FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Issuer
Pursuant to Rule 13a-16 or 15d-16
of the Securities Exchange Act of 1934
For the month of February, 2022
Commission File Number: 001-12518
 
 
Banco Santander, S.A.
(Exact name of registrant as specified in its charter)
 
 
Ciudad Grupo Santander
28660 Boadilla del Monte (Madrid) Spain
(Address of principal executive office)
 
 
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:
Form 20-F  ☒            Form 40-F  ☐
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):
Yes  ☐            No  ☒
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):
Yes  ☐            No  ☒










Banco Santander, S.A.
TABLE OF CONTENTS
Item
1




logoparaportada.jpg



Pillar 3 - Disclosure Report
2021 - strengthening our capital strategy

imagenesparalaportada.jpg



a00contraportada.jpg



Index
a00ndice.jpg



Introduction (Ch. 1)
Capital (Ch. 2)
Santander Capital
Santander Pillar 3 Report overviewCapital function
Regulatory frameworkCapital management and adequacy. Solvency ratios
Scope of consolidationPillar 1 - Regulatory Capital
Pillar 2 - Economic Capital
Capital planning and stress tests
TLAC & MREL
Lines of defence
Corporate Special Situations and Resolution Framework
Risks (Ch. 3, 4, 5, 6, 7, 8, 9 and 10)
Santander (Ch. 11 and 12)
Global risk visionRemuneration policies
Credit RiskAppendices
Counterparty Credit Risk
Credit Risk - SecuritisationsOther appendices available on the Santander website.
Market Risk
Operational Risk
pillar3disclosurereporten.jpg
Access 2021 Pillar 3 Disclosures Report available on the Santander Group website
ESG Risk
Other Risks
a00ndicetransparencia.jpg



a01introduccin.jpg


a01introduccinnmero.jpg
Introduction
1.1. Santander
1.2. Santander Pillar 3 report overview
1.2.1. Background information on Santander
1.2.2. Governance: approval and publication
1.2.3. Transparency enhancements
1.2.4. Disclosure criteria used in this report
1.3. Regulatory framework
1.3.1. Prudential framework 2021: Capital Adequacy and Resolution key points
1.3.2. Regulatory response to impacts of covid-19
1.3.3. Other regulations: Sustainability
1.3.4. Other regulations: Digital
1.3.5. Other regulations: AML/FT
1.4. Scope of consolidation
1.4.1. Differences between the consolidation method for accounting purposes and the consolidation method for regulatory capital calculation purposes
1.4.2. Substantial amendments due to a change in perimeter and corporate transactions


INTRODUCTION 2021 Pillar 3 Disclosures Report

1.Introduction
1.1. Santander
Everything we do must be Simple, Personal & Fair
Our aim and purpose
Santander is one of the largest banks in the eurozone. As of December 2021, we had EUR 1,595,835 million in assets and EUR 1,153,656 million in total funds. Our market capitalization reached EUR 50,990 million.
Santander has a very clear aim to be the best open financial service platform, by acting responsibly and earning the lasting loyalty of our people, customers, shareholders and communities. Our purpose is to help people and businesses prosper.
Our business model
CUSTOMER FOCUSOUR SCALEDIVERSIFICATION
Customers worldwide

153 mn
+5 mn in 2021
Top 3
in 10 of our markets
a00ourscale.jpg1

Geographic and business Aa01diversification.jpg
A. 2021 underlying attributable profit by region. Operating areas excluding Corporate Centre.
We have laid the foundations to deliver great value and service for our customers, while increasing profits, improving profitability, and strengthening our capital base
Customer focus
Deepening the relationships with our customers through a simpler value proposition, superior customer experience and our digital proposition
We have increased our number of customers over the last seven years, and notably in 2021, with balanced growth by region and business.
Our aim is to further enhance our customers' experience and satisfaction.
We also help a new generation of customers with new ways to interact with their finances, which is reflected in an increase digitalization (54% digital sales / total sales in 2021).
Our scale
Local scale and global reach
Regional and global scale based on three geographic regions, where we maintain a leadership position in our core markets.
Worldwide reach through our global businesses and PagoNxt, enabling greater collaboration across the Group to generate higher revenue and efficiencies.
Diversification
Our geographic and business diversification make us more resilient under adverse circumstances
We have a diversified geographical footprint which is well balanced between emerging and developed markets.
Business diversification between customers segments (individuals, SMEs, mid-market companies and large corporates).
This diversification remains a source of great strength and earnings stability.
1 Market share in lending as of Sep-21 including only privately-owned banks. UK benchmark only covers the mortgage market (source: central banks). Digital Consumer Bank (DCB) refers to auto financing market shares in the majority of our Europe footprint (source: information from local auto associations and market intelligence reported by SCF units).
9
image89.jpg
2021 Pillar 3 Disclosures Report

INTRODUCTION 2021 Pillar 3 Disclosures Report

Santander main results
Strong operating performance in 2021: EUR 8.7 bn of underlying profit
2021 (vs. 2020)
GROWTH
PROFITABILITY
STRENGTH
Total customers
RoTE B
FL CET1 C
153 mn (+5mn)
12.7% (+529bps)
12.0% (+7bps)
Total revenue A
Efficiency ratio
Cost of credit D
EUR 46.4 bn (+7%)
46.2% (-86bps)
0.8% (-51bps)
2021 Shareholder value creation: +11%E
A. Changes in constant euros. In euros: +4%.
B. Underlying RoTE. Statutory RoTE: 12%.
C. Including acquisition of SC USA minority interest which closed on 31 January 2022 and the announced acquisition of Amherst Pierpont which is subject to completion, regulatory approval and other conditions.
D. Provisions to cover losses due to impairment of loans in the last 12 months / average customer loans and advances of the last 12 months.
E. TNAV per share + cash DPS of EUR 7.6 cents paid in calendar year 2021.

ESG commitments

We are creating value for our shareholders by focusing on delivering profitable growth in a responsible way
In 2021, we continued to deliver on our ESG commitments, supporting our customers´ green transition and financially empowering more people

Supporting the green transition
Building a more inclusive society
With a talented and diverse team
EUR 61 bn7.5 mn6
Green finance since 2019 A
People financially empowered since 2019Geographies where we are Top 10 company to work for
>200%>EUR 500 mn26%
YoY green finance in retail B
Credit allocated to microfinance in 2021Women in senior leadership positions
EUR 27 bn1.4 mnESG
AuM in Sustainable funds C
Microentrepreneurs supported since 2019Metrics included in executives´incentives
#18#1
Financial advisor in Project Finance renewables D
Countries with microfinance initiatives underwayBank in Bloomberg Gender Equality Index
Note: non-audited data.
A. Only Santander Corporate Investment Bank (SCIB) global business.
B. All segments excluding SCIB and WM&I (Well Management and Investment).
C. AuMs classified as Article 8 and 9 funds (SFDR) from SAM, plus third-party funds and other ESG products according to EU taxonomy from Private Banking. We apply equivalent ESG criteria to SAM´s funds in Latin America.
D. Banco Santander, SA emerged as the top financial advisor for renewable energy project financing in 2021, with a total deal credit of USD 10.3 billion and a market share of 28%, according to Bloomberg NEF´s H2 2021 Clean Energy League Tables.
10

INTRODUCTION 2021 Pillar 3 Disclosures Report

Economic landscape
Santander operated in 2021 amid an environment characterised by:

1
Fiscal and monetary policies implemented to counter the adverse effects of the covid-19 pandemic.
2
The ongoing recovery from the pandemic, which has been inconsistent across countries and sectors.
3
New covid-19 variants and significant outbreaks.
4
An upturn in inflation in the second half of the year, which reached a three-decade high in mature markets.
Inflationary pressures have intensified as a result of a number of factors, including the renewed demand for consumer goods; labour shortages; tensions in the supply chains of microchips and other key items; transportation issues; and increases in energy, certain raw materials and food prices.
Under these circumstances, withdrawal of the expansionary fiscal and monetary policies implemented in response to the covid-19 pandemic began, especially in the last quarter of 2021, particularly in countries that experienced the heaviest pressure on prices.
Capital management and solvency ratios

Grupo Santander’s capital management aims to guarantee solvency and maximize profitability, while complying with internal objectives and regulatory requirements.
It is a key strategic tool for local and corporate decision making, enabling us to set a common framework of actions, criteria, policies, functions, metrics and processes.
Our active capital management applies strategies on efficient capital allocation to business lines, and considers securitizations, asset sales and issuances of capital instruments (capital hybrids and subordinated debt).
Our economic capital model aims to ensure our capital allocation is right for the risks inherent in our operations and risk appetite to optimize economic value added for our group and business units.
To optimize economic value added, we measure the real economic capital an activity requires and its return, and select those activities that maximize returns. We do this under both expected as well as unlikely but plausible economic scenarios, and with the solvency level decided by the Group.






11
image89.jpg
2021 Pillar 3 Disclosures Report

INTRODUCTION 2021 Pillar 3 Disclosures Report

The fully-loaded CET1 ratio stood at 12.12%,
keeping our target between 11% and 12%

Fully-loaded CET1 ratio
chart-9cb8d15e89144563b24.jpg
Regulatory CET1 ratio (Phased-in)2
11.65 %12.34 %12.51 %
Main capital figures and capital adequacy ratios.
EUR million
Fully-loaded
Phased-in2
2021202020212020
Common Equity (CET1)70,20869,39972,40269,399
Tier 179,93975,51082,45278,501
Total capital95,07888,36897,31791,015
Risk weighted assets579,478561,850578,930562,580
CET1 Ratio12.12 %11.89 %12.51 %12.34 %
Tier 1 Ratio13.79 %13.44 %14.24 %13.95 %
Total capital ratio16.41 %15.73 %16.81 %16.18 %
Leverage Ratio5.21 %5.31 %5.37 %5.33 %





Strong organic generation driven by profit and RWA management
in fully-loaded CET1 ratiochart-9837fc76952a4cd1979.jpg
*Includes Accrued shareholders remuneration

If we do not apply the transitory IFRS 9 provisions, nor the subsequent amendments introduced by Regulation 2020/873 of the European Union, which has a 39 basis point impact, the fully-loaded CET1 ratio was 12.12%.
Of note in the year was organic generation of 118 basis points, supported by the results obtained in the year and management of risk-weighted assets. This figure includes a negative impact of 45 basis points related to shareholder remuneration. This strong generation was partially offset by regulatory and model impacts, the negative market impacts on available for sale (HTC&S) portfolios and non-recurring impacts (acquisition of minority interest in Mexico and restructuring costs).
If we include the acquisition of SC USA minority interests, which closed on 31 January 2022, and the announced acquisition of Amherst Pierpont, which is pending to completion, the CET1 ratio would be an estimated 16 basis points lower, bringing it to 11.96%.
The fully-loaded leverage ratio stood at 5.21%.

2 The phased-in ratios include the transitory treatment of IFRS 9, calculated in accordance with article 473 bis of the Regulation on Capital Requirements (CRR) and subsequent amendments introduced by Regulation 2020/873 of the European Union. Additionally, the Tier 1 and total phased-in capital ratios include the transitory treatment according to chapter 2, title 1, part 10 of the aforementioned CRR.
12

INTRODUCTION 2021 Pillar 3 Disclosures Report

Main risks capital requirements
Solid risk culture, robust governance and advanced
risk management processes

87%3%10%
chart-51e8c9710d8045f682c.jpg   chart-a5c40ee9937f47a6a49.jpg   chart-9cecdd93d82b4ddc977.jpg
Credit risk3Market riskOperational risk
40,2331,3784,703
Million euros
Million euros
Million euros
The credit risk management process involves identification, assessment, control and decision-making in relation to the credit risk incurred in the group's operations.
It incorporates operational, customer and portfolio factors, together with a comprehensive view of the credit risk cycle. The Business and Risk areas are involved in the process, along with senior management.
Santander's profile is mainly retail, with an adequate diversification of credit risk between mature and emerging markets.
The Group includes counterparty credit risk in its credit risk framework. Additionally, for management purposes, it also has a specific counterparty credit risk model, policy and procedures.
The measurement, control and monitoring perimeter of the Market Risk area includes all transactions where risk arises due to changes in market factors. This risk arises from changes in risk factors (interest rate, exchange rate, equities, credit spreads, commodity prices and the volatility of each of these) which may impact earnings or capital, and from the liquidity risk of the products and markets in which Santander operates.
At the end of December 2021, Santander had authorisation to use the internal market risk model for calculating regulatory capital in the trading books of the Spain, Chile and Mexico units. From October 2021, the market risk capital of the internal model for Spain and Santander London Branch (SLB) will be reported in a single entity, following regulatory approval of the diversification between the two units. The Group aims to gradually extend this approval to the rest of the units with significant market positions.
The Group controls and manages operational risk by focusing on identifying, assessing, mitigating and reporting sources of operational risk, whether or not they have materialised, ensuring that risk management priorities are properly established. Santander expressly recognises that while a certain volume of operational losses can be expected, severe unexpected losses resulting from failures in business controls are unacceptable.
The group applied new developments and enhancements to the operational risk management model in 2021 in the risk assessment and control tools, operational risk appetite, business continuity plans and the analysis and integration of new risks (such as transformation risk or climate risk) into the non-financial risk monitoring and control model.

