Banking Supervision by Banco de España — Detailed Explanation with Case Laws

Jurisdiction: Spain / European Union

Banking supervision in Spain is based on a shared European–Spanish supervisory system. Banco de España (Bank of Spain) remains Spain’s national banking supervisor, but since the creation of the EU Single Supervisory Mechanism (SSM), important supervisory powers—especially over significant banks—are exercised by the European Central Bank (ECB) in cooperation with Banco de España.

The basic structure is:

\[ EU\ Banking\ Law \rightarrow ECB/SSM \leftrightarrow Banco\ de\ España \rightarrow Spanish\ Credit\ Institutions \]

The central objective is not simply to check whether banks obey individual rules. Supervision seeks to determine whether institutions remain solvent, liquid, properly governed, adequately capitalised, operationally resilient, and capable of protecting depositors and financial stability.

1. Legal basis of Banco de España's supervisory powers

Several layers of law govern Spanish banking supervision.

At Spanish level, important legislation includes Law 13/1994 on the Autonomy of Banco de España and Law 10/2014 on the organisation, supervision and solvency of credit institutions, together with Royal Decree 84/2015, which develops significant parts of Law 10/2014.

At EU level, the framework includes:

• Article 127(6) TFEU;
• Regulation (EU) No 1024/2013—the SSM Regulation;
• Regulation (EU) No 575/2013—the Capital Requirements Regulation (CRR), as subsequently amended;
• the Capital Requirements Directive (CRD) framework;
• Regulation (EU) No 468/2014—the SSM Framework Regulation;
• EBA regulatory and supervisory standards.

Consequently, Banco de España cannot be understood as an entirely independent national supervisory system. It operates inside the EU Banking Union architecture.

2. ECB versus Banco de España

The SSM divides institutions broadly between significant institutions (SIs) and less significant institutions (LSIs).

Significant institutions

Major Spanish banking groups are directly supervised by the ECB.

Supervision is normally conducted through Joint Supervisory Teams (JSTs) containing personnel from both the ECB and national competent authorities, including Banco de España.

The ECB therefore has the principal direct prudential supervisory role.

Less significant institutions

LSIs are generally supervised directly by Banco de España, although the ECB maintains oversight of the overall system.

The ECB may also assume direct supervision of an LSI where this is necessary to ensure consistent application of high supervisory standards.

Thus:

\[ Significant\ Bank \rightarrow ECB\ Direct\ Supervision \]

while:

\[ Less\ Significant\ Bank \rightarrow Banco\ de\ España\ Direct\ Supervision \rightarrow ECB\ Oversight \]

This allocation is one of the most important concepts in Spanish banking law.

3. Authorisation of credit institutions

A business cannot simply begin accepting deposits from the public and describe itself as a bank.

Authorisation examines matters such as:

• capital;
• ownership structure;
• qualifying shareholders;
• directors and senior management;
• governance arrangements;
• business model;
• internal controls;
• risk-management systems.

Under the Banking Union framework, authorisation involves interaction between Banco de España and the ECB.

The ECB possesses important exclusive SSM powers concerning the authorisation of credit institutions and withdrawal of banking authorisations.

Banco de España nevertheless plays an important national role in processing and assessing relevant matters.

This illustrates the integrated character of the system: national authorities perform important supervisory work even where the final European supervisory decision belongs to the ECB.

4. Capital supervision

One of Banco de España's central supervisory functions is monitoring the solvency of banks.

Banks must maintain regulatory capital capable of absorbing losses.

The core relationship is:

\[ Capital\ Ratio = \frac{Eligible\ Regulatory\ Capital} {Risk\ Weighted\ Assets} \]

Supervision considers several measures, including:

• Common Equity Tier 1 (CET1);
• Tier 1 capital;
• total capital;
• leverage;
• capital buffers;
• Pillar 2 requirements.

The supervisor does not simply accept a bank's calculation.

It may investigate whether assets have been properly classified, risks appropriately weighted, provisions recognised and capital instruments correctly treated.

5. Supervisory Review and Evaluation Process

A particularly important mechanism is the Supervisory Review and Evaluation Process (SREP).

SREP allows supervisors to examine the institution as a whole.

Major areas include:

Business model: Is the bank's strategy sustainable?

Governance: Does management understand and control the institution's risks?

Capital: Does the institution have sufficient capital for its risk profile?

Liquidity: Could it survive severe funding stress?

Supervisors may consequently impose institution-specific requirements beyond general minimum regulatory ratios.

This is the distinction between:

\[ Pillar\ 1 = General\ Minimum\ Requirements \]

and

\[ Pillar\ 2 = Institution-Specific\ Supervisory\ Requirements \]

SREP therefore converts prudential supervision from a mechanical checklist into a risk-based assessment of each institution.

