JPRF-F-2024-0127 — Additional Technical Equity Requirement for Systemic Entities

Address: Av. Amazonas between Pereira and Unión Nacional de Periodistas, Financial Government Management Platform. Red Block, 8th floor | Postal Code: 170507 | Quito - Ecuador | Resolution No. JPRF-F-2024-0127 THE FINANCIAL POLICY AND REGULATION BOARD CONSIDERING: That, Article 82 of the Constitution of the Republic of Ecuador establishes the right to legal certainty, which is based on respect for the Supreme Norm and the existence of prior, clear, public norms applied by competent authorities; That, Article 132, number 6, of the Magna Carta grants control and regulatory bodies the authority to issue general norms in matters within their competence, without altering or innovating legal provisions; That, Article 226 of the Supreme Norm provides that State institutions acting under state power shall exercise only the competencies and faculties attributed to them in the Constitution and the law; That, Article 284 ibidem prescribes as an objective of economic policy the following: “7. Maintain economic stability, understood as the maximum level of sustainable production and employment over time.”; That, Article 303 of the Constitution stipulates that the formulation of monetary, credit, exchange, and financial policies is the exclusive faculty of the Executive Function; That, Article 308 of the Magna Carta determines that financial activities are a public order service and may be exercised, with prior State authorization, in accordance with the law, and have as their fundamental purpose to preserve deposits and meet financing requirements for the country's development; That, Article 309 of the Fundamental Norm provides that the National Financial System is composed of the public, private, and popular and solidary sectors, which intermediated public resources. Each of these sectors will be responsible for preserving their security, stability, transparency, and solidity; That, Article 13 of the Organic Monetary and Financial Code, Book I, reformed by the Organic Law Reforming the Organic Monetary and Financial Code, published in the Official Register No. 443 of May 3, 2021, created the Financial Policy and Regulation Board, part of the Executive Function, as a public law legal entity, responsible for the formulation of credit, financial, securities, insurance, and prepaid comprehensive health care services policy and regulation; That, Article 14, number 2, of the aforementioned normative body grants the Board the competence to “2. Issue regulations that allow maintaining the integrity, solidity, sustainability, and stability of the national financial, securities, insurance, and prepaid comprehensive health care services systems in accordance with what is provided in Article 309 of the Constitution of the Republic of Ecuador;” That, number 3 of Article 14.1 of the aforementioned Organic Code determines as a function of the Financial Policy and Regulation Board to issue macroprudential regulations within the scope of its competence; That, number 7 of the aforementioned Article 14.1 establishes that the Policy Board has the attribution to: “7. Issue the prudential regulatory framework to which financial entities, securities, insurance, and prepaid comprehensive health care services must adhere, a framework that must be coherent, not give rise to regulatory arbitrage, and cover, at least, the following: (…) b. Establish the interest rate system, as provided in Article 130 of this Code, for active and passive operations of the national financial system and other interest rates required by law, promoting prudent credit development: Minimum capital levels, technical equity, and risk weightings of assets, their composition, calculation method, and modifications;”; That, Article 150 of the mentioned legal body prescribes that entities of the national financial system are subject to the regulation issued by the Financial Policy and Regulation Board; That, Article 151 of the referenced normative body provides that the regulation must recognize the nature and particular characteristics of each of the sectors of the national financial system. It also states that the regulation may be differentiated by sector, segment, activity, among others; That, Article 160 of the aforementioned Organic Code stipulates that the national financial system is integrated by the public financial sector, the private financial sector, and the popular and solidary sector; That, Article 161 of the aforementioned Organic Code defines that the public financial sector is composed of banks and corporations; That, Article 162 of the aforementioned Organic Code determines that among the entities that integrate the private financial sector are multiple banks and specialized banks; That, the third paragraph of Article 190 of the aforementioned Organic Code determines: “Each superintendency, both the Superintendency of Banks and the Superintendency of Popular and Solidary Economy, may establish an additional requirement for primary technical equity for the following concepts, per institution or segment as appropriate: an increase between 0.5 and 2.5 percentage points, for counter-cyclical effect; and; an increase between 1.0 and 3.5 percentage points, if the financial institution or financial group is classified in a situation of systemic risk cause, through the methodology that the Financial Policy and Regulation Board dictates for this effect, prior report from the respective superintendency.”; That, by letter No. SB-DS-2024-0152-O of April 3, 2024, the Superintendency of Banks sends to the Financial Policy and Regulation Board Report No. SB-INRE-2024-0200-M of April 1, 2024 with the “Methodology for calculating additional capital requirement for systemic and counter-cyclical effect”, and its respective annexes, with the purpose of complying with what is established in the third paragraph of Article 190 of the Organic Monetary and Financial Code, Book I, related to the solvency and technical equity of entities of the National Financial System; That, by letter No. SB-DS-2024-0193-O of May 8, 2024, the Superintendency of Banks made an extension to letter No. SB-DS-2024-0152-O, and sent Report No. SB-INRE-2024-0266-M of May 8, 2024, in which the proposal of “Methodology for identifying financial entities with systemic importance” is recorded; That, by Letter No. SB-DS-2024-0241-0 of June 28, 2024, the Superintendency of Banks sent to the Financial Policy and Regulation Board Report No. SB-INRE-2024-0359-M of June 26, 2024, by which it exposes an update of the methodology to identify systemically important entities that was consensuated with the technical team of the International Monetary Fund (IMF) in the context of the technical assistance that this multilateral organization maintains with the country;