3 It includes counterparty credit risk and securitisations without 1250% deduction.
13
image89.jpg
2021 Pillar 3 Disclosures Report

INTRODUCTION 2021 Pillar 3 Disclosures Report

1.2. Santander Pillar 3 report overview    
a02cuadrorojo.jpg

1.2.1. Background information on Santander
Banco Santander, S.A. is a private-law entity subject to the rules and regulations applicable to banks operating in Spain. In addition to its direct operations, Banco Santander is the head of a group of subsidiaries engaged in a range of business activities that comprise Santander. The Capital Requirements Regulation (CRR) and its modifications (hereinafter referred to as CRR), Capital Requirements Directive (CRD) and its modifications, and its transposition through Banco de España Circular 2/2016, on supervision and capital adequacy, are applicable at a consolidated level to the whole of the Group.
Santander is one of the banks that have not required state aid in any of the countries in which they operate.
See Appendix II, CRR Mapping, for all aspects for which disclosure is required under Part Eight of the CRR, as amended but that are not applicable to Santander. These are reported as “N/A” (not applicable).
At 31 December 2021, none of the financial institutions consolidated in the Group had less than the minimum capital required under applicable regulations.
Under Article 7 and 9 of the CRR, the subsidiaries Santander Leasing S.A. EFC and Santander Factoring y Confirming S.A. EFC are exempt from the minimum capital requirements, the limit on large exposures and the internal corporate governance obligations at 31 December 2021. None of the exemptions under applicable regulations have been used for any other Santander subsidiaries.
1.2.2. Governance: approval and publication
Santander Group has a formal policy on the disclosure of information of prudential relevance with the aim of defining the criteria for regulating the preparation process, minimum requirements to be included, frequency and associated governance in accordance with the provisions set forth in Directive 2013/36/EU, Regulation (EU) no. 2019/876 of 20 May 2019 (the EU Regulation or CRR2) amending Regulation (EU) no. 575/2013, as well as the law on supervision and capital requirements (10/2014) of the Bank of Spain.
This policy has been prepared in compliance with the criteria established in the European Banking Authority: Guidelines on Materiality, Proprietary, Confidentiality and Frequency of the Information in accordance with Article 432, sections 1 and 2 and Article 433 of Regulation (EU) 575/2013.
Pursuant to this policy, the Prudential Relevance Report corresponding to the financial year 2021 is published after its approval by the Board of Directors. Prior to its approval by the Board of Directors held on 24 February 2022, the report was reviewed by the Capital Committee held on 18 February 2022 and the Audit Committee during its session on the 21 February 2022.
Furthermore, since March 2015, a quarterly report is published which includes a set of information complying with the internal policy and criteria established in the European Banking Authority guidelines.
The information contained in this report has been subject to review by the External Auditor (PwC) which has not declared any incident in its report in relation to the reasonableness of the information detailed and the compliance with the information requirements established in the European Capital Directive and Regulation.
Certification by governing bodies
The board of directors of Santander certifies that the publication of the Pillar 3 disclosures report is compliant with the guidelines in Part Eight of Regulation (EU) 575/2013 and consistent with the “Pillar 3 Disclosures Policy” adopted by the board of directors.
No exceptions have been applied for the publication of information considered proprietary or confidential.
The Pillar 3 disclosures report relies on a range of processes relating to the internal control framework, with duties and responsibilities having been defined for review and certification of the information in the report at several levels of the organisation.
Further information on Santander´s internal control model (ICM) can be found in section VIII of the chapter on Corporate governance of the 2021 Annual report.
annualreporten.jpg
Access 2021 Annual Report available on the Santander Group website
In addition, an ex-ante review is performed by external audit, the conclusions of which are presented to the audit committee and form part of the work plans of the recurring internal audit reviews.
The Pillar 3 disclosures report is available in the Shareholders and Investors section of the Santander website (www.santander.com), under "Financial and economic information".
pillar3disclosurereporten.jpg
Access 2021 Pillar 3 Disclosures Report available on the Santander Group website
Disclosures by Santander subsidiaries
In addition to the information contained in this report, Santander subsidiaries that are considered to have significant
14

INTRODUCTION 2021 Pillar 3 Disclosures Report

importance for their local market (under article 13 of the CRR, Application of disclosure requirements on a consolidated basis) publish information at the individual level on their websites, in relation to own funds, capital requirements, capital buffers, credit risk adjustments, remuneration policy and the application of credit risk mitigation techniques.
Santander subsidiaries in Argentina, Mexico, the United States, Santander Consumer Nordics, Santander Consumer Germany, Portugal, Chile, Poland, the United Kingdom and Uruguay publish their Pillar 3 reports in accordance with local regulations.
1.2.3. Transparency enhancements
The Group has noted the recommendation issued by international bodies with the aim of improving the transparency of the information published each year in the Pillar 3 disclosures report.
Santander takes into account all reporting requirements regarding market transparency published by the EBA, the BCBS and the Commission. Appendices I and II contain details on the various relevant documents.
Appendix I shows compliance with the different ITS in force in relation to disclosure, and Appendix II lists the location of the information disclosed in accordance with the relevant articles of Part Eight of the Regulation.
Some of the main transparency enhancements include the following:
Some of the main transparency enhancements include the following:
In June 2021, phased to December 2021, the implementing technical standard (ITS) for the disclosure of Part VIII of Regulation No 575/2013 (CRR) came into force to standardise Pillar 3 disclosures. This disclosure increases our semi-annual disclosure by 30% and our annual disclosure by 10% and provides a uniform definition of the relationship between reporting and disclosure (mapping tool) for 60% of it.
The implementing technical standard on the disclosure and reporting of the minimum requirement for own funds and eligible liabilities (MREL) and the total loss absorbing capacity (TLAC) also came into force in June 2021.
¤
For more information, see section 2.7.
As a result of the global health crisis, the EBA published a guide to the impact of covid-19 entitled "EBA GLs on reporting and disclosure of exposures subject to measures applied in response to the covid-19 crisis", which specifies that three quantitative templates with information on the scope of the moratoria must be published every six months. Given the ongoing covid-19 pandemic and the uncertainty over its future development, the EBA confirmed in January 2022 the continued application of this reporting and disclosure requirements until further notice.
¤
For more information, see section 4.10.
The EBA also published another ITS on Pillar 3 disclosure on interest rate risk arising from the non-trading book activities (IRRBB).
¤
For more information, see section 7.4.1.
See Appendix I Transparency Enhancements and Appendix II CRR Mapping for further information on improvements in transparency.
¤
For more information, see Appendix I.
¤
For more information, see Appendix II.
In the Financial and economic information / Pillar 3 section of the Group's website, we also publish all the tables shown in this document in editable format for easier processing, as well as the appendices.
pillar3disclosurereporten.jpg
Access 2021 Pillar 3 Disclosures Report available on the Santander Group website
Best practise aspiration
Grupo Santander strives to be a best practise example of disclosure, having already excelled in the last EBA assessments in the areas of liquidity, prudent valuation, improvements to general sections, presentation of information and other aspects of navigability.
1.2.4. Disclosure criteria used in this report
This report has been prepared in accordance with current European regulations on capital requirements (CRR).
The ratios presented in this report have been calculated using the transitional CRR and IFRS 9 implementation schedules.
Details of the types of information where there are differences between the regulatory information shown in this report and the information in the annual report and accounting information are as follows.
The credit risk exposure measurements used for calculating regulatory capital requirements include:
Not only current exposures but also potential future risk exposures arising from future commitments (contingent liabilities and commitments) and changes in market risk factors (derivative instruments).
The mitigating factors for these exposures (netting agreements and collateral agreements for derivative exposures, and collateral and personal guarantees for on-balance-sheet exposures).
The criteria used in classifying non-performing exposures in portfolios subject to advanced models for calculating regulatory capital are more conservative than those used
15
image89.jpg
2021 Pillar 3 Disclosures Report

INTRODUCTION 2021 Pillar 3 Disclosures Report

for preparing the disaggregated information provided in the annual report.
1.3. Regulatory framework
1.3.1. Prudential framework 2021: Capital Adequacy and Resolution key points
Credit institutions must meet a number of minimum capital and liquidity requirements. These minimum requirements are governed by the European Capital Requirements Regulation, better known as CRR, and the Capital Requirements Directive, CRD. In June 2019, these regulations were significantly amended.
The applicable regulations are now CRRII and CRDV.
As the Directives need to be transposed into the legal systems of the different Member States in order to be applicable, in the case of Spain, Royal Legislative Decree 7/2021 and Royal Decree 970/2021 were published for this purpose in 2021.
In June 2019, CRRII introduced the minimum TLAC (Total Loss Absorbing Capacity) requirement, which only applies to global systemically important banks (G-SIBs). This requirement introduces two metrics: i) a minimum requirement for own funds and eligible liabilities as a percentage of the Total Risk Exposure Amount (TREA) set at 16% during the transition period and 18% from 1 January 2022 after the end of the transition period; and ii) a metric to set a minimum requirement for own funds and eligible liabilities in terms of a percentage of the Basel III tier 1 leverage ratio exposure measure of 6% during the transition period and 6.75% from 1 January 2022 after the end of the transition period.
This year saw the implementation of the EBA Guidelines on the New Definition of Default, which were prepared in accordance with CRR II, on 1 January 2021. The changes to CRRII that are applicable from June 2021 include the introduction of a minimum leverage ratio of 3%, the new standardised EAD calculation for counterparty risk, known as SA-CCR, the long-term liquidity ratio (NSFR), the new limits for large exposures and the requirement to report under the standardised approach for market risk.
CRDV introduces important modifications such as Pillar 2G regulation (guidance, Pillar 2 requirements orientation).
On 27 October 2021, the European Commission published the draft review of European banking legislation: CRR III and CRD VI.
This review completes the implementation of the Basel III reform, which was agreed at the end of 2017 and aims to reduce the variability of risk-weighted assets and improve comparability between banks.
The banking package consists of the following elements: 1) Implementation of the final Basel III reforms, 2) Contribution to sustainability and green transition and 3) Stronger supervision: ensuring sound management of EU banks and better protection of financial stability.
The first part is reflected in the Commission's proposal to amend the text of the CRR. This proposal contains changes concerning, among other things, key risk factors, standardised credit risk, internal models, the output floor and operational risk.
The second part, relating to the contribution to sustainability and green transition, is reflected in the fact that the legislative proposals continue to incorporate ESG (environmental, social and governance) factors into the various areas of prudential regulation: governance, supervision, risk management, reporting obligations to competent authorities and disclosure requirements, among other topics.
Finally, the third part, which refers to stronger supervision and protection of financial stability, is expressed in a series of provisions concerning: fit-and-proper requirements, the extension of the scope by revising certain definitions that would cover groups managed by fintechs, and the establishment of third-country branches in the EU in order to achieve greater harmonisation of rules and better supervision of this type of entity.
In general, the Commission proposes to start applying the new rules from 1.1.2025, but the amendments to the regulation that concern resolution issues could come into force in the first months of 2022.
With regard to the resolution rules, institutions must have an adequate funding structure to ensure that, in the event of financial distress, the institution has sufficient liabilities to absorb losses in order to recover its position or be resolved, while ensuring the protection of depositors and financial stability.
The directive that governs the resolution framework mentioned above is the Bank Recovery and Resolution Directive (BRRD). Like the CRR and the CRD, the BRRD was amended in June 2019, so BRRDII refers to all of these amendments. The transposition of this directive into the Spanish legal system took place in 2021 through a Royal Decree.
BRRDII has introduced important changes to the Minimum Requirement for Own Funds and Eligible Liabilities (MREL). For example, the TLAC requirement is now considered a Pillar 1 resolution requirement for G-SIBs. For large banks (defined as banks with total assets of more than €100 billion) or banks deemed systemically important by the resolution authority, BRRDII sets a minimum subordination requirement of 13.5% of risk-weighted assets or 5% of the leverage ratio, whichever is higher. For all other institutions, the subordination requirement is set by the resolution authority on a case-by-case basis.
Finally, Deposit Guarantee Schemes (DGS) are regulated by Directive 2014/49 or DSGD, which has not undergone any significant changes since its publication in 2014. It aims to harmonise the deposit guarantee schemes of the Member States, thus ensuring stability and balance in the different countries. It creates an appropriate framework for depositors to have better access to DGSs than was the case before the publication of this Directive through clear coverage, shorter repayment periods, better information and robust funding requirements. This Directive is transposed into Spanish law by Law 11/2015, Royal Decree 1012/2015 and Royal Decree 1041/2021.
16

INTRODUCTION 2021 Pillar 3 Disclosures Report

1.3.2. Regulatory response to impacts of covid-19
The severe economic disruption caused by the covid-19 pandemic during 2020, which continued throughout 2021, has brought home the importance of the financing role banks will play in contributing to the recovery. Competent authorities (national, European and international) have acted by relaxing liquidity, capital and operational requirements so that banks could continue to provide funding to the economy, while ensuring they continue to act prudently.
As part of the European Central Bank's actions, several recommendations have been issued asking European banks to refrain from paying dividends and buying back shares to compensate shareholders.
The first recommendation to refrain from paying dividends was issued in March 2020 and was successively extended until 30 September 2021, when the ECB decided to lift it.
Throughout 2020, national governments took measures to counter the economic and social impact of the pandemic, particularly through legislative repayment moratoria to contain non-performing loans and help people cope with their liquidity needs. For its part, the European Banking Authority (EBA) has adopted a number of guidelines during 2020, including the guidelines on legislative and non-legislative moratoria implemented to respond to the covid-19 crisis on 2 April 2020. These guidelines clarify how the requirements of the public and private moratoria granted are to be met in order to avoid unjustified mass categorisation of these exposures as restructured or doubtful. While these guidelines were originally intended to apply to moratoria granted before 30 June 2020, the EBA decided on 2 December 2020 to reactivate the application of these guidelines for moratoria requested before 31 March 2021 and for a period not exceeding 9 months.
Another measure adopted in 2020 to provide flexibility in meeting the requirements was the approval and entry into force of the CRR "Quick Fix" amending CRR II (urgent and extraordinary amendments to bring about a more flexible regulatory framework in response to covid-19). The Quick Fix introduces a number of new features, including the extension of the transitional period granted before the pandemic for the entry into force of IFRS 9, due to the sudden and significant increase in expected credit loss provisions to be recognised. The implementation of certain provisions of CRR II has also been delayed, such as those relating to the leverage ratio buffer (postponed until 1 January 2023); the possibility of excluding exposures to central banks from the calculation of the leverage ratio, which should have been applied from June 2021 on, has been brought forward. Other provisions beneficial to institutions have also been brought forward. These include the support factors for SMEs and infrastructure, and the new treatment for software (applicable from the day following the publication date of the Delegated Regulation that implements it).
1.3.3. Other regulations: Sustainability
Since the publication of the European Commission's Action Plan underpinning the EU's 2030 climate and sustainable development goals and agenda, steady progress has been made in the development of sustainable finance.
2021 saw further implementation of the Taxonomy Regulation (2020/852), which sets harmonised criteria for classifying an economic activity as environmentally
sustainable. As part of its task to develop the six environmental objectives, the European Commission published the final selection criteria for identifying sustainable activities that contribute to the climate change mitigation and adaptation objectives, which were finally adopted in December 2021. The remaining four objectives – sustainability and protection of water and marine resources, transition to a circular economy, pollution prevention and control, and protection and restoration of biodiversity and ecosystems – will be further implemented during 2022. In addition, the Commission has begun to work on a possible extension of the taxonomy to also classify activities in transition that do not yet meet the criteria of the taxonomy, as well as those with harmful environmental impacts and those with social objectives. This work will continue in 2022.
The final version of the Delegated Act on Article 8 of the Taxonomy Regulation on disclosure requirements for financial and non-financial undertakings was published in July. It sets out a series of indicators that companies subject to the Non-Financial Reporting Directive (NFDR) must publish in relation to the taxonomy.
The most relevant indicator for banks is the Green Asset Ratio. The Green Asset Ratio is the percentage of its exposures that are consistent with the environmentally sustainable activities identified and specified in the relevant Delegated Regulations underlying the Taxonomy Regulation. The final text was adopted in December 2021.
The European Central Bank published its guide on supervisory expectations for climate and environmental risks in November 2020, which was integrated into the supervisory dialogue during the 2021 financial year. The European Central Bank also announced that it will conduct a climate stress test in the first half of 2022, the methodology for which was published at the end of October this year.
Finally, in July, the EBA published its report on the management and monitoring of ESG risks for banks and investment firms. This report will form the basis for the development of guidelines for the ESG risk management of institutions and the supervision of ESG risks by competent authorities in the EU. The EBA guidelines are expected to be published in June 2022.
In 2022, the EBA is expected to publish the technical implementation details for the integration of ESG risks in the Pillar 3 report. Institutions must implement these developments from 2023, for the 2022 financial year.
1.3.4. Other regulations: Digital
Due to the digitalisation of the financial industry and the resulting transformation of the sector, regulators and supervisors need to update both the regulatory framework and their approach to reflect the new realities and business models that are emerging as a result of this new digital world.
In their efforts to maintain financial stability, financial regulators and Supervisors proceed in three main ways:
by adapting or creating new rules that take into account new realities and new uses of already identified technologies or new relationships that emerge between participants in the financial system and technology companies;
17
image89.jpg
2021 Pillar 3 Disclosures Report

