal auditors, among others, and like them performs checks, but it never takes part in the management of credit institutions.
- Investor compensation and deposit guarantee schemes. Financial supervision seeks to give the system the necessary stability, which involves a reduction in the probability of bank crises. In this respect, supervision is, indirectly, a means of protecting depositors and creditors in general. However, the supervisory authorities cannot guarantee, in the strict sense, the transactions of bank customers.
To carry out that function, guarantee schemes have been organised in developed countries which, in the event of crisis, provide for the repayment of deposits or for compensation for the loss of securities entrusted to credit institutions, on certain conditions.
The Spanish system is basically regulated by Royal Decree 2606/1996 of 20 December, on the Deposit Guarantee Funds of Credit Institutions (DGF). This royal decree envisages the payment of compensation to depositors and holders of securities or financial instruments deposited with credit institutions for the purpose of provision of an investment service.
- The resolution systems. These are responsible for managing difficult situations in an institution, minimising risks to financial stability and the cost for society as a whole.
- Independent external analysis of credit institutions. Although external analysts and credit rating agencies make an independent assessment of the situation of each institution, for the purpose of guiding the decisions of potential investors, the supervisory process also involves analytical work, but its purposes are limited to the securing by the supervisory authority of the information necessary to take its decisions.
The exercise of supervisory powers takes into account the above objectives and limits. It efficiently assigns its resources and defines its supervision plans taking into account the importance and the risk profile of each institution and the priority that it should afford to the monitoring of its solvency.
In addition, supervisory procedures are based on the principle of prudence and are constructively oriented, as their objective is to solve any problems that may arise in order to ensure the solvency and viability of credit institutions and the stability of the system.
This involves carrying out numerous activities with discretion, possibly over a long period, and deciding on and taking urgent measures in the event that the Bank faces the continuous deterioration of an institution.