6. Liquidity supervision

Banco de España and the ECB also supervise liquidity and funding risk.

A profitable bank can still fail if it cannot meet withdrawals or refinance obligations.

Important measures include the Liquidity Coverage Ratio (LCR):

\[ LCR = \frac{High\ Quality\ Liquid\ Assets} {30-Day\ Net\ Cash\ Outflows} \]

and the Net Stable Funding Ratio (NSFR).

Supervisors also examine:

• deposit concentration;
• wholesale funding dependence;
• collateral availability;
• maturity mismatches;
• contingency funding plans;
• liquidity stress testing.

Recent banking crises internationally have reinforced the importance of rapid deposit outflows and digital banking in liquidity supervision.

7. Credit-risk supervision

For Spanish banks, credit risk remains a major supervisory concern.

Banco de España may examine the entire credit lifecycle:

\[ Borrower\ Assessment \rightarrow Loan\ Approval \rightarrow Monitoring \rightarrow Classification \rightarrow Provisioning \rightarrow Recovery \]

Particular attention can be given to:

• mortgages;
• commercial real estate;
• corporate lending;
• consumer credit;
• non-performing exposures;
• connected borrowers;
• concentration risk.

Spain's experience following the property and banking crisis made the accurate recognition of real-estate-related credit losses especially important.

8. Governance supervision

Modern prudential regulation treats governance failures as financial risks.

Banco de España and the ECB therefore examine whether boards and senior management effectively control their institutions.

Supervisory issues include:

• board composition;
• independence;
• risk committees;
• internal audit;
• compliance;
• conflicts of interest;
• remuneration;
• suitability of directors;
• risk culture.

The relevant principle is:

A bank may satisfy today's numerical capital ratios and still be unsafe if its governance structure cannot identify tomorrow's risks.

Supervision therefore evaluates both quantitative and qualitative factors.

9. Fit-and-proper supervision

Persons responsible for managing banks must satisfy suitability requirements.

Assessment can concern:

Reputation – whether there are circumstances undermining trust in the person.

Experience – whether the individual possesses sufficient banking, financial or managerial knowledge.

Independence of mind – whether decisions can be made objectively.

Time commitment – whether sufficient attention can realistically be devoted to the position.

Collective suitability – whether the board collectively possesses the skills necessary to govern the institution.

This is important because prudential supervision increasingly seeks to prevent problems before financial losses occur.

10. On-site and off-site supervision

Banco de España uses both continuing information analysis and direct inspection.

Off-site supervision

Supervisors analyse regulatory reports, financial statements, capital ratios, liquidity information, risk indicators and governance information.

On-site inspections

Supervisory teams can conduct more intensive examinations of areas such as:

• credit files;
• internal models;
• provisioning;
• governance;
• operational risk;
• internal controls;
• data quality.

The two mechanisms complement one another.

A suspicious pattern discovered through regulatory data can produce a deeper supervisory inspection.

11. Stress testing

Stress testing asks what would happen to a bank under hypothetical adverse conditions.

For example:

\[ Recession + Property\ Price\ Decline + Borrower\ Defaults + Funding\ Stress \]

Supervisors then estimate the effect on:

• losses;
• capital;
• liquidity;
• profitability;
• risk-weighted assets.

Stress testing is forward-looking.

Traditional financial statements largely describe what has already happened; stress tests attempt to determine whether the bank could survive what might happen next.

12. Internal models

Large banks may use sophisticated internal models for regulatory purposes, subject to legal requirements and supervisory approval.

Model supervision is important because a model can influence the calculation of risk-weighted assets.

For example:

\[ Lower\ Estimated\ Risk \rightarrow Lower\ RWA \rightarrow Higher\ Reported\ Capital\ Ratio \]

Consequently, an excessively optimistic model can make a bank appear stronger.

Supervisors therefore examine model methodology, assumptions, historical data, validation and governance.

13. Enforcement and sanctions

Spanish banking law provides a framework for administrative infringements and sanctions.

Potential problems include:

• breach of capital requirements;
• governance deficiencies;
• unauthorised activities;
• failures to provide required information;
• inaccurate regulatory information;
• obstruction of supervision;
• serious internal-control failures.

Depending on the applicable allocation of powers, enforcement may involve Banco de España, the ECB or other competent authorities.

Possible consequences can include financial penalties, restrictions, management measures and—in extreme circumstances—loss of banking authorisation.

14. Banco de España and consumer protection

A distinction must be made between prudential supervision and bank-customer conduct regulation.

Banco de España also performs important functions concerning transparency and banking customer protection. However, a customer complaint process should not be confused with prudential supervision of bank solvency.

A mortgage customer complaining about disclosure or contractual treatment raises different issues from a supervisor examining whether the same bank has enough CET1 capital.