INTRODUCTION 2021 Pillar 3 Disclosures Report

by broadening the scope of the already existing regulatory framework to ensure regulation that applies consistently to all those engaged in the same activity (in line with the principle of "same activity, same risks, same rules");
and finally, by adapting the supervisory approach to the new risks that emerge in a constantly evolving digital environment.
In 2021, there have been other regulatory initiatives at both international and European levels that address new realities or the use of technology in the financial industry. These include in particular in Europe (currently under discussion):
The proposed Digital Operational Resilience Act (DORA), which aims to manage the risks generated by IT-related service providers in their interactions with financial sector participants. An important part of this proposal is that providers deemed to be critical will be subject to direct supervision by banking supervisors.
The proposed Digital Markets Act (DMA) regulation aims to regulate competition in digital markets and proposes to impose certain "ex ante" obligations on those digital platforms that can be considered "gatekeepers".
The proposal for a European regulation on Artificial Intelligence, which regulates the use of this technology for both public and private entities. The proposal focuses on applications that are considered high-risk, including the customers' creditworthiness assessment and human resources management.
The proposed Regulation on Markets in Crypto-Assets (MiCA), which regulates and establishes a regulatory framework for service providers (e.g. issuers, exchanges, wallets, etc.) of crypto-assets, which are not considered financial instruments. Among other things, the proposal regulates crypto-assets used for payments and establishes a stricter framework for crypto-assets that are "significant" in terms of their degree of proliferation.
The proposed revision of the EIDAs (Regulation on Electronic Identification, Authentication and Trust Services), which proposes a new framework for a European digital identity available to citizens and businesses through digital wallets. The new framework will enable the electronic exchange of documents and proof of identity across Europe, as well as access to public services, applications requiring a high level of security, such as banking services, and digital platforms.
In the area of payment services, the authorities are focusing on further development so that the benefits of innovation and the opportunities created by digitalisation can be exploited. The aim is to create a payment system that is more accessible, faster, offers cross-border solutions and preserves consumer protection at all times.
There is still a debate on whether and under what conditions it makes sense to issue a Digital Euro (there has been a lot of discussion about possible design options this year). The same sorts of debates are also taking place in many other jurisdictions across the world.

1.3.5. Other regulations: Anti-money laundering and countering the financing of terrorism (AML/FT)
In July 2021, the European Commission published a proposal for an Anti-Money Laundering and Countering the Financing of Terrorism (AML/FT) regulatory package that aims to strengthen existing EU rules, improve the detection of suspicious transactions and activities, and close loopholes in the current regulatory framework. It consists of four legislative proposals:
1.Regulation establishing a new European AML/FT Authority that will coordinate national AML/FT authorities and directly supervise certain financial sector institutions. The Authority is expected to become operational in 2024 and to start its supervisory activities in 2026.
2.AML/FT Regulation. Parts of the current Directive will be transferred to this Regulation, which will be directly applicable in all Member States without the need for local transposition. This will harmonise EU requirements in areas such as customer due diligence, among others. Expected to be implemented by the end of 2025.
3.Sixth AML/FT Directive, which will repeal the current Directive. It contains provisions that must be transposed into national law, in particular on national supervisory authorities and Financial Intelligence Units (FIUs).
4.Recast of the Regulation on Transfers of Funds, with a particular focus on the tracking of transfers of crypto-assets. This revision introduces new requirements in relation to Virtual Asset Service Providers (VASPs) by requiring these actors to collect and make available data on the originators and beneficiaries of the transfers of virtual or crypto assets they operate.
The European Parliament and the Council are now debating this package, and the legislative procedure is estimated to take about two years.
1.4. Scope of consolidation
This section covers the qualitative requirements LIA - Explanations of differences between accounting and regulatory exposure amounts and LIB - Other qualitative information on the scope of application.
The Group companies included in the scope of consolidation for calculating the capital adequacy ratio under the CRR are the same as those included in the scope of consolidation for accounting purposes under Banco de España Circular 2/2018.
1.4.1. Differences between the accounting consolidation method and the consolidation method for calculating regulatory capital
In application of Part I (General Provisions) of the CRR, some Santander companies are consolidated using a different methods for accounting consolidation.
For the purposes of calculating the capital adequacy ratio based on the nature of their business activities, the Group companies included in the prudential scope of consolidation are consolidated using the full consolidation method, with the exception of jointly controlled entities, which use proportionate consolidation. All companies that cannot be
18

INTRODUCTION 2021 Pillar 3 Disclosures Report

consolidated based on their business activities are accounted for using the equity method and so are treated as equity exposures.
The basis of the information used for accounting purposes differs from that used for calculating regulatory capital requirements. Risk exposure measurements may differ depending on the purpose for which they are calculated, such as financial reporting, regulatory capital reporting and management information. The exposure data included in the quantitative disclosures in this document are used for calculating regulatory capital or leverage ratio.
The companies for which different consolidation methods are used, depending on the regulations applied (table LI3), are listed in Appendix V of the 2021 Pillar 3 Report file available on the Santander website.
pillar3disclosurereporten.jpg
Access 2021 Pillar 3 Disclosures Report available on the Santander Group website
19
image89.jpg
2021 Pillar 3 Disclosures Report

INTRODUCTION 2021 Pillar 3 Disclosures Report

The following table shows the relationship between the categories in the financial statements and the risk categories in accordance with prudential requirements.
Table 1.LI1 - Differences between accounting and regulatory scopes of consolidation and mapping of financial statement categories with regulatory risk categories
EUR million
2021
Carrying values as reported in published financial statementsCarrying values under scope of regulatory consolidationCarrying values of items:
Subject to credit risk frameworkSubject to the CCR framework Subject to securitisation frameworkSubject to market risk frameworkNot subject to capital requirements or subject to deduction from capital
Assets
Cash and cash balances at central banks210,689211,095211,095
Financial assets held for trading116,953116,92371,26473116,850
Non-trading financial assets mandatorily measured at fair value through profit or loss5,5363,4837527601,971
Financial assets not held for trading valued mandatorily at fair value through profit or loss15,95713,7905,48913,790
Financial assets designated at fair value through profit or loss108,03895,24680,80314,443
Financial assets at amortised cost1,037,8981,042,2271,005,83232,6373,67782
Derivatives - Hedge accounting4,7614,7704,770
Fair value changes of the hedged items in portfolio hedge of interest rate risk410410410
Investments in subsidiaries, joint ventures and associates7,5258,4928,492
Reinsurance assets283
Tangible assets33,32131,07331,073
Intangible assets16,58416,8191,76615,052
Tax assets25,19625,21023,9541,256
Other assets8,5978,8426,8701,972
Non-current assets and disposal groups classified as held for sale4,0894,3054,305
Total assets1,595,8371,582,6851,366,450114,16118,953132,61027,264
Liabilities
Financial liabilities held for trading(79,469)(79,508)(67,272)(79,508)
Financial liabilities designated at fair value through profit or loss(32,733)(15,305)(390)(15,305)
Financial liabilities measured at amortised cost(1,349,169)(1,354,296)(1,354,296)
Derivatives - Hedge accounting(5,463)(5,457)(5,457)
Fair value changes of the hedged items in portfolio hedge of interest rate risk(248)(248)
Liabilities under insurance contracts(770)
Provisions(9,583)(9,595)(733)(8,862)
Tax liabilities(8,649)(8,576)(8,576)
Other liabilities(12,700)(12,669)(12,669)
Total liabilities(1,498,784)(1,485,654)(733)(73,119)(94,813)(1,384,403)
20

INTRODUCTION 2021 Pillar 3 Disclosures Report

The difference in total assets between the public and the reserved scopes is not material and corresponds to the exclusion of financial institutions and the inclusion of jointly controlled and intra group entities.
In addition, the sum of the carrying amounts of certain items is greater than the carrying amounts under the scope of prudential consolidation, as the financial assets held for trading and the financial assets at fair value through profit or loss are subject to the capital requirements of more than one risk category under the regulatory scope.
The main differences between the carrying amounts in the financial statements and the exposures for prudential purposes are shown below:
Table 2.LI2 - Main sources of differences between regulatory exposure amounts and carrying values in financial statements
EUR million
2021
TotalItems subject to:
Credit risk frameworkCCR frameworkSecuritisation frameworkMarket risk framework
Asset carrying value amount under scope of regulatory consolidation (as per template EU LI1)1,632,1741,366,450114,16118,953132,610
Liabilities carrying value amount under regulatory scope of consolidation (as per template EU LI1)(168,665)(733)(73,119)(94,813)
Total net amount under regulatory scope of consolidation1,463,5091,365,71741,04218,95337,797
Off-balance sheet amounts331,030331,030
Regulatory Add-on31,97531,975
Differences in valuations
Differences due to different netting rules, other than those already included in row 2(42,626)(4,828)(37,797)
Non-eligibility of the balances corresponding to accounting hedges (derivatives)(4,770)(4,770)
Securitisations with risk transfer28,32132,874(4,553)
Other(17,006)(50,745)33,739
Differences due to consideration of provisions(14,601)(14,389)(212)
Differences due to CRMs(32,629)(16,442)(15,592)(595)
Differences due to CCFs(235,233)(235,233)
Exposure amounts considered for regulatory purposes (EAD)1,508,1281,412,81247,82747,489

This table shows a breakdown of the differences between the amounts of exposures for prudential purposes and the carrying amounts according to various parameters
The main causes in this case, result from the amount of off-balance sheet items +EUR 331.030 billion) and the application of CCFs (-EUR 235.233 billion). The regulatory add-on (+EUR 31.975 billion and the differences resulting from the various offsetting rules (-EUR 42.626 billion).
The reconciliation of the public and non-public balance sheets (table CC2) is shown in Appendix VI, which is available on the Santander website.
pillar3disclosurereporten.jpg
Access 2021 Pillar 3 Disclosures Report available on the Santander Group website
1.4.2. Substantial amendments due to a change in the perimeter and corporate transactions
For more information on the main acquisitions and disposals of holdings in other companies and other major corporate transactions by Santander last year, refer to section 3 of the Notes to the consolidated financial statements in the Audit Report section of the 2021 Annual Report.
annualreporten.jpg
Access 2021 Annual Report available on the Santander Group website



21
image89.jpg
2021 Pillar 3 Disclosures Report

INTRODUCTION 2021 Pillar 3 Disclosures Report













































ñ´lkjh
22


a02capitala.jpg



a02capitalnmeroa.jpg
Capital
2.1. Capital
2.2. Capital function
2.2.1. Organisation
2.2.2. Capital governance
2.3. Capital management and adequacy. Solvency ratios
2.3.1. Profitability
2.3.2. Pricing
2.3.3. Other activities in capital management
2.4. Pillar 1 - Regulatory capital
2.4.1. Eligible capital
2.4.2. Capital requirements
2.4.2.1. Plan to deploy advanced internal models and supervisory approval
2.4.3. Capital buffers and capital requirements
2.4.4. Leverage ratio
2.5. Economic capital and RoRAC - Pillar II
2.6. Capital planning and stress tests
2.7. Total Loss-Absorbing Capacity (TLAC) and Minimum Requirement for own funds and Eligible Liabilities (MREL)
2.8. Lines of defence
2.8.1. Second line of defense
2.8.2. Internal Audit
2.9. Corporate Special Situations and Resolution Framework, crisis management, Recovery and Resolution Planningk


CAPITAL 2021 Pillar 3 Disclosures Report
2. Capital
a00cuadrorojo2a.jpg


Fully-loaded CET1 ratio
chart-4e2aa3bcb4c24ab2b10.jpg
Regulatory CET1 ratio (Phased-in)4
11.65 %12.34 %12.51 %

Focus ahead will remain on disciplined capital allocation and shareholder
remuneration while we maintain our fully-loaded CET1 target
between 11% and 12%.
At December 31, 2021, the fully-loaded CET1 ratio (without applying the IFRS 9 or CRR transitional arrangements) stood at 12.12% and the phased-in CET1 ratio was 12.51%. Only applying the IFRS 9 transitional arrangements (CRR fully-loaded), the ratio remains at 12.51%. The following table shows shows the impact of the CRR transitional arrangements under a IFRS 9 phased-in scenario:
Table 3.Main capital figures and capital adequacy ratios (Phased-in IFRS 9).
EUR million
 Fully-loaded CRRPhased-in CRR
Dec'21Sep'21Jun'21Mar'21Dec'20Dec'21Sep'21Jun'21Mar'21Dec'20
Common Equity (CET1)72,40270,78770,86469,62769,39972,40270,78770,86469,62769,399
Tier 182,13380,58579,66178,41778,12682,45280,89779,97378,73178,501
Total capital97,01393,24092,27091,46690,93397,31793,53792,53991,55091,015
Risk weighted assets578,930577,209584,999567,797562,580578,930577,209584,999567,797562,580
CET1 Ratio12.51 %12.26 %12.11 %12.26 %12.34 %12.51 %12.26 %12.11 %12.26 %12.34 %
Tier 1 Ratio14.19 %13.96 %13.62 %13.81 %13.89 %14.24 %14.02 %13.67 %13.87 %13.95 %
Total capital ratio16.76 %16.15 %15.77 %16.11 %16.16 %16.81 %16.20 %15.82 %16.12 %16.18 %
Leverage Ratio5.35 %5.29 %5.25 %5.06 %5.31 %5.37 %5.31 %5.27 %5.08 %5.33 %
2020 and 2021 figures are calculated applying the transitional arrangements of IFRS 9 unless specified otherwise (Phased-in IFRS 9).
In March and June 2021 a pay-out of 50% was applied, from September onwards 20% cash was applied depending on the dividend in cash and the first authorized repurchase.
2.1. Capital
Capital management and control at the Group is a fully transversal process that seeks to guarantee the bank's capital adequacy, while complying with regulatory requirements and maximising profitability.
It is determined by the strategic objectives and risk appetite set by the board of directors. To achieve this, the following
policies have been established that shape the approach that the Group applies to capital management:
Establish adequate capital planning, so as to meet current needs and provide the necessary resources to meet the needs of the business plans, regulatory requirements and the associated risks in the short and medium term, while maintaining the risk profile approved by the board.
4 The phased-in ratios include the transitory treatment of IFRS 9, calculated in accordance with article 473 bis of the Regulation on Capital Requirements (CRR) and subsequent amendments introduced by Regulation 2020/873 of the European Union. Additionally, the Tier 1 and total phased-in capital ratios include the transitory treatment according to chapter 2, title 1, part 10 of the aforementioned CRR.
25
image89.jpg
2021 Pillar 3 Disclosures Report