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Address: Av. Amazonas between Pereira and Unión Nacional de Periodistas, Financial Government Management Platform. Red Block, 8th floor | Postal Code: 170507 | Quito - Ecuador | That, by letter No. JPRF-JPRF-2024-0252-O of September 9, 2024, the Financial Policy and Regulation Board sent to the control body the observations on the “Methodological Proposal for calculating additional requirement for systemic effect”; That, in letters Nos. SB-DS-2024-0350-O, SB-DS-2024-0355-O, and SB-DS-2024-0358-O of September 11, 16, and 24, 2024, respectively, the Superintendency of Banks sent to the Financial Policy and Regulation Board its response to the observations issued by the regulatory body; That, by letter SB-DS-2024-0367-O of September 27, 2024, the Superintendency of Banks sent to the Financial Policy and Regulation Board, Technical Report No. SB. INRE-2024-0527-M of September 26, which contains the “Methodology for the identification of public and private financial entities of systemic importance under the control of the Superintendency of Banks”, with its respective annexes and the Systemic Importance Index Matrix (IIS); That, the Technical Secretary of the Financial Policy and Regulation Board, through Memorandum No. JPRF-ST-2024-0101-M of November 27, 2024, sends to the President of the Board Technical Report No. JPRF-CTSF-2024-012 and Legal Report No. JPRF-CJF-2024-055, both dated November 27, 2024; That, the Financial Policy and Regulation Board, in an extraordinary session held by technological means, convened on November 28, 2024, and carried out via video conference on November 29, 2024, learned of Memorandum JPRF-ST-2024-0101-M of November 27, 2024, issued by the Technical Secretary of the Board; as well as Technical Report No. JPRF-CTSF-2024-012 and Legal Report No. JPRF-CJF-2024-055 of November 27, 2024, issued by the Technical Coordination of Policy and Regulation of the Financial System and by the Legal Coordination of Policy and Financial Norms, and the corresponding draft resolution; That, the Financial Policy and Regulation Board, in an extraordinary session held by technological means, convened on November 28, 2024, and carried out via video conference on November 29, 2024, learned of and approved the following Resolution; and, In exercise of its functions, RESOLVES: ARTICLE FIRST.- Incorporate Section IV “Methodology for Identification of Public and Private Financial Entities of Systemic Importance and Constitution of Additional Primary Technical Equity Requirement for Systemic Risk” following Section III “Constitution of Total Technical Equity”, Chapter VIII “Relationship between Total Technical Equity and Risk-Weighted Assets and Contingents for Entities of the Public and Private Financial System”, Title II “National Financial System”, Book I “Monetary and Financial System” of the Codification of Monetary, Financial, Securities, and Insurance Resolutions, with the following text:

“SECTION IV: METHODOLOGY FOR IDENTIFICATION OF PUBLIC AND PRIVATE FINANCIAL ENTITIES OF SYSTEMIC IMPORTANCE AND CONSTITUTION OF ADDITIONAL PRIMARY TECHNICAL EQUITY REQUIREMENT FOR SYSTEMIC RISK

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Address: Av. Amazonas between Pereira and Unión Nacional de Periodistas, Financial Government Management Platform. Red Block, 8th floor | Postal Code: 170507 | Quito - Ecuador | Art. 10.- Systemic importance entities.- Entities that due to their characteristics could trigger a contagion effect on other participants in the financial system, generating losses of economic value or confidence, increasing uncertainty about the financial system as a whole and/or generating adverse effects in the real economy, shall be understood as such. Art. 11.- Objective.- Establish the methodology to identify entities of systemic importance in order to establish an additional primary technical equity requirement for systemic risk. Art. 12.- Identification Procedure.- For the identification of locally systemically important financial entities, the Superintendency of Banks must apply the following procedure: Categories and indicators to establish the Systemic Importance Index (IIS). - For the identification of entities of systemic importance, the following categories and quantitative indicators will be considered: 12.1. Size: measured as participation in total assets: It is calculated as the proportion of the entity's total assets in relation to the total assets of the public and private financial sector. 12.2. Interconnectedness: measures the financial relationship between entities that, in the event of deterioration of one of them, could impact the system given the connection in contractual obligations on which they operate within the financial system. For this purpose, the following indicators are considered: 12.2.1. Intra-financial assets: corresponds to investments, portfolios, and available funds that entities of the public and private financial sector maintain in other financial entities of the national financial system, such as private banks, public banks, savings and credit cooperatives, mutual savings and credit associations for housing, and other government entities. 12.2.2. Intra-financial liabilities: measures the dependence of an entity on other entities of the financial system, both for received deposits and for obligations contracted with other economic agents. 12.2.3. Securities in circulation: balance of non-convertible securities issued and placed by legally authorized entities. 12.3. Substitutability: measures the impact in the difficulty of products and services of a financial entity being substituted by others in the market; four quantitative indicators will be considered. For this purpose, the following indicators are considered: 12.3.1. Assets under custody: balance of securities and goods received from third parties for collection, in process of reimbursement, as guarantee for granted or received operations, or for any other concept, under custody, administration, or loan. 12.3.2. Demand and time deposits: corresponds to the balance of resources received from the public, payable within a period less than thirty days, plus obligations derived from the capture of public resources, payable upon expiration of a period not less than thirty days.

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Address: Av. Amazonas between Pereira and Unión Nacional de Periodistas, Financial Government Management Platform. Red Block, 8th floor | Postal Code: 170507 | Quito - Ecuador | 12.3.3. Gross portfolio: the balance of the credit portfolio of all segments placed with natural or legal persons by the public