Nevertheless, the areas interact because widespread misconduct can produce:

\[ Consumer\ Misconduct \rightarrow Litigation \rightarrow Compensation \rightarrow Financial\ Loss \rightarrow Capital/Reputational\ Risk \]

Spanish mortgage litigation provides particularly strong examples.

Important Case Laws

15. Landeskreditbank Baden-Württemberg v ECB — Case C-450/17 P, CJEU (2019)

This is one of the most important cases for understanding the constitutional structure of the SSM.

A German bank challenged its classification within the European supervisory framework and sought treatment that would leave supervision primarily at national level.

The litigation clarified the extensive role of the ECB under the SSM Regulation.

Significance for Spain

The judgment is crucial even though the institution was German.

The SSM is a single EU framework applying equally to Spain.

The case confirms that national authorities such as Banco de España operate within an integrated European supervisory structure rather than an entirely separate national prudential system.

16. Berlusconi and Fininvest v Banca d'Italia and IVASS — Case C-219/17, CJEU (2018)

This case involved an administrative procedure in which national authorities participated in preparing a decision ultimately adopted by an EU institution.

The CJEU held, in substance, that where national measures form part of a procedure leading to a final EU decision, judicial review of the final decision belongs within the EU judicial system.

Importance for Banco de España

This is highly relevant to composite SSM procedures.

Banco de España may investigate, assess and transmit information, while the ECB adopts the final supervisory decision.

The case therefore helps explain why identifying the actual decision-maker is essential before deciding whether proceedings belong before Spanish courts or EU courts.

17. Crédit Agricole SA and Others v ECB — Joined Cases concerning ECB prudential decisions

The Crédit Agricole litigation before the EU courts concerned ECB supervisory decisions and demonstrates that prudential requirements imposed by the ECB remain subject to judicial review.

The broader principle is important:

\[ Supervisory\ Discretion \neq Unlimited\ Power \]

The ECB must operate within the legal authority conferred by EU banking legislation and provide decisions capable of judicial scrutiny.

The same principle protects institutions operating under the Spanish SSM framework.

18. Trasta Komercbanka and Others v ECB — Case C-663/17 P and related proceedings

The litigation concerned withdrawal of a Latvian bank's authorisation by the ECB.

It generated important questions concerning judicial protection, standing and representation of a credit institution challenging an ECB supervisory decision.

Spanish relevance

The case demonstrates that withdrawal of banking authorisation within the SSM is not simply a domestic administrative matter.

For a Spanish credit institution, Banco de España can participate in the process, but the ECB's powers under the SSM framework are fundamental.

19. ECB v Crédit Lyonnais — Case C-389/21 P, CJEU (2023)

This case concerned the treatment of certain exposures for purposes of the leverage-ratio framework and an ECB decision refusing requested exclusion.

The Court scrutinised the ECB's exercise of supervisory discretion.

It is particularly important because it demonstrates that courts can examine whether the ECB properly considered relevant circumstances when exercising prudential discretion.

The principle can be expressed as:

\[ Wide\ Supervisory\ Discretion + Legal\ Limits + Reasoned\ Assessment + Judicial\ Review \]

A supervisor cannot rely simply on the importance of financial stability to avoid meaningful legal scrutiny.

20. Banco Santander SA v Demba and Bonet — Case C-96/16 and C-94/17, CJEU (2018)

This litigation concerned unfair terms and default interest in consumer loan agreements.

It is primarily a consumer banking case rather than an SSM prudential-supervision case.

Nevertheless, it matters for Spanish banking supervision because widespread contractual practices can create substantial:

• litigation risk;
• conduct risk;
• provisioning requirements;
• reputational risk.

These risks can ultimately enter prudential assessments.

21. Gutiérrez Naranjo and Others v Cajasur Banco and Others — Joined Cases C-154/15, C-307/15 and C-308/15, CJEU (2016)

The famous Spanish floor-clause litigation concerned unfair minimum-interest clauses in mortgage contracts.

The CJEU rejected temporal limitations that improperly restricted consumers' entitlement to restitution following findings that contractual terms were unfair.

Its supervisory significance is substantial.

Mass litigation can convert a consumer-law problem into a prudential problem:

\[ Unfair\ Contract\ Terms \rightarrow Mass\ Claims \rightarrow Restitution \rightarrow Provisions \rightarrow Lower\ Profits/Capital \]

Supervisors therefore cannot treat major conduct litigation as irrelevant to bank safety.

22. Banco Español de Crédito SA v Camino — Case C-618/10, CJEU (2012)

This major Spanish banking case strengthened judicial control over unfair terms in consumer contracts.

The CJEU held that EU consumer-protection requirements require effective judicial scrutiny of unfair contractual terms.