CAPITAL 2021 Pillar 3 Disclosures Report
Ensure that Santander and its companies have adequate capital to cover needs resulting from increased risks due to deteriorating macroeconomic conditions under stress scenarios.
Optimise capital use through its appropriate allocation among the businesses, based on the relative return on regulatory and economic capital and taking risk appetite, growth and strategic objectives into account.
Santander maintains a very comfortable capital adequacy position, well above the levels required by applicable regulations and by the European Central Bank.
IFRS 9 became effective on 1 January 2018, implying changes in accounting that affect capital ratios. Santander decided to apply the transitional arrangements, which means a seven-year transitional period.
Had the IFRS9 or CRR transitional arrangements not been applied, the total impact on the fully-loaded CET1 ratio at December would have been -39bps.
Phased-in CET1 stood at 12.51% in December, increasing by 17 bps during the year.
For further detail see the comparison of institutions’ own funds and capital and leverage ratios with and without the application of transitional arrangements for IFRS 9 or analogous ECLs (IFRS 9-FL), Appendix VIII (NIIF9).
pillar3disclosurereporten.jpg
Access 2021 Pillar 3 Disclosures Report available on the Santander Group website
For further information on capital key metrics see Appendix VII (KM1 requirement).
pillar3disclosurereporten.jpg
Access 2021 Pillar 3 Disclosures Report available on the Santander Group website

Changes in main Capital ratios (Phased-in IFRS9)
chart-83274a8e34ea44bf926.jpg
nT2
nAT1
nCET1
nTier 1
nTotal capital ratio
2021 CET1 evolution (Phased-in IFRS9)
%
+17bps
chart-2c72ea79e33a467290a.jpg
*Includes Accrued shareholders remuneration

26
image89.jpg
2021 Pillar 3 Disclosures Report

CAPITAL 2021 Pillar 3 Disclosures Report
There was 120 basis points of organic capital growth in the year (including the negative impact from shareholder remuneration), supported by the results obtained in the year and the management of risk weighted assets. This figure includes a negative impact of 45 basis points related to shareholder remuneration. This strong generation was partially offset by regulatory and model impacts, the negative market impacts on available for sale portfolios and non-recurring impacts (acquisition of minority interest in Mexico and restructuring costs).
If we include the acquisition of SC USA minority interests, which closed on 31 January 2022, and the announced acquisition of Amherst Pierpont, which is pending to completion, the CET1 ratio would be 12.35% (instead of 12.51%).
The phased-in leverage ratio was 5.37%.
¤For more information, see section 2.4.3.
2.2. Capital function
The core principles establish the basic guidelines governing the actions of Santander entities in capital management, monitoring and control processes.

2.2.1. Organisation
The organisational structure has been defined with the aim of guaranteeing compliance with the core principles in relation to capital and ensuring that the relationship between the subsidiaries and the corporate centre is maintained. This function allows twin objectives to be met: comply with the subsidiary’s financial autonomy while at the same time retaining coordinated monitoring at group level.
2.2.2. Capital governance
Santander has developed a structure of agile and efficient governing bodies, ensuring the Capital function operates properly when it comes to both decision-making and supervision and control. This ensures the involvement of all the areas concerned and the necessary involvement of senior management.
The Group's characteristic subsidiary-based structure has a strong capital governance where there are various committees that have responsibilities at regional level and also for coordination at group level. The local committees must report to the corporate committees in due time and proper form on any relevant aspects of their activity that may affect capital, to ensure proper coordination between the subsidiaries and the corporate centre.

a01gobiernoa.jpg

27
image89.jpg
2021 Pillar 3 Disclosures Report

CAPITAL 2021 Pillar 3 Disclosures Report
2.2.3. Capital targets
Focus ahead will remain on disciplined capital allocation and shareholder remuneration while we maintain our fully-loaded CET1 target between 11%-12%.
Fully-loaded CET1 ratio
chart-647b6e307cce4ef2a0d.jpg
Regulatory CET1 ratio (Phased-in)
11.65 %12.34 %12.51 %
The continuous improvement in the capital ratios reflects our profitable growth strategy and a culture of active capital management at all levels of the organization.
In order to have a more global vision and simplify our structure, we created a new team, ‘Capital and Profitability Management’, in charge of our capital analysis, adequacy and management, coordination with subsidiaries in all matters related to capital and monitoring and measuring returns.
All the countries and business units have drawn up individual capital plans focused on achieving a business that maximizes the return on equity.
Santander gives a significant weight to capital and incentives. Certain aspects relating to capital management and returns are taken into account when setting the variable remuneration payable to members of senior management:
The relevant metrics include our CET1 ratio, the county units' capital contributions to the Group ratio, the return on tangible equity (RoTE) and profit after tax.
The qualitative aspects considered include the proper management of regulatory changes affecting capital, effective management of capital relating to business decisions, sustainable capital generation over time and effective capital allocation.
Action plans
In addition, we have developed a three-year action plan for the continuous improvement of infrastructures, processes and methodologies that support all aspects related to capital,
with the aim of further enhancing active capital management, responding more quickly to the numerous and increasing regulatory requirements and efficiently carrying out all associated activities.
We continue to improve our processes and controls associated with capital data quality. Additionally, we continuously develop risk management initiatives at both the consolidated and local levels to strengthen and fine-tune different activities.
2.3. Capital management and adequacy. Solvency ratios
The aim of capital management and adequacy at the Group is to guarantee solvency and maximise its profitability, while complying with internal capital targets and regulatory requirements.
Capital management is a key strategic tool for decision-making at both the local and corporate levels.
At the Group there is a common framework of action, criteria, policies, functions, metrics and processes for capital management.
The Group's most notable capital management activities are:
Establishing capital adequacy and capital contribution targets aligned with minimum regulatory requirements and internal policies, to guarantee robust capital levels consistent with our risk profile and efficient use of capital to maximise shareholder value.
Developing a capital plan to meet those objectives consistently with the strategic plan. Capital planning is an essential part of executing the three-year strategic plan.
Assessing capital adequacy to ensure that the capital plan is also consistent with our risk profile and risk appetite framework in stress scenarios.
Developing the annual capital budget as part of the group's budgeting process.
Monitoring and controlling the group's and countries' budget execution and drawing up action plans to correct any deviations from the budget.
Integrating capital metrics into business management to ensure consistency with group objectives.
Preparing internal capital reports, and reports for the supervisory authorities and the market.
Planning and managing other loss absorbing instruments (MREL and TLAC).
The Group's capital function is carried out on three levels:
28
image89.jpg
2021 Pillar 3 Disclosures Report

CAPITAL 2021 Pillar 3 Disclosures Report
Regulatory capital
The first step in managing regulatory capital is to analyse the capital base, the capital adequacy ratios under the current regulatory criteria and the scenarios used in capital planning in order to make the capital structure as efficient as possible, both in terms of cost and compliance with regulatory requirements. Active capital management includes strategies for capital allocation and its efficient usage, together with securitisations, asset sales and issuances of equity instruments (hybrid equity instruments and subordinated debt).
Economic capital
The objective of the economic capital model is to ensure that we adequately allocate our capital to cover all the risks to which we are exposed as a result of our activity and risk appetite. It also aims to optimise value creation in the Group and all of the business units.
Profitability and pricing
Creating value and maximizing profitability is one of Santander's main objectives, carefully selecting the most appropriate markets and portfolios based on profitability, taking into account risk. Profitability and pricing are therefore integral parts of the key capital model processes.
Disciplined capital allocation, prioritizing organic growth and shareholder remuneration, always present in our capital management.

2.3.1. Profitability
One of the main priorities in the Group is capital management, ensuring a profitable capital adequacy in all our activities.
Our strategy includes allocating capital in those markets and portfolios showing the best capital returns, ensuring a strong value creation for shareholders in a sustainable manner.
Identifying and managing underperforming businesses is part of this process, where we hope to optimize Group's capital, targeting customers, portfolios and markets with an interesting capital return, being dynamic, monitoring it actively.
We must encourage the Group's business development within capital and profitability targets through adequate and efficient capital allocation. Our strength is our business model, diversified in businesses and geographically, with solid results, based on risk-adjusted profitability, metrics such as RoTE, RoRWA and RoRAC are part of our admission and monitoring policies.
The combination with a correct pricing adjusted to the risk taken with maintaining a medium-low risk profile is the key to success, having in every moment (including stress scenarios) the needed capital to undertake our corporate strategy.








29
image89.jpg
2021 Pillar 3 Disclosures Report

CAPITAL 2021 Pillar 3 Disclosures Report
Disciplined capital allocation
A disciplined execution of our capital allocation strategy...

a02disciplinedcapitalalloca.jpg

leads to growth, profitability and strength.

growtha.jpg
profitabilitya.jpg
balancea.jpg
GROWTHPROFITABILITYBALANCE SHEET STRENGTH
Focused on business that generate high RoTE and high capital generation, along with meaningful potential for growth.Focused on maintaining high and sustainable levels through scale in the markets in which we operate, leading to efficiency, and allowing us to provide value to our customers and high returns to our shareholders.After years of regulatory capital accumulation, we are focused on maintaining capital levels around 11%-12% on a fully-loaded basis.
ESG embedded in everything we do
2.3.2. Pricing
Santander's core objectives include creating value and maximising profitability. Therefore, pricing and profitability are among the capital model's key processes.
Pricing is an objective process for determining the right price based on the characteristics of the transaction, product, borrower, segment and market. The process must make sure the price is not below a minimum threshold for, at least, covering funding, operating, credit and capital costs, plus a margin that factors in the sensitivity of demand to price and value generation. Therefore, the pricing process should aim to maximise profitability by creating value on every transaction, customer and/or portfolio and ensuring that minimum return on capital targets are achieved.
The main components and responsibilities of the pricing process are:

30
image89.jpg
2021 Pillar 3 Disclosures Report

CAPITAL 2021 Pillar 3 Disclosures Report
ABC
Determining the minimum price
Integrating pricing into the approval process
Monitoring of prices and profitability
The finance function sets the criteria for establishing cost of capital and determining minimum profitability thresholds, ensuring that at least capital, funding, operating and credit costs are covered. The financial management function sets the criteria for establishing cost of funding and the management control function allocates operating costs and passes on financing costs to the businesses. The risk function sets the criteria for measuring expected loss and estimates the parameters used to calculate it.
The business function is ultimately responsible for the transaction approval process, while the risk function is involved in authorising transactions based on each committee's rules and regulations and the governance of authority, and incorporates profitability metrics and minimum thresholds into the approval process.
The financial and risk functions are the main functions charged with monitoring trends in profitability using appropriate risk-adjusted profitability metrics and presenting them to the relevant governing bodies. Together with the financial function, the risk function is also responsible for duly recording, controlling and monitoring transactions approved under the defined minimum threshold. The management control function monitors the degree of compliance with the budgeted profitability of each portfolio.
The capital committee tracks return on capital metrics, the ALCO monitors the status of origination, and the executive risk committee (ERC) ensures that all transactions and customers/portfolios have the appropriate risk profile and create value in line with the agreed-upon return on capital targets. The ERC must also approve the internal models plan and approve the Group's main models, while the model approval forum (MAF) reviews and authorises the models used in the Group's capital management.
To execute this process correctly, Santander has a granular approval process for the SCIB and corporates segments with tools for calculating regulatory and economic return on capital (RoRWA and RoRAC) and determining the appropriate price. For retail segments, granular approval processes using risk-adjusted approval tools are already in place in many cases or are currently being developed. The approval and pricing processes consider the unit's minimum profitability threshold for creating value above cost of capital. Cost of capital is reviewed at least annually and approved by the capital committee. Implementation of a common granular tool for monitoring return on capital among units is now in the advanced stage. Once implemented, it will make it easier to assess profitability, determine whether pricing is commensurate with the level of risk considering the main related costs, and help recommend possible action plans.
Approval tools are used to identify and justify any new loans granted at a price below the minimum threshold. Monitoring tools are used to identify transactions whose profitability is below cost of capital and destroys value, and those for which it must apply measures to raise profitability and deliver on targets. The approval and profitability monitoring processes both have robust approval and review governance for ensuring that the minimum threshold is integrated correctly. An appropriate escalation process is in place for authorising transactions and those approved below the minimum threshold are monitored closely.
In 2022-2023, we will continue with our three-year strategy on resources allocation efficiently, competing where we can achieve the best returns.
With all this, Santander is in an optimal position to ensure appropriate pricing and maximise profitability. It also complies with regulatory requirements, especially the EBA guidelines on loan origination and monitoring published in May 2020 and effective from June 2021, which set out
supervisory expectations regarding the need for risk-based pricing of loans, covering the main costs and ensuring that institutions apply an overall framework in their pricing. These EBA guidelines state that, in pricing, institutions should consider the relevant costs (mainly cost of capital, credit risk costs, cost of funding, and operating and administrative costs), that risk-adjusted indicators should be used as performance measures (e.g. EVA, RoRWA, RoRAC, RoTA), that ex ante transaction tools and regular ex post monitoring should be implemented, and that all material transactions below costs should be reported and properly justified.
The guidelines note that pricing frameworks should be well documented and supported by appropriate governance structures that are responsible for the maintenance of the overall pricing framework and for individual pricing decisions when relevant. In December 2020, the capital committee approved a corporate pricing policy, which sets out the general criteria and describes the main stages for pricing. It also outlines the core components, focusing on the minimum threshold, the need to integrate pricing in approval using ex ante tools and the relevance of defining robust governance and monitoring of recurring profitability. All Group units transposed this corporate policy in 2021, after validation by the corporate teams, to ensure uniformity in interpretation and local implementation. Meanwhile, the risk function drew up and approved three pricing procedures in 2021
SCIB
Corporates
Pooled or personalised treatment
These procedures implement the processes described in the corporate pricing policy, further specifying and allocating the required roles and responsibilities, and governance. These pricing procedures are now being transposed by the units and will also be subject to prior validation by the corporate teams.
2.3.3. Other activities in capital management
Details of the most significant actions undertaken over the year are set out below:
Issues of hybrid capital and other loss absorbing instruments
In 2021, Banco Santander, S.A. issued EUR 4,464 million in hybrid instruments. This comprised EUR 1,852 million in T2 subordinated debt and EUR 2,612 million in contingently convertible preferred shares (CoCos). Part of these CoCos
31
image89.jpg
2021 Pillar 3 Disclosures Report

