“Regtech will enable agile and quick communication between supervisors and banks”

He walks in the room with the charismatic smile that characterizes him. At BBVA, Ricardo Gómez Barredo is known for his willingness to help anyone who needs it. “I’m the son of a shopkeeper. My father was a tailor and I used to go with him to the store every Saturday morning. Since I was little, I have lived in this world of the person who always wants to please everyone,” he confesses.

However, he thinks that this personality has two sides. “In personal relations it is a virtue, but in the professional world it can sometimes be a flaw because you try to reach an agreement and that’s not always possible,” he adds. He just became a grandfather at the age of 52, which he thinks is “wonderful”, although being in “the generational frontline” makes him reflect on his life. In his spare time he combines an intense family life - he has four children - with going for walks and his passion for the movies. He especially likes science fiction films ever since he watched the Lord of the Rings. “I like the psychological escapism in fantasy films much more than I thought,” he says. With his height, he has had a love for basketball since he was young, as well as fencing and rugby. Sports that over time, he has replaced with paddle tennis.

Ricardo Gómez Barredo was there for the birth of BBVA (through the merger of BBV and Argentaria), a Group he has been associated with for more than two decades. Professionally, he describes himself as very demanding of himself. He thinks that the best part of his professional experience has always been “the people I’ve been lucky enough to work with”. The Director of Accounting and Supervisors got his undergraduate degree in Economic and Business Sciences at the Autonomous University of Madrid and holds a Master’s degree in Tax Advice from ICADE. He started his career at PricewaterhouseCoopers and the Spanish Aluminum Industry, in both cases working in the tax area. In 1994, he took the leap to banking as Director of Tax Advice at the Banco Hipotecario. From there, he held several different positions of responsibility at the BBVA Group, until he reached his current role of the first line of reporting to the Group Executive Chairman. His career took a major turn in 2003 when he moved into the wolrd of financial planning, after working on tax issues for 15 years. Now he is in charge of functions that are so critical to a bank like liaising with supervisors, working out financial information and reporting. He admits that “as you move up in your career, you realize you increasingly get less comfort from what you know and more from what you are able to transmit and manage.”

Q: What does the recently created Accounting & Supervisors area do?

Ricardo Gómez Barredo: Accounting & Supervisors (A&S) is in charge of preparing the BBVA Group’s financial statements and reporting.

Its mission is to ensure the transparency, integrity and accuracy of the information"

From a legal standpoint, presenting the accounts is one of the most important extrajudicial statements made by the Group’s Board of Directors. There are some financial processes to work the accounts out which are the basis for an internal control model and A&S is directly responsible for its second line of defense. In other words, it’s a department that ensures that the way the Group engages with others - and even the way it engages with its main governing body (the Board of Directors) - complies with a series of conditions. This makes it possible to keep the responsibilities we assume under control.

The area is related to different subjects: to the Board through the Auditing Commission; to the stock markets by presenting documentation, accounts and significant events; to the banking supervisor so that they really become familiar with the Group and understand the extent to which we assume a risk, how we manage it and why we have to be a reliable institutions; and finally, it also covers how we engage with the treasury departments in each jurisdiction.

Q: How is the relationship with the European Central Bank since it is the supervisor of BBVA?

A: We have felt supervisory pressure. Banks have had to adapt to the new supervisory demands. On November 4, 2014, the Single Supervisory Mechanism entered into force and on January 1, 2016, it was the turn of the Single Resolution Board - all of this, together with the new capital directives CRD IV and CRR and the resolution directive.

All of this dramatically changes the map of activities and relations with supervisors and regulators. Today we are facing a lot more requirements, of all kinds, which affect more than the financial part of the institution. We are therefore facing a new scenario.

We have gone from a demanding local supervisor that focused on financial aspects to a European supervisor, also very demanding, and with a much wider range of supervision.

The new supervision is also forward looking. In other words, it analyzes banks’ business model and strategy to find out what they can expect in three years. This was unthinkable not long ago. They also supervise the management and corporate governance - two areas that have grown exponentially in importance.