Again, the decision primarily concerns consumer law rather than prudential supervision.

Its wider supervisory lesson is that banks must incorporate legal and conduct risks into enterprise-wide risk management.

23. Aziz v Caixa d'Estalvis de Catalunya, Tarragona i Manresa — Case C-415/11, CJEU (2013)

Aziz became one of the landmark cases concerning Spanish mortgage enforcement and EU consumer protection.

The CJEU found shortcomings in the Spanish procedural framework concerning effective protection against unfair contractual terms.

The case illustrates how EU law can directly reshape national banking practices.

For supervisors, the important lesson is that legal risk cannot be evaluated purely under existing national practice. Banks must consider the impact of EU consumer law and CJEU jurisprudence.

24. Andriciuc and Others v Banca Românească — Case C-186/16, CJEU (2017)

This case concerned foreign-currency lending and transparency.

Although originating outside Spain, it established principles relevant throughout the EU regarding whether consumers were adequately informed about the economic consequences and currency risks associated with loan terms.

For banking supervisors, such decisions matter because widespread inappropriate lending practices may create simultaneous:

conduct risk + credit risk + litigation risk + reputational risk.

25. Relationship with bank resolution

Supervision and resolution must also be distinguished.

Supervision asks:

Is the bank operating safely and complying with prudential requirements?

Resolution asks:

What should authorities do when a bank is failing or likely to fail?

Spain therefore operates within the broader EU Single Resolution Mechanism, involving authorities such as the Single Resolution Board and Spain's national resolution architecture.

The distinction became particularly visible in litigation arising from Banco Popular Español.

Banco Popular was declared failing or likely to fail in June 2017 and subsequently resolved under the EU resolution framework.

The extensive Banco Popular litigation before EU courts illustrates how:

\[ Supervision \rightarrow Deteriorating\ Bank \rightarrow Failing-or-Likely-to-Fail\ Assessment \rightarrow Resolution \]

can become a continuous regulatory sequence while still involving legally distinct powers.

26. Supervisory independence and judicial accountability

Banking supervisors require considerable technical discretion.

Courts normally should not operate as substitute bank supervisors deciding whether a particular portfolio needs exactly a particular quantity of capital.

But technical expertise does not eliminate the rule of law.

A supervisory decision can still be examined for matters such as:

• competence;
• procedural fairness;
• correct legal interpretation;
• adequate reasoning;
• proportionality;
• misuse of powers;
• manifest assessment errors.

Cases such as Landeskreditbank, Berlusconi, Trasta Komercbanka and Crédit Lyonnais collectively demonstrate the emergence of a sophisticated system of European judicial control over banking supervision.

27. Modern supervisory cycle

Banco de España's role can therefore be understood through a continuous supervisory cycle:

\[ Authorisation \]\[ \downarrow \]\[ Regulatory\ Reporting \]\[ \downarrow \]\[ Risk\ Monitoring \]\[ \downarrow \]\[ SREP \]\[ \downarrow \]\[ On-Site\ Inspection \]\[ \downarrow \]\[ Capital/Liquidity/Governance\ Measures \]\[ \downarrow \]\[ Remediation \]\[ \downarrow \]\[ Enforcement\ if\ Necessary \]

and ultimately, if the institution becomes non-viable:

\[ Resolution\ or\ Withdrawal\ of\ Authorisation \]

Conclusion

Banco de España remains a central pillar of Spanish banking supervision, but it now operates inside the EU Single Supervisory Mechanism rather than as an isolated national regulator. It directly supervises less significant Spanish institutions, contributes personnel and expertise to the supervision of significant banks, participates in authorisation and qualifying-holding procedures, monitors prudential compliance, conducts inspections, evaluates governance and risk management, and exercises national supervisory and enforcement functions assigned by Spanish and EU law.

The major cases reveal different parts of this architecture. Landeskreditbank explains the strength of the ECB-centred SSM framework; Berlusconi explains judicial review of composite national/EU procedures; Trasta Komercbanka addresses legal protection surrounding ECB authorisation decisions; and ECB v Crédit Lyonnais demonstrates that even highly technical prudential discretion remains subject to judicial review. Spanish consumer-banking cases such as Aziz, Banco Español de Crédito, Gutiérrez Naranjo,* and *Banco Santander additionally demonstrate how conduct and litigation risks can ultimately become prudential concerns.

The modern Spanish model can therefore be summarized as:

\[ \boxed{ Banco\ de\ España + ECB + EU\ Prudential\ Law + National\ Banking\ Law + Judicial\ Review = Integrated\ Spanish\ Banking\ Supervision } \]

The key idea is shared supervision: Banco de España remains essential, but supervision of Spanish banks—especially the largest institutions—is now fundamentally European as well as national.