CAPITAL 2021 Pillar 3 Disclosures Report
were intended to replace the early amortization of a EUR 1,500 million issuance called in September 2021.
Banco Santander, S.A. also issued EUR 7,934 million in senior non-preferred debt.
For further details on main features of regulatory own funds instruments and eligible liabilities instruments (table CCA), see Appendix IX available on the Group's website.
pillar3disclosurereporten.jpg
Access 2021 Pillar 3 Disclosures Report available on the Santander Group website
Dividend policy
On 28 September 2021, the board announced its 2021 shareholder remuneration policy to pay out an interim distribution of approximately 40% of the Group's underlying profit (half through a cash dividend and half through a shares buyback).
Interim remuneration. Accordingly, it authorized the payment of an interim dividend of EUR 4.85 cents per share (i.e. 20% of the Group's underlying profit for H1'21), in cash and charged against 2021 profits; it was paid on 2 November 2021. The board also voted to launch the First Buyback Programme worth EUR 841 million (20% of the
Group's underlying profit for H1'21) once the ECB approved it on 28 September 2021. The number of shares acquired (259,930,273 shares) makes up approximately 1.499% of our share capital.
Final remuneration. The board of directors voted to submit a resolution at the 2022 AGM for the approval of a complementary cash dividend of EUR 5.15 cents per share (gross), equalling an approximate total of EUR 865 million; and a Second Buyback Programme for EUR 865 million, to be approved by the ECB.
Finally,in some geographies where the ECB is not home supervisor, local regulators have recommended limiting dividend payments in 2021. Santander México followed the CNBV's recommendation and distributed only 25% of annual profits, and the subsidiary in Poland distributed 30% because of restrictions imposed by the KNF due to mortgages in foreign currency. The other subsidiaries were able to distribute their dividends without any constraints.
Described at greater length in the "Corporate governance" chapter, "Dividends" section.
annualreporten.jpg
Access 2021 Annual Report available on the Santander Group website

comillas1a.jpg
The updated remuneration policy reflects our confidence that
investing in our shares at this valuation offers an attractive
opportunity to generate value for our shareholders. This reflects
the very strong performance we have seen in our businesses during 2021.
comillas2a.jpg
Ana Botín
Executive Chairman Banco Santander
2.4. Pillar 1 - Regulatory capital
The current regulatory framework for calculating capital is based on three pillars:
Pillar 1 sets the minimum capital requirements for credit risk, market risk and operational risk, allowing internal ratings and models to be used. The aim is to make regulatory requirements more sensitive to the risks actually incurred by financial institutions in their business activities.
Pillar 2 establishes a system of supervisory review, aimed at improving banks' internal risk management and capital adequacy assessment in line with their risk profile.
Pillar 3 is intended to enhance market discipline by developing a set of disclosure requirements that enable market agents to appraise key information relating to the application of Basel II: capital, risk exposures, risk assessment processes and, by extension, the bank's capital adequacy.
32
image89.jpg
2021 Pillar 3 Disclosures Report

CAPITAL 2021 Pillar 3 Disclosures Report
2.4.1. Eligible capital
Equity at 31 December 2021 stood at €97,053 million, up €5,731 million from the year before.
The reconciliation between equity and capital eligible as Tier 1 is set out below:
Table 4.Reconciliation of accounting capital with regulatory capital
EUR million
20212020
Subscribed capital8,670 8,670 
Share premium account47,979 52,013 
Reserves56,606 62,777 
Treasury shares(894)(69)
Attributable profit8,124 (8,771)
Approved dividend(836)— 
Shareholders' equity on public balance sheet119,649 114,620 
Valuation adjustments(32,719)(33,144)
Non-controlling interests10,123 9,846 
Total equity on public balance sheet97,053 91,322 
Goodwill and intangible assets(16,132)(15,711)
Eligible preference shares and participating securities10,050 9,102 
Accrued dividend(895)(478)
Other adjustments(7,624)(5,734)
Tier 1 (Phased-in)82,452 78,501 
CRR Phased-in, IFRS 9 Phased-in.

The following table provides a breakdown of the Group’s eligible capital and a comparison with the previous year:
Table 5.Eligible capital
EUR million
20212020
Eligible capital
Common Equity Tier 1 (CET1)72,40269,399
Capital8,6708,670
(-) Treasury shares and own shares financed(966)(126)
Share premium47,97952,013
Reserves58,15764,766
Other retained earnings(34,784)(34,937)
Minority interests6,7366,669
Attributable profit net of dividends6,394(9,249)
Deductions(19,784)(18,407)
Goodwill and intangible assets(16,064)(15,711)
Others(3,720)(2,696)
Aditional Tier 1 (AT1)10,0509,102
Eligible instruments AT110,1028,854
T1 excesses - subsidiaries(52)248
Residual value of intangibles
Deductions
Tier 2 (T2)14,86512,514
Eligible instruments T215,42413,351
Gen. funds and surplus loan loss prov. IRB75
T2 excesses - subsidiaries(634)(837)
Others
Total eligible capital97,31791,015
CRR Phased-in, IFRS 9 Phased-in.
Common equity Tier 1 capital (CET1) comprises the elements of Tier 1 capital (after applying prudential filters) and CET1 deductions after applying the threshold exemptions specified in the CRR.

33
image89.jpg
2021 Pillar 3 Disclosures Report

CAPITAL 2021 Pillar 3 Disclosures Report
CET1 consists of:
Subscribed share capital, which stood at €8,670 million in December 2021.
Other tier 1 capital items: (i) paid-up share premiums; (ii) effective and disclosed reserves generated against profits and amounts that are not taken to the income statement but are recorded under “Other reserves” (any item); (iii) other retained earnings, including certain valuation adjustments, primarily for exchange differences and for hedges of net investments in foreign operations.
The paid-up portion of any non-controlling interests arising from the issue of ordinary shares by consolidated subsidiaries, subject to the limits set in the CRR.
The Group's attributable net of dividends, which was €6,394 million in December 2021.
The prudential filters exclude any positive or negative valuation adjustments from cash flow hedges. They also exclude gains or losses on liabilities and derivative liabilities measured at fair value resulting from changes in the institution’s own credit quality. The prudential filters include the additional valuation adjustments applied pursuant to article 34 of the CRR.
Deductions from CET1 items mainly include: treasury shares; current-year losses; goodwill and other intangible assets recognised in the balance sheet; deferred tax assets that rely on future earnings (subject to the limits set in the CRR); the valuation adjustments due to prudent valuation requirements; and defined benefit pension fund assets shown on the balance sheet.
In addition to the movements in net book equity, for changes in regulatory capital, the undistributed dividend for 2021 was considered to be €895 million, so the net attributable profit net of dividends calculated is €6,394 million.
Table 6.Regulatory capital. Changes
EUR million
2021
Common Equity Tier 1 (CET1)
Starting figure (31/12/2020)69,399
Shares issued during the year and share premium account(4,034)
Treasury shares and own shares financed(840)
Reserves2,640
Attributable profit net of dividends6,394
Other retained earnings152
Minority interests67
Decrease/(increase) in goodwill and other intangibles(353)
Other deductions(1,023)
Ending figure (31/12/2021)72,402
Additional Tier 1 (AT1)
Starting figure (31/12/2020)9,102
Eligible instruments AT11,248
T1 excesses - subsidiaries(299)
Residual value of intangibles
Deductions
Ending figure (31/12/2021)10,050
Tier 2 (T2)
Starting figure (31/12/2020)12,514
Eligible instruments T22,073
Gen. funds and surplus loan loss prov. IRB75
T2 excesses - subsidiaries203
Deductions
Ending figure (31/12/2021)14,865
Deductions from total capital
Final figure for total capital (31/12/2021)97,317
CRR Phased-in, IFRS 9 Phased-in.
Eligible capital over time
6.92%
chart-6c4bf6bb209149a6924.jpg

34
image89.jpg
2021 Pillar 3 Disclosures Report

CAPITAL 2021 Pillar 3 Disclosures Report
Tier 1 capital comprises CET1 capital plus Additional Tier 1 capital (AT1) including preferred securities issued by Santander.
Tier 2 capital comprises Tier 1 capital plus Tier 2 capital (T2) and includes, among other items, equity instruments and subordinated loans where the conditions laid down in the CRR are met.
This regulation provides for a phase-in period that will give institutions time to adapt to the new requirements in the European Union. This phase-in applies to the Group under Regulation (EU) 2016/445 of the European Central Bank on the exercise of options and national discretions, published on 14 March 2016.
The movement of issued shares and issue premiums is mainly due to the agreement approved at the General Shareholders' Meeting to allocate part of the results obtained during the 2021 financial year to the share premium reserve account, involving losses of €3,557 million.
Similarly, the change included in deductions and prudential filters was increased as a result of an increase in the assets of defined benefit pension funds and of the modifications introduced by Regulation 2019/630 of the European Parliament and of the Council that modifies the Capital Requirements Regulation (CRR).
The increase in Tier 1 capital is mainly explained by the issues made in the period. Banco Santander, S.A. launched a preference issue for €1,750 million and $1,000 million applicable to Tier 1 capital.
The increase in Tier 2 capital is mainly due to the recognition of subordinated debt issues by Banco Santander, S.A. amounting to £850 million and $1,000 million.
For further detail on regulatory own funds (Table CC1) see Appendix X.
pillar3disclosurereporten.jpg
Access 2021 Pillar 3 Disclosures Report available on the Santander Group website
2.4.2. Capital requirements
Capital requirements have barely changed from 2020, maintaining a Pillar I risk distribution similar to that of the prior year: credit risk 87%, market risk 3% and operational risk 10%.
The risk weighted assets for credit risk increased by 2.91% up to 578,930. This is due to the fact that credit risk increases 7,644 million euros impacted by the New default definition, counterparty credit risk increases mainly due to SA-CCR, 5,435 million euros, operational risk increases 2,921 million euros, compensated partially by a decrease of 759 million euros in market risk.
RWA Evolution
2.91%
chart-a2999701f9ca4482af5.jpg

Distribution of capital requirements by risk type and geography
2021
chart-8dc733099409400694f.jpg  chart-af0520e804324b71b92.jpg  chart-836832020e254c57813.jpg
nSpain
nUK
nRest of Europe
nUSA
nRest of North America
nBrazil
nRest of South America
nOthers
40,23351,3784,703
Million euros
Million euros
Million euros
5 It includes counterparty credit risk and securitisations without 1250% deduction.
35
image89.jpg
2021 Pillar 3 Disclosures Report

CAPITAL 2021 Pillar 3 Disclosures Report
Below is a general evolution of RWAs by risk, and then also by geography:
Table 7.OV1 - Overview of risk weighted exposure amounts
EUR million
RWAMinimum Capital Requirements
Dec'21Sep'21Dec'20Dec'21
Credit risk (excluding CCR)*477,977479,618470,33338,238Chapter 4. Credit Risk
Of which, standardised approach (SA)262,869267,589259,36221,029
Of which, the foundation IRB (FIRB) approach9,4837,7998,841759
Of which, slotting approach**14,67214,62114,5291,174
Of which, equities under the simple risk weighted approach2,2192,2822,750178
Of which, the advanced IRB (AIRB) approach173,956170,622168,09613,916
Counterparty credit risk - CCR 15,67414,79810,2391,254
Chapter 5. Counterparty Credit Risk
Of which, the standardised approach***13,63912,8679,2781,091
Of which, internal model method (IMM)
Of which, exposures to a CCP26827024121
Of which, credit valuation adjustment - CVA1,7671,662720141
Of which, other CCR
Settlement risk11
Securitisation exposures in the banking book (after the cap) 11,1519,1829,751892Chapter 6. Credit Risk - Securitisations
Of which, SEC-IRBA approach5,2264,1804,731418
Of which, SEC-ERBA approach1,3661,2831,607109
Of which, SEC-SA approach****2,6762,3441,821214
Of which, 1250%/ deduction1,8831,3741,592151
Position, foreign exchange and commodities risks (Market risk)17,22419,08817,9831,378
Chapter 7. Market Risk
Of which, standardised approach6,8446,3885,047547
Of which, IMA10,38012,70012,936830
Large exposures
Operational risk58,78655,89655,8654,703
Chapter 8. Operational Risk
Of which, basic indicator approach
Of which, standardised approach58,78655,89655,8654,703
Of which advanced measurement approach
Amounts below the thresholds for deduction (subject to 250% risk weight)21,03224,29522,3821,683
Total*****578,930578,583562,58046,314
CRR Phased-in, IFRS9 Phased-in.
*It includes equities under the PD/LGD approach.
** Correction from the mapping to {C 08.01, r0020, c0260, s0010} + {C 08.01, r0030, c0260, s0010}.
***Correction from the mapping to {C 34.02, r0030, c0200, s0002} - RWEA pertaining to exposures to CCPs that are not QCCPs .
****Correction from the mapping to the one appearing in tables SEC3+SEC4.
***** Correction from the mapping, 1250% deductions are not included in the total.
At 31 December 2021, the Group had no additional capital requirements arising from the floors set by Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms, in Part Ten, Title 1.