The BBVA Group is under the supervision of the ECB at a consolidated level, but the local franchises also have their local supervisors.

Therefore, the need for coordination among supervisors is greater now"

Before, each one had a specific area to cover and assumed that their problems were covered. After the 2007 banking crisis, supervisors realized that they lacked a holistic view of the financial institutions. The problem is that they didn’t come to an agreement over who should have that perspective. Furthermore, prudential supervision is divided in two: the supervisor separated ordinary banking business from the resolution world.

In short, we have a new regulatory and supervisory environment with an holistic view (not just financial). This requires a new approach from the bank’s perspective.

Q: Was it good that BBVA was removed from the list of global systemically important banks?

A: BBVA’s removal from the group of global systemically important banks was the result of an analysis that demonstrated that the bank did not reach the minimum quantitative levels of a systemic bank. Up until that point, it had been put on the list based on the supervisor’s criterion. And in November 2015, it went from being considered a global systemically important bank to a local systemically important bank in several of the markets where BBVA has a presence.

First of all, let’s think about what it means to be a systemic institution. A bank provides two critical services: putting financial deficits in contact with financial surpluses (banking intermediation) and offering tools that enable the system’s transaction banking - or the relations between different economic actors through payments, collections, etc. From this perspective, there are institutions that are so large in certain locations that they would create a considerable impact if the ceased to exist. This is the reason for supervisors’ reaction.

Local or global systemically important banks have to be regulated in a special way because if not, the system would be at a loss.

When the regulation for these banks was implemented, it seemed like the market was going to give greater value to systemic banks, as they are the most powerful, or most capable. But that has not been the case. Systemic banks have additional obligations that put them under much more pressure.

Q: What is your opinion of the banking resolution mechanism that was used for the first time in Europe?

A: The mission of the SRB is to ensure an orderly resolution of banks or banking groups in bankruptcy or a complicated situation, with a minimal impact on the real economy and public finances. It is a figure that establishes that, when a bank is predicted to go bankrupt, it is intervened before this occurs. The managing team changes and measures are taken so that it never gets to the point of an arrangement with creditors, or at least so that the bank’s participation and critical functions in the system continue regardless of whether the bank disappears. That is the concept of resolution.

Q: And at least it has been achieved?

A: It has been achieved, although it is necessary to improve the coordination of the different supervisors with other authorities. In fact, the Single Resolution Mechanism is starting to meet with the European Securities and Markets Authority (ESMA) - the supervisor of all national securities commissions in Europe - to try to coordinate requests for banks’ accounting information. I think that the resolution mechanism will work much better in four of five years.

Q: When will there be an agreement on Basel?

A: I think there will an agreement on Basel soon. We still need to see if the new regulation fulfills the expectation for homogenization of internal models to calculate the risk-weighted assets. An agreement will be reached, but I don’t think it’s the final regulation. It definitely needs some additional modifications regarding solvency.

Q: What are you expecting from the next European stress tests? Do you think they will have sufficient credibility?

A: Conducting these exercises is very important because if banks pass the test it means that there is a good base for economic growth. Additionally, supervisors use the results from the stressed scenario to determine the capital requirements of an individualized level.

However, these assessments are based on general parameters that are not always able to identify idiosyncratic problems. Today, the financial sector is highly globalized and, keeping in mind the speed at which events take place, new risks sometimes appear that were not included in the design of the stress tests. They are then included in subsequent exercises.

In short, even if the stress tests go well and take into account many of the sector’s risks, it’s important to be aware that they do not resolve challenges like regulatory uncertainty, the arrival of new unregulated competitors or reputational risk.

Q: It has been ten years since the crisis. What is your assessment of the financial system?

A: If banks weren’t facing the disruption of the industry brought by new technologies, clearly the situation would be better. If this same situation were taking place 20 years ago, the future would be much brighter. The big question is what the role of the financial system will be in the economy in 10 years. It remains unknown. Banks should be flexible to adapt to the environment. And the supervisor should, too.

Q: How are supervisors reacting to institutions’ transformation?