36
image89.jpg
2021 Pillar 3 Disclosures Report

CAPITAL 2021 Pillar 3 Disclosures Report
Table 8.Capital requirements by geographical region
EUR million2021
TotalEuropeOf which, SpainOf which, UKNorth AmericaOf which, USSouth AmericaOf which, BrazilOther
Credit risk (excluding CCR)38,23822,9269,6885,8246,8315,2057,5925,103888
Of which, internal rating-based (IRB) approach*16,68413,0905,7894,3201,3205401,5301,241745
Central governments and Central Banks
Institutions7764549295138675411131
Corporates9,4286,3923,5861,3061,1754701,4721,229389
of which, Specialised Lending1,3451,029362426205566249
of which, SMEs1,5931,4271,22655108157541
Retail - Secured by real estate SME2322312221111
Retail - Secured by real estate non-SME3,6503,6368842,5153228
Retail - Qualifying revolving37337298216
Retail - Other SME578564388114
Retail - Other non-SME1,5621,35643518721203
Other non-credit-obligation assets858585
Of which, standardised approach (SA)21,0329,1933,2081,5305,5484,6676,1463,918144
Central governments or central banks2,0731,058903241608467769
Regional governments or local authorities25841613
Public sector entities294151510
Multilateral Development Banks
International Organisations
Institutions36711359171231141261036
Corporates3,4501,76032949169267497539923
Retail7,8682,9733245162,6312,2802,1671,71496
Secured by mortgages on immovable property2,614860180547925869622791
Exposures in default957370156762812413041963
Items associated with particular high risk111132210108816
Covered bonds131312
Claims on institutions and corporates with a short-term credit assessment208165
Collective investments undertakings (CIU)17176
Equity under risk weighted1257
Other items3,4751,9921,2453378387466444211
Of which, Equity IRB1,3581,3581,358
Simple method178178178
Under the PD/LGD method428428428
Equity exposures under risk weighted753753753
Counterparty credit risk1,254959701125114671771274
Of which, standardised approach1,09183267078104601531112
Of which, internal model method (IMM)
Of which, CCPs2114181166
Of which, CVA1411133138951792
Settlement risk
Securitisations exposures in banking book (after cap)**74138311413134531011112
Market risk1,3781,02765314111134096
Of which, the standardised approach5474336014111110396
Of which, internal model method (IMM)830594594237
Operational risk4,7032,0018345461,1708791,149622383
Of which, basic indicator approach
Of which, standardised approach4,7032,0018345461,1708791,149622383
Of which, advanced measurement approach
Amounts below the thresholds for deduction (subject to 250% risk weight)1,68390776524102673656
Total***46,31427,29611,9916,6418,4716,4729,2705,9601,277
*Including counterparty credit risk.
**It does not include 1250% deductions.
*** Total does not include amounts below the thresholds for deductions (subject to 250% risk weight).
37
image89.jpg
2021 Pillar 3 Disclosures Report

CAPITAL 2021 Pillar 3 Disclosures Report
2.4.2.1. Plan to deploy advanced internal models and supervisory approval
This section covers the letter (a) of the qualitative requirement CRE - Qualitative disclosure requirements related to IRB approach.
Santander remains committed to adopting the Basel II advanced internal ratings-based (AIRB) approach for its banks, increasing the amount of exposure managed using internal models. This approach will be applied progressively over the coming years. The commitment to the supervisory authority means adapting the advanced approaches in the Group's core markets.
This objective of covering IRB models in the group should be seen in the context of the current supervisory focus on the
robustness and adequacy of existing models, as well as the simplification strategy recently agreed with ECB.
Santander has supervisory approval to use advanced approaches for calculating regulatory capital for credit risk for the parent and its main subsidiaries in Spain, the United Kingdom and Portugal, and for some portfolios in Germany, Mexico, Brazil, Chile, Nordic countries (Sweden, Finland and Norway), France and the United States.
The following table shows the geographical scope of the internal models for credit risk (AIRB or FIRB) in the various portfolios:
List of authorised IRB models by legal entity
CountryLegal EntityIRB portfolio (AIRB or FIRB)
UKSantander UK PLCInstitutions, Corporates, Corporates SMEs, Corporates Project Finance, Mortgages, Qualifying Revolving, Other Retail.
Abbey National Treasury ServicesInstitutions, Corporates, Corporates SMEs, Corporates Project Finance.
Abbey Covered Bonds LLPInstitutions
SpainBanco Santander, S.A.Institutions, Corporates, Corporates SMEs, Corporates Project Finance, Mortgages, Qualifying Revolving, Retail SMEs, Other Retail
Santander Factoring y Confirming S.A.Institutions, Corporates, Corporates SMEs, Corporates Project Finance, Mortgages, Retail SMEs, Other Retail
Santander Lease, S.A. E.F.C.Institutions, Corporates Corporates SMEs, Mortgages, Retail SMEs, Other Retail
Santander Consumer EFC, S.A.Corporates, Corporates SMEs, Qualifying Revolving, Other Retail.
Santander Consumer Finance, S.A.Corporates, Corporates SMEs, Qualifying Revolving, Other Retail.
PortugalBanco Santander TottaInstitutions, Corporates, Corporates SMEs, Corporates Project Finance, Mortgages, Qualifying Revolving, Retail SMEs, Other Retail.
BrazilBanco Santander BrazilCorporates
Santander Brasil EFCCorporates
GermanySantander Consumer Bank AGCorporates, Corporates SMEs, Mortgages, Revolving and Other Retail
MexicoBanco Santander MéxicoInstitutions, Corporates, Corporates SMEs, Corporates Project Finance
USASantander Bank, National AssociationCorporates
FranceSociété Financiére de Banque - SOFIBCorporates, Corporates SMEs, Retail SMEs, Other Retail
NordicsSantander Consumer Bank A.S.Other Retail
Santander Consumer Finance OYOther Retail
ChileBanco Santander - ChileInstitutions and Corporates
For further information on the scope of the use of IRB and SA approaches (Table CR6-A) see Appendix XI.
pillar3disclosurereporten.jpg
Access 2021 Pillar 3 Disclosures Report available on the Santander Group website






38
image89.jpg
2021 Pillar 3 Disclosures Report

CAPITAL 2021 Pillar 3 Disclosures Report
The following table shows the geographical scope of portfolios using the internal models approach (IMA) for market risk:
List of authorised IMA models by legal entity
Country
Legal entity
IMA portfolio (product)
SpainBanco Santander, S.A.Trading book
Santander London BranchTrading book
ChileBanco Santander - ChileTrading book
Santander Agent de Valores LimitedTrading book
Santander Investment Chile LimitedTrading book
Santander Corridors de Bolsa LimitedTrading book
MexicoBanco Santander MéxicoTrading book
Casa de Bolsa Santander, S.A. de C.V.Trading book
¤
For further information on the market risk, see chapter 7.
The Group currently uses the standardised approach for calculating regulatory capital for operational risk, as provided for in the CRR. In 2017, the European Central Bank granted authorisation for the Alternative Standardised Approach to be used to calculate consolidated capital requirements at Banco Santander México, following the approval granted in 2016 for Brazil.
¤
For further information on the Operational Risk, see chapter 8.
Supervisory validation process
As established by the European Parliament, the first key element of Banking Union is the Single Supervisory Mechanism (SSM). Under this mechanism, direct banking supervision falls to the European Central Bank. This ensures that the largest European banks are independently supervised by just one entity and are subject to a common set of standards. Eurozone states are required to participate. Participation is voluntary for non-eurozone EU Member States.
The second key element is the Single Resolution Mechanism (SRM), which is responsible for preparing for the worst-case scenario, i.e. bank failure. The objective is to ensure that such situations can be resolved in an orderly fashion and at the minimum cost to taxpayers. The focus on shielding taxpayers from the costs of future bank resolutions led to a change in the underlying regulations, namely the Bank Recovery and Resolution Directive (BRRD), so that the bank's shareholders and creditors will bear the brunt of the resolution costs. Under certain circumstances, banks may also obtain supplementary financing from the recently-created Single Resolution Fund (SRF), which is financed by the banking sector. The SRF is expected to meet its target funding level by 2023.
The SSM and the SRM are both operational: the SSM became effective on 4 November 2014
The SRM started developing resolution plans for banks in January 2015 and is fully operational since January 2016, with a full range of resolution tools.


































39
image89.jpg
2021 Pillar 3 Disclosures Report

CAPITAL 2021 Pillar 3 Disclosures Report
The European Central Bank has gradually been deploying its new structure and functions, developing into the single European supervisor. The European Banking Authority (EBA) will continue to actively collaborate in adapting regulations. Each body's responsibilities are as follows:

a222.jpg

The governance process of the European supervisor follows the following steps:
The Joint Supervisory Team (JST), consisting of a mixed team of experts, analyses the entity's situation and releases a technical report to the ECB's Supervisory Board.
The Supervisory Board then submits its preliminary decisions to the Governing Council.
The Governing Council then issues a final decision authorising or rejecting the use of internal models.
The supervisory authority uses the documentation provided by the entity as the basis for its assessment of whether the minimum requirements for using advanced models to calculate regulatory capital have been met. This information must be sufficiently thorough and detailed to provide a third party with a clear idea of the entity's rating systems, methodologies, technological infrastructure, capital calculation process and internal governance, and to be able to replicate the outputs of the model. The unit itself is responsible for preparing this documentation, which forms part of the formal application required for the validation process established by the supervisors of entities seeking to implement advanced models to calculate regulatory capital.
a03supervisoryprocessa.jpg
A preparatory "pre-application" phase has been introduced as part of the supervisory approval process for major changes to advanced models for calculating regulatory capital. This involves the entity providing the supervisory authority with the necessary documentation beforehand, so that the supervisory authority can assess whether the minimum requirements have been met to continue the formal approval process. If the European Central Bank considers the entity to be initially ready, the application is sent and the supervisory authority begins a formal review process of the regulatory models.
The approval of changes in the Group's models sometimes involves supervisory authorities from various jurisdictions, often subject to different legislation, criteria and implementation calendars. This often hinders and slows joint decisions on the approval of internal models on the basis of consolidation and may affect authorisations at the local level.
Targeted Review of Internal Models
The on-site performance of the TRIM (Targeted Review of Internal Models) was completed in 2019. Banco Santander has reviewed several portfolios through on-site inspections
40
image89.jpg
2021 Pillar 3 Disclosures Report

CAPITAL 2021 Pillar 3 Disclosures Report
this year. From April 2018 to April 2021, the final decision letters (including findings, commitments and limitations) of the inspections carried out have been received, coinciding in April 2021 with the publication of the final horizontal results of the whole TRIM.
Banco Santander launched two strategic programmes in 2018, which are currently underway to improve the quality of the internal models IRB 2.0 (internal credit risk models) and MRAP – Market Risk Advanced Platform – (internal market risk models), to meet the expectations and requirements of regulators (including the entry into force of the EBA repair programme in January 2022) and to address the weaknesses identified in TRIM and IMIs (Internal Model Inspections).
In addition, in order to intensify the development of high-quality models, in 2020 the organisation was reinforced thanks to the creation of the Global Models and Data Unit, aiming to execute modelling in a better, more efficient way, while leveraging the synergies that come from combining modelling and data. We have also strengthened the role of the Single Validation Office, a team tasked with improving consistency and coordination of all model validation activities.
2.4.3. Capital buffers and eligible capital requirements
The Group must always comply with the combined capital buffer requirement, which is defined as the total CET1 capital necessary to meet the following obligations:
Capital conservation buffer (CCoB): mandatory for all entities from 1 January 2016. The recharge for banks is 2.5%.
Buffers for systemically important banks (G-SIB and D-SIB): applicable from 1 January 2016. There are two types, each with their own methodologies, which classify financial institutions into buckets. These buckets determine their systemic risk (either global or domestic) and the recharge percentage applicable. Where an institution is subject to both recharges at the same consolidation level, the higher of the two shall apply. The two types are:
G-SIB (global systemically important banks) buffer: common methodology following the Basel framework. Applicable at the consolidated level. CRDV added an additional methodology that considers the eurozone as a single jurisdiction, allowing the competent authority to classify a G-SIB in a lower bucket, reducing the applicable G-SIB buffer accordingly.
D-SIB (domestic systemically important banks) buffer: common methodology following EBA guidelines. This is applied at the consolidated, sub-consolidated or individual level.
Systemic risk buffer (SyRB): competent national authorities may require this buffer to mitigate macro prudential or systemic risks that are not covered by the countercyclical buffer or the systemically important financial institutions buffer and that could trigger a disturbance in the financial system with serious consequences for both it and the real economy. Its application by the authorities is discretionary, and it may be required for all institutions or for one or more subsets of institutions, for all exposures or for a subset of
exposures (domestic, third countries, mortgage sector, etc.).
Countercyclical capital buffer (CCyB): this is applied when the national authorities consider that lending is growing excessively in a jurisdiction, with the aim of containing it. This buffer is calculated specifically for each institution or group and consists of the weighted average of the countercyclical buffer rates applied in regions in which the bank's significant exposures are located. It is also applicable from 1 January 2016.
The table below summarises the required regulatory rates based on the capital buffers to be applied and Banco Santander's position in 2022:
Application
Buffers (% RWAs)
2022
All entitiesConservation (CCoB)2.5 %
Designated entities
G-SIB entities (1%-3.5%) (1)
100% of the buffer
D-SIB entities (2)
100% of the buffer
At the discretion of competent national authoritySystemic risk (SRB)0%-5%
Countercyclical (CCyB) (3)
0% - 2.5%
Consolidated combined buffer
CCoB+CCyB+SyRB +Max (G-SIB, D-SIB)(4)
(1) Banco de España requires a 1% buffer from Santander for 2022
(2) This requirement is 1% for Santander.
(3) % countercyclical buffer applicable at 1 January 2022 according to data from the European Systemic Risk Board (ESRB):
a.Exposures to customers resident in Bulgaria: 0.5%
b.Exposures to customers resident in the Czech Republic: 0.5%
c.Exposures to customers resident in Norway: 1%
d.Exposures to customers resident in Luxembourg: 0.5%
e.Exposures to customers resident in Slovakia: 1%
4) The highest of the three buffers applies if the SyRB buffer covers all exposures. Otherwise, the higher of G-SIB and D-SIB plus the SyRB buffer applies. With the transposition of the CRDV, the SyRB will be additional to the others.
The geographic breakdown of significant lending exposures for calculating the countercyclical capital buffer (table CCyB1) and the amount of institution-specific countercyclical capital buffer (table CCyB2) are available in Appendix XII and Appendix XIII respectively on Santander's website.
pillar3disclosurereporten.jpg
Access 2021 Pillar 3 Disclosures Report available on the Santander Group website

41
image89.jpg
2021 Pillar 3 Disclosures Report

CAPITAL 2021 Pillar 3 Disclosures Report
Eligible capital requirements
The capital decision resulting from the Supervisory Review and Evaluation Process (SREP) under the European Central Bank’s (ECB) Single Supervisory Mechanism comprises a Pillar 2 Requirement (Pillar 2R) and Pillar 2 Guidance (Pillar 2G). Pillar 2R is binding and failure to comply may have direct consequences for banks. Pillar 2G is not directly binding. Failure to comply has no bearing on the maximum distributable amount (MDA) threshold. However, the ECB expects compliance with Pillar 2G at all times. If a bank is not compliant with Pillar 2G, the ECB will carefully consider the reasons and circumstances and may define additional supervisory control measures.
At 1 January 2022, at consolidated level, Santander must maintain a minimum CET1 ratio of 8.85% (i.e. 4.50% of the Pillar 1 requirement, 0.84% of the Pillar 2R requirement, 2.50% of the capital conservation buffer requirement, 1.00% of the G-SIB requirement and 0.01% of the countercyclical capital buffer requirement).
Santander must also maintain a minimum Tier 1 capital ratio of 10.64% and a minimum total capital ratio of 13.01%.
In 2021, the capital adequacy target set was achieved. Santander's fully loaded CET1 ratio stood at 12.51% at the close of the year, demonstrating its organic capacity to generate capital.

Regulatory Capital vs Regulatory requirement (Phased-in IFRS9)
a04regulatorycapitala.jpg
A. Countercyclical buffer.
B. Global systemically important banks (G-SIB) buffer.
C. Capital conservation buffer.




42
image89.jpg
2021 Pillar 3 Disclosures Report

CAPITAL 2021 Pillar 3 Disclosures Report
Global systemically important institutions
The Group is one of 30 entities designated as global systemically important banks (G-SIB) in 2021.
Systemically important banks may pose a risk to financial stability.
The insolvency of a systemically important bank, or even an expectation that it might become insolvent, could generate negative effects for the financial system and even the real economy that are difficult to predict.
This situation warrants special prudential treatment. This has led to the introduction of specific capital buffer requirements for both global (G-SIB) and domestic (D-SIB) systemically important banks.
This designation requires Santander to meet additional requirements mainly relating to the following:
Its capital buffer (Santander is in the group of banks with the lowest capital buffer, 1%)
TLAC (total loss-absorbing capacity) requirements
The requirement to publish relevant information more often than other banks
Stricter regulatory requirements for internal control bodies
Special supervision
Requirements to submit special reports to supervisory authorities
The BCBS and the Financial Stability Board jointly decide which banks qualify as being global systemically important, using a method based on five indicators: size, cross-jurisdiction activity, interconnectedness with other financial institutions, substitutability of financial services/infrastructure and complexity. Each of these categories has an equal weighting of 20%.
This methodology has been changed and will come into effect from January 2022. The main changes in the methodology are: inclusion of a trading volume indicator, modifying the weighting of the remaining indicators in the substitutability category, and inclusion of insurance companies in the reporting scope. A new measurement for cross-jurisdictional indicators will also be included, which will consider the EU as one jurisdiction, possibly reducing the indicator by +/-10 bp.
The information needed to evaluate the indicators is requested yearly from banks with leverage exposure exceeding €200 billion, or from any other banks at the supervisor's discretion: 76 banks were considered in December 2020. These institutions are then required to publish the information before 30 April of the following year.
The information is used to produce a global indicator. The score obtained by each bank determines the size of the capital buffer required of it, which is based on a set of buckets defined by the regulators (CET1 surcharge ranging from 1% to 3.5%).
In November 2021, the Financial Stability Board (FSB) published its list of global systemically important banks based on the December 2020 data. This will be fully applicable in 2023. Meeting these requirements makes the Group a more robust bank than its domestic rivals. Santander is currently subject to a systemic capital surcharge of 1%, which will become fully effective in 2022.
otherpresentationsena.jpg
For more details regarding Quantitative Indicators, access file “G-SIBs indicators quantitative”, under section Shareholders and Investors/Other presentations (April month) on the Santander Group website.
Indicators for global systemically important institutions
CategoryIndividual indicatorSupervisor jurisdiction
SizeExposure used for the leverage ratio calculationAn indicator of the weight of the bank in the financial system
Cross-jurisdictional activityCross-jurisdictional assetsSnapshot of a bank’s global footprint
Cross-jurisdictional liabilities
InterconnectednessIntra-financial system assetsMeasures a bank’s interconnectedness with other financial institutions
Intra-financial system liabilities
Securities outstanding
Substitutability/financial infrastructureAssets under custodyMeasures whether the bank’s activity can be replaced with other banks
Payments activity
Transactions subscribed in debt and equity markets
ComplexityNotional amount of over-the-counter (OTC) derivativesMeasures the complexity of a financial entity
Level 3 assets
Held for trading and available-for-sale securities
43
image89.jpg
2021 Pillar 3 Disclosures Report

CAPITAL 2021 Pillar 3 Disclosures Report
Global systemically important institutions
Capital buffer
Entity
5 (3.50%)(Empty)
4 (2.50%)JP Morgan Chase
3 (2.00%)BNP Paribas
Citigroup
HSBC
2 (1.50%)Bank of America
Bank of China
Barclays
China Construction Bank
Deutsche Bank
Goldman Sachs
Industrial and Commercial Bank of China Limited
Mitsubishi UFJ FG
1 (1,00%)
Agricultural Bank of China
Bank of New York Mellon
Credit Suisse
Group BPCE
Group Crédit Agricole
ING Bank
Mizuho FG
Morgan Stanley
Royal Bank of Canada
Santander
Société Générale
Standard Chartered
State Street
Sumitomo Mitsui FG
Toronto Dominion
UBS
Uni credit Group
Wells Fargo
Domestic Systemically Important Institutions
When identifying domestic systemically important banks (D-SIBs), Banco de España, using the methodology established in rule 14 of Circular 2/2016, applies a mix of guidelines based on size, importance, complexity (cross-jurisdiction activity) and the degree of interconnectedness between the institutions and the financial system. Banco de España conducts an annual review of this classification. The following institutions are included on its 2021 list:
Systemical buffer (2022)
Domestic Systemically Important Institutions
chart-58999b2e8c5849bcbb9.jpg
The Group is on the lists of both global and domestic systemically important banks. Banco de España requires the higher of the two buffers to be applied, under rule 23 of Circular 2/2016. As both buffers are the same for Banco Santander, the applicable surcharge in 2022 will be 1%.
2.4.4. Leverage ratio
This section covers the qualitative requirement LRA - Free format text boxes for disclosure on qualitative items.
Basel III established the leverage ratio as a non-risk-sensitive measure to limit excessive growth of the balance sheet relative to available capital.
The ratio is calculated as the ratio of Tier 1 divided by the leverage exposure. This exposure is calculated as the sum of the following components:
Asset value, without derivatives and without elements considered as deductions in Tier 1 (for example, the loan balance is included but not goodwill), also excluding the exposures referred to in section 1 of article 429.a of the standard.
Off-balance-sheet accounts (mainly: guarantees, undrawn credit limits, letters of credit) weighted by the conversion factors of the standardised approach to credit risk.
Inclusion of the net value of derivatives (gains and losses against a single counterparty are netted, minus collateral – provided certain criteria are met) plus a surcharge for potential future exposure.
A surcharge for the potential risk of financing securities transactions.
Lastly, a surcharge is included for risk relating to unhedged credit derivatives (CDS).
The following tables illustrate the ratios published by Santander since December 2020. These show that Banco Santander's ratio is stable with an upward trend.
Leverage ratio (CRR Fully loaded , IFRS 9 Phased-in)
chart-0e34e0575e35489fbce.jpg chart-d52aa7c962ac4d9b9b0.jpg
Leverage ratio (CRR Phased-in, IFRS 9 Phased-in)
chart-31666903eb434ec1a5f.jpg chart-9e25b90adbf344ae84f.jpg 2021 and 2020 data has been calculated under application of CRR and IFRS 9 transitional arrangements

44
image89.jpg
2021 Pillar 3 Disclosures Report

CAPITAL 2021 Pillar 3 Disclosures Report
With the publication of CRR II, the definitive calibration of the leverage ratio was set at 3% for all institutions, with G-SIBs being subject to an additional surcharge of 50% of the ratio of the buffer applicable to the global systemically important institution (G-SII). Adjustments to its calculation are also included, chief among which are the exclusion of certain exposures from the measure of total exposure: public loans, transfer loans and officially supported export credits.
Banks implemented this final definition of the leverage ratio in June 2021, although the new ratio calibration (the additional surcharge for G-SIBs) will begin to apply from January 2023.
The Group's leverage ratio at 31 December 2021 was as follows:
Table 9.Leverage ratio
EUR million
2021
Fully-loaded CRRPhased-in CRR
Tier 182,13382,452
Exposure1,536,5161,536,516
Leverage Ratio5.35 %5.37 %

The following table gives a breakdown of the ratio calculation:
Table 10.Leverage ratio details
EUR million
2021
ItemAmounts Consol.
Balance Sheet
To be
eliminated
To be
included
Leverage
exposure
Comment
Derivatives59,07259,07228,02528,025Substitution of carrying amount by EAD net of collateral
Securities financing transactions58,6971,78060,478A buffer is added for these transactions
Assets deducted in Tier 117,40917,409Deletion to avoid duplication
DTAs1,0451,045Carrying amount of the balance sheet asset adjusted for changes in DTAs, as a result of the recognition of lower reserve account provisions, due to the application of IFRS 9 transitional arrangements.
Rest of Assets1,446,462111,3931,335,070Fully included
Total Assets1,582,685188,91929,8051,423,572
Total Off-Balance-Sheet items349,913236,969112,944Balances are weighted according to their risk
Total Exposure (denominator)1,536,516
Tier 1 (numerator)82,452
Leverage ratio1,393,7675.37 %Minimum recommended 3%
The leverage ratio is calculated by Santander every month and reported to the capital committee and other governing bodies, thus ensuring adequate monitoring of the risk of excessive leverage at its most restrictive measurement: fully loaded.
The leverage ratio is a primary metric in Santander's Risk Appetite Framework, as part of its commitment to preserving robust capital adequacy ratios. It is regularly monitored to ensure that the ratio comfortably exceeds the minimum regulatory requirements. The bank's Risk Appetite Framework includes a "stressed" leverage ratio as an additional metric, to manage the risk of excessive leverage in a forward-looking way, identifying how it will perform in a crisis scenario.
Within this framework, the group has established the necessary limits and alerts to ensure that leverage is kept at tolerable risk levels, consistent with sustainable growth in the group's balance sheet and well above the minimum levels that could be considered to be a risk. Any significant changes in any of the main drivers of this indicator are therefore analysed and reported to senior management.
Additional quantitative indicators are monitored as part of the group's active management of leverage risk, to complement
the management and monitoring of the risk of excessive leverage, so as to understand the maturities, types of charges and movements of collateralised assets. These metrics include asset encumbrance and the Net Stable Funding Ratio (NSFR).
¤
For more information, see section 10.1.2.
As part of its capital planning, the group estimates the leverage ratio over a three-year horizon under a range of macroeconomic scenarios, including recession.
Despite the covid-19 crisis, which has necessitated higher levels of liquidity for our customers, at no point did the leverage ratio rise above the limits established in the Risk Appetite Framework over the course of the year.

45
image89.jpg
2021 Pillar 3 Disclosures Report

CAPITAL 2021 Pillar 3 Disclosures Report
For further information on the leverage ratio, see tables LR1(LRSum)-summary reconciliation of accounting assets and leverage ratio exposures, LR2(LRCom)-leverage ratio common disclosure and LR3 (LRSpl)- split-up of on balance sheet exposures (excluding derivatives, SFTs and exempted exposures) in Appendix XIV, Appendix XV and Appendix XVI respectively, which are available on Santander's website.
pillar3disclosurereporten.jpg
Access 2021 Pillar 3 Disclosures Report available on the Santander Group website
2.5. Economic capital and RoRAC – Pillar II
Economic capital is the capital required to cover risks from our activity with a certain level of solvency. We measure it through an internal model.
Economic capital is an essential tool for internal management and the development of our strategy, assessing solvency and managing portfolio and business risk. It is also a key player in the supervisory review and evaluation process (SREP) as well as in the internal capital adequacy assessment process (ICAAP).
Our economic capital model measurements cover all significant risks incurred in our activity.
Our economic capital model measurements cover all significant risks incurred in our activity (concentration risk, structural interest rate risk, business risk, pensions risk, deferred tax assets (DTAs), goodwill and others that are beyond the scope of regulatory Pillar 1).
It also considers diversification, which is key to determining and understanding our risk profile and solvency in view of our multinational operations and businesses.
Having a balanced geographic and business diversification makes us more resilient, more predictable and less volatile.
a05diversificationa.jpg
A. 2021 underlying attributable profit by region. Operating areas excluding Corporate Centre.
For more information on economic capital, including RoRAC, value creation and capital planning, see Capital management section of the Economic and financial report of the 2021 Annual report. This section covers the Disclosure OVC 'ICAAP information' implementing technical standards (ITS).
annualreporten.jpg
Access 2021 Annual Report available on the Santander Group website
2.6. Capital planning and stress tests
This section covers the qualitative requirement OVC - ICAAP information.
Internal capital stress and planning aims to ensure sufficient current and future capital, even in unlikely-but-plausible economic scenarios.
We estimate results in various business environments (including severe recessions as well as expected macroeconomic environments), based on our initial situation (financial statements, capital base, risk parameters and regulatory and economic ratios) to determine our solvency ratios, usually for a three-year period.
In addition to internal projections and stress tests, the Group participates in regulatory stress tests (e.g. EBA stress tests), which are conducted at regular intervals and the results of which are published.
For more information on capital planning and stress tests, see section 3.5 of the Economic and financial report of the 2021 annual report.
annualreporten.jpg
Access 2021 Annual Report available on the Santander Group website
46
image89.jpg
2021 Pillar 3 Disclosures Report

CAPITAL 2021 Pillar 3 Disclosures Report
2.7. Total Loss-Absorbing Capacity (TLAC) and Minimum Requirement for own funds and Eligible Liabilities (MREL)
Information on TLAC and MREL can be found in chapter 3.5. of the Economic and financial report of the 2021 Annual Report.
annualreporten.jpg
Access 2021 Annual Report available on the Santander Group website
TLAC information is published separately on Santander's website, in the section "Information on TLAC", which can be found between the link "Prudential Relevance Report (Pillar III)" and the link "Information for other regulators".
tlacena.jpg
Access the file TLAC Disclosure available on the Santander Group website
For further details, see the Fixed income presentation available on the Santander's website.
fixedincomeena.jpg
Access the file Fixed Income Presentations available on the Santander Group website
2.8. Lines of defence
In this section, the provisions of letters (b), (c) and (d) of the CRE - Qualitative disclosure requirements related to IRB approach requirement -Institution risk management approach, are complied with.
Our model of three lines of defence effectively manages and controls risks:
First line: formed by the business units that take or originate exposure to risk, it recognizes, measures, controls, monitors and reports on risks according to internal risk management regulation. Risk origination must be consistent with the approved risk appetite and related limits.
Second line: formed by the risk and compliance and conduct functions, it independently oversees and challenges the first line’s risk management. Its duties include ensuring that risks are managed according to the risk appetite defined by senior management and strengthening our risk culture throughout Grupo Santander.
Third line: the internal audit function, which is independent to ensure the board of directors and senior managers with high quality and efficient internal controls, governance and risk management systems, helping to safeguard our value, solvency and reputation.
The Risk, Compliance & Conduct and Internal Audit functions are separate and independent.
Each has direct access to the board of directors and its committees.
2.8.1. Second line of defence
For more information on the second line of defence see chapter 10. 'Other risks'.
¤
For further information on second line of defence, see chapters 3,4,5,6,7,8,9 and 10.
2.8.2. Internal Audit
Internal Audit applies the definition of internal audit by the Institute of Internal Auditors. Internal Audit is a permanent function and is independent of all other functions and units. Its mission is to provide the board of directors and senior management with independent assurance with regard to the quality and efficacy of the systems and internal control, risk (current and emerging) management and governance processes, helping to safeguard the organisation's value, capital adequacy and reputation. Internal Audit evaluates:
i.the efficacy and efficiency of the processes and systems referred to above;
ii.compliance with applicable legislation and the requirements of supervisory bodies;
iii.the reliability and integrity of financial and operating information;
iv.and the integrity of capital.
The scope of Internal Audit's work encompasses:
i.all group entities over which the group exercises effective control;
ii.separate asset pools (for example, investment funds) managed by the entities mentioned in the previous section;
iii.all entities (or separate asset pools) not included in the previous points for which there is an agreement for the group to provide internal audit functions.
Internal Audit is guided by the following principles in this work: (i) Independence, objectivity and impartiality, (ii) Integrity, ethical behaviour and confidentiality of the information handled and its findings, (iii) Competence and professional qualifications of the auditors, (iv) Quality of the work, (v) Value creation, (vi) Adequate collaboration with other control functions in the group and with the external auditors and other assurance providers working within the organisation, (vii) A smooth relationship with the supervisory bodies and (viii) Compliance with international standards for the function.
Internal Audit is the third line of defence, acting independently from the others. Internal Audit organises its
47
image89.jpg
2021 Pillar 3 Disclosures Report