A: If it’s hard for banks to predict the future, for the supervisor it’s practically impossible. Also, their function is not for a company to work well - that’s the responsibility of the management boards - but to ensure that the company does not have a negative effect on the system. However, we find ourselves with a problem: every supervisor is concerned about their domain. In this regard, the challenge is to make prudential regulation compatible with technological advances, so as to promote a sound regulatory framework with healthy institutions that are subjected to the same rules of the game as the new digital competitors.

There are three keys to being able to compete in an environment of technological change: processing power, transmission speed and storage capacity.

Currently, information transmission speed is increasingly faster and cheaper"

Storage capacity is almost infinite. So where is the bottleneck? In the processing power. Traditional banks have the problem that their processing power is very expensive and slow. Meanwhile, the new arrivals have cloud-based processing power, which is fast, cheap and immediately adapts to customers’ needs. Therefore, banks need the supervisor to allow the processes to take place outside of the institution. Furthermore, new technologies and consumers’ new 4 needs demand quick decision-making and assuming more risk. That’s why we need sandboxes, or testing grounds, which allow us to advance more quickly.

Therefore, the jurisdiction whose supervisor adapts the fastest to the capacity to do the process outside of the bank and facilitates the establishment of sandboxes will create a competitive advantage for the banks in that country.

Q: Moving on to a more specific regulation topic, IFRS9, how will it impact Spanish banks?

A: It is a radical change for institutions to take into account the losses due to insolvencies according to the principles of IFRS9 (internal methods to calculate provisions). Not only due to the significant operations this requires, but because it entails the need for joint work in the accounting and risks areas, in order for credit risk management to be adequately reflected in financial statements.

According to IFRS9, the cost or risk is calculated based on the expected losses in a year. This makes more economic sense than it may seem. Let’s take the example of an institution with a single loan portfolio that will accrue interest for a year. The cost of this portfolio will be calculated based on the estimated losses for the year. This way, on December 31st the expected loss equivalent to the following year will be calculated. Therefore, it creates some anticipation that the accounting supervisor likes because institutions will be better prepared to face shocks, as accounting losses are captured before they occur.

However, the estimation of losses implies the use of predictions about the amount and timing of collection. This creates a risk of material bias that can affect financial statements, as well as financial and regulatory metrics.

In fact, as a result of IFRS9, lots of banks are reconsidering their business model

Those that are highly leveraged in long-term operations with a high risk will have to consider the price at which they conduct the operations, or even whether it makes sense to continue conducting them.

Q: So, it will have a significant impact.

A: I think that it will have real impact on the way each bank operates in the market.

Q: Turning to taxes. How can the myth that large corporations try to pay less taxes be debunked?

A: The first step is to correct the erroneous behaviors of certain multinational groups who design structures with the goal of reducing the tax burden in certain places. This is true - it’s not a myth.

Second, the institutions should be as transparent as possible. They also have to be capable of convincing society and correctly reporting the taxes they pay.

With the goal of setting a good example for transparency, BBVA voluntarily decided to make the bank’s global tax contributions available to the public. We break down the profit obtained in each jurisdiction and the taxes we pay on those profits.

Furthermore, banks are a vital partner for the Treasury, as we managing the information it needs to collect taxes from taxpayers"

It would cost the tax authorities an enormous amount to do this work.

Q: In terms of “regtech”, how is the technology helping banks comply with regulations?

A: “Regtech” aims to provide solutions in the regulatory arena for issues like interpreting new regulations; data access, storage and management; regulatory reporting; fraud prevention; and risk management. It is not limited to using technology to collect information, store it and transmit it correctly. It also involves the supervisor using the same technological system as the financial institutions to process the information. It is essential that regulators adopt new technological solutions to understand the benefits and risks that come with them. This will allow them to make informed decisions, based on a profound understanding of the subject. It will also lead to much more agile and quick communication between the supervisor and banks.

Q: Where is “regtech” at now?

A : The first thing that is needed is a clear and stable definition of the information the supervisor needs from the institutions in each of the jurisdictions where they have a presence. And don’t forget that it’s information that is constantly changing.

When the supervisor clarifies the information they need, it will be easier to apply the regtech solutions I have mentioned.