CAPITAL 2021 Pillar 3 Disclosures Report
activities with the flexibility necessary to adapt to the group's current structure and circumstances and to achieve its objectives with maximum effectiveness and efficiency.
Internal Audit's authority comes directly from the board of directors. Internal Audit reports to the audit committee and complies with the information requirements it receives from the committee in the discharge of its duties. However, as an independent unit, it reports regularly to the board of directors, at least twice a year, and, when it deems it necessary, it has direct access to the board.
The Group chief audit executive is responsible for submitting a corporate framework for Internal Audit to the board of directors for approval and subsequent implementation. This corporate framework sets out the global function and the way in which it is to be performed, as well as any changes that arise from its regular reviews.
Internal Audit prepares a plan based on an assessment of the risks to which the group is exposed, and submits it to the audit committee. It is then submitted to the board of directors, which approves it. In terms of solvency, this plan is defined in accordance with the cycle of capital audits, taking into account the results of engagements in previous years and other criteria, such as the rate of implementation of recommendations issued, the results of regulatory inspections, requests made by supervisory authorities and changes in mandatory regulations.
The Internal Audit functions uses this cycle to issue a full opinion on the capital function in the Group, assessing the capital governance framework and the key capital processes defined in the period established and executed by teams specialised in capital. It also performs other tasks focusing on
transversal issues with significant impact on the Group's solvency, such as analysis of credit portfolios and accounting provisions, and risk management processes.
Internal Audit also includes Recovery and Resolution work in its review plan as part of the specific audit cycle, covering key aspects of crisis management and resolution.
In accordance with the "ECB Guide to Internal Models" of October 2019, a risk assessment exercise is performed on the models used to calculate capital. This focuses on the aspects in each geography that present the greatest risks in the following major lines of action:
i.Reviewing compliance with the Group's internal governance model and supervisory requirements for the approval and maintenance of advanced models.
ii.Managing models and their adequacy and integration.
iii.Analysing the accuracy of risk measurement. Checking, through analysis and tests on the consistency and integrity of the Basel databases, that the methodology used in constructing the risk parameter models is consistent with their intended uses and complies with corporate standards and regulatory requirements, and verifying the replication of the calculations.
iv.Reviewing the regulatory capital calculation and reporting process.
v.Analysing the technical aspects and applications of the technological environment.


a06linesofdefensea.jpg

48
image89.jpg
2021 Pillar 3 Disclosures Report

CAPITAL 2021 Pillar 3 Disclosures Report
2.9. Corporate Special Situations and Resolution Framework, crisis management, Recovery and Resolution Planning
For details on the main developments by the Group in crisis management, specifically in relation to viability and resolution plans, and the special situations management framework, see section 3.6 of the Economic and financial report of the 2021 annual report.
annualreporten.jpg
Access 2021 Annual Report available on the Santander Group website








































































49
image89.jpg
2021 Pillar 3 Disclosures Report

CAPITAL 2021 Pillar 3 Disclosures Report


























´ñlkjhgf

















































50
image89.jpg
2021 Pillar 3 Disclosures Report


a3visionglobalderiesgosa.jpg



a03visionglobalderiesgosnma.jpg
Global risk view
3.1. Risk management and control model
3.1.1. Risk principles and culture
3.1.2. Risk factors
3.1.3. Risk management processes and tools
3.2. Governance
3.2.1. Board of directors
3.2.1.1. Diversity
3.2.1.2. Board committees
3.2.3. Risk and Compliance committees structure


GLOBAL RISK VISION 2021 Pillar 3 Disclosures Report
3. Global risk view
3.1. Risk management and control model
This section covers the qualitative requirements OVA - Institution risk management approach and OVB - Disclosure on governance arrangements.
Our risk management and control model is underpinned by common principles, a strong risk culture, a solid governance structure and advanced risk management processes and tools.
3.1.1. Risk principles and culture
Our risk principles below are compulsory. They comply with regulatory requirements and are inspired by best market practices:
1. All employees are risk managers who must understand the risks associated with their functions and not assume risks with an impact that exceeds the Group’s risk appetite or is unknown.
2. Involvement of senior managers, with consistent risk management and control through their conduct, actions and communications, as well as oversight of our risk culture and make sure we maintain our risk profile within the defined risk appetite.
3. Independent risk management and control functions, according to our three lines of defence model, described in detail under section 2.8. 'Lines of defence'.
¤
For further information on the lines of defense, see
section 2.8.
4. A forward-looking, comprehensive approach to risk management and control for all businesses and risk types.
5. Complete and timely information to identify, assess, manage and disclose risks to the appropriate level.
Grupo Santander’s holistic control structure stands on these principles and includes strategic tools and processes set out in the risk appetite statement, such as annual planning and budget planning, scenario analysis, the risk reporting structure and risk identification and assessment.
Risk culture - Risk Pro
Santander has a strong risk culture called Risk Pro (or I AM RISK in the UK and the US), based on the principle that all employees are risk managers. Risk Pro is a pillar of 'The Santander Way' group culture and considers all risks to promote socially responsible management and long-term sustainability.

For more details on risk culture and the code of conduct , see the section 'Risk pro: our risk culture' in the Responsible Banking chapter of the 2021 annual report.
annualreporten.jpg
Access 2021 Annual Report available on the Santander Group website
3.1.2. Risk factors
Grupo risks categorization ensures effective risk management, control and reporting. Our risk framework distinguishes these key risk types:
1
Credit risk relates to financial loss arising from the default or credit quality deterioration of a customer or counterparty, to which Santander has directly financed or assumed a contractual obligation.
2
Market risk results of loss and detriment to profits or capital stemming from movements in interest rates, exchange rates, stock and commodity prices and its potential impact on capital requirements.
3
Liquidity risk occurs if liquid financial resources are insufficient or too costly to obtain in order to meet liabilities when they fall due.
4
Structural risk relates risk that market movements or
balance sheet behaviour will change the value or profit
generation of assets or liabilities in the banking book. It
covers insurance and pension risks as well as the risk that
Santander will not have sufficient capital (in terms of
quantity or quality) to meet internal business targets,
regulatory requirements or market expectations.
5
Operational risk is the possibility of losses due to
shortcomings and failures relating to processes, employees and internal systems, even as a result of external events. It includes legal, regulatory compliance and conduct risks.
6
Financial crime risk is the risk of loss due to criminal or illegal activity involving Santander’s resources, products and services. Such activity includes money laundering, terrorism financing, violation of international sanctions, corruption, bribery and tax evasion.
7
Model risk involves potential losses due to inaccurate
forecasting or from a model being implemented or misused models that can result in poor decision-making.
8
Reputational risk is the risk of current or potential negative
economic impact due to damage to the bank’s reputation
among employees, customers, shareholders, investors and
broader society.
9
Strategic risk relates to losses due to strategic decisions or
their poor implementation that affect our core stakeholders’ medium-to-long-term interests or to an inability to adapt to a changing environment.
Environmental and climate-related risk drivers are considered as factors that could impact the existing risks in the medium-to-longterm.
53
image89.jpg
2021 Pillar 3 Disclosures Report

GLOBAL RISK VISION 2021 Pillar 3 Disclosures Report
These elements include, on the one hand, those derived from the physical effects of climate change, generated by one-off events as well as by chronic changes in the environment and, on the other hand, those derived from the process of transition to a development model with lower emissions, including legislative, technological or behaviour of economic agents changes.
3.1.3. Risk management processes and tools
Grupo Santander has the following processes and tools to carry out an effective risk management :
A. Risk appetite and structure of limits
Risk appetite is the volume and type of risks we deem prudent for our business strategy, even in unforeseen circumstances. It considers adverse scenarios that could have a negative impact on capital, liquidity and profitability. The board sets the Group's risk appetite statement (RAS) every year. Our subsidiaries' boards also set their own risk appetites annually. Each of those risk appetites translates into risk management limits and policies based on risk type, portfolio and segment.
a00riskapetiteandstructurea.jpg
For more details on risk appetite fundamentals and risk appetite principles see the section 2.4. 'Risk management processes and tools' in the Risk management and compliance chapter of the 2021 annual report.
annualreporten.jpg
Access 2021 Annual Report available on the Santander Group website
Limits structure, monitoring and control
Our risk appetite is expressed in qualitative terms and limits structured on these five core elements.
1
Earnings volatility
Maximum loss Santander can tolerate in an acute-but plausible stress scenario.
2
Solvency
Minimum capital position Santander can tolerate in a
stress scenario.
• Maximum leverage Grupo Santander can tolerate in a
stress scenario.
3
Liquidity
Minimum structural liquidity position.
• Minimum liquidity horizon Santander can tolerate in peak stress scenarios.
• Minimum liquidity coverage position.
4
Concentration
Concentration in single names, industries and portfolios.
• Concentration in non-investment-grade counterparties.
• Concentration in large exposures.
5
Non-financial risks
Maximum operational risk losses.
• Maximum risk profile.
• Non-financial risk indicators:
◦ Financial crime compliance (FCC)
◦ Cyber and security risk
◦ Model risk
◦ Reputational risk
While risk appetite limits are regularly monitored, specialized control functions report on risk profile and compliance with limits to the board and its committees every month. The link between risk appetite limits and the limits used to manage business units and portfolios is key to making risk appetite an effective tool for managing risks.
B. Risk profile assessment
Identification and assessment are central to the management and reporting of Grupo Santander’s risk. To assess the Group's risk profile systematically, we use a single, robust methodology that allows us to analyse the various risk types described in our risk framework (outlined under Section 2.2 “Risk factors"). In addition, it classifies them by different levels and unit according to a points system with four categories (“low”, “medium-low”, “medium-high” and “high”).
The RPA methodology is based on the main principles of the identification and risk assessment model, such as: self-assessment and exercise suitability; efficiency; and holistic, in-depth risk analysis (with common approaches and alignment for decision-making). The three lines of defence take part in assessment, strengthening our risk culture by reviewing how risks change and pinpointing areas for improvement.
For more details on risk appetite see the section 2.4. 'Risk management processes and tools' in the Risk management and compliance chapter of the 2021 annual report.
annualreporten.jpg
Access 2021 Annual Report available on the Santander Group website
Acquisitions and disposals
Following is a summary of the main acquisitions and disposals of ownership interests in the share capital of other entities and other significant corporate transactions performed in the last three years or pending to be completed:
i.Purchase by SHUSA for shares of Santander Consumer USA.
ii.Acquisition of Amherst Pierpont, a U.S. fixed-income broker dealer.
iii.Tender offer for shares of Banco Santander México, S.A., Institución de Banca Múltiple, Grupo Financiero Santander México.
54

GLOBAL RISK VISION 2021 Pillar 3 Disclosures Report
iv.Agreement for the acquisition of a significant stake in Ebury Partners Limited.
v.Reorganization of the banking insurance business, asset management and pension plans in Spain.
vi.Agreement with Crédit Agricole S.A. on the depositary and custody business.
vii.Offer to acquire shares of Banco Santander Mexico, S.A., Institución de Banca Multiple, Grupo Financiero Santander México.
For more information on Acquisitions and disposals, see 'Notes to the consolidated annual accounts' Chapter of the 2021 Annual Report.
annualreporten.jpg
Access 2021 Annual Report available on the Santander Group website
3.2. Governance
This section covers the qualitative requirements OVA - Institution risk management approach and OVB - Disclosure on governance arrangements.
The board is the highest decision-making body and focuses on supervision.
3.2.1. Board of directors
Size
At 31 December 2021, the board of directors was made up of the 15 members whose profile and background are described in section 4.1 'Our directors'. The Bylaws allow it to have between 12 and 17 members.
Composition by type of director
The composition of the board of directors is balanced between executive and non-executive directors, most of whom are independent. Each director’s status has been verified by the nomination committee and submitted to the board.
Our Board composition
a01boardcompositiona.jpg

For more details on the actual knowledge, skills and experience of the members of the board of directors, as well as on the appointment, renewal and succession of directors, see section 4. 'Board of Directors' of the Corporate Governance chapter of the 2021 annual report.
annualreporten.jpg
Access 2021 Annual Report available on the Santander Group website
3.2.1.1. Diversity
A diverse board of directors is essential to its effectiveness.
The combination of skills and experiences creates an environment with varied points of view that improves the quality of decision-making. Thus, we seek to achieve a sound balance of technical skills, expertise and points of view.
Our policy on the selection, suitability assessment and succession of directors helps make our board more diverse from different perspectives, for instance, in terms of gender, age, geographical provenance, experience and knowledge. It was amended in July 2018 in line with European legislation on the disclosure of non-financial and diversity information and the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) joint guidelines on suitability assessments of board members and key functions holders. In 2019, the new gender equality target of 40%-60% representation of either gender in the board was included. The policy was later amended in April 2020, at the time of the general review of the succession process for directors and other executive positions, and in December 2020, after the CNMV amended the Spanish Corporate Governance Code in June 2020 to include age diversity as a factor to take into account. Banco Santander applies this policy to select candidates for any vacancy on the board.
Our selection policy aims to diversify the board of directors in different terms. In particular:
Country of origin or international education
Gender equality
Age
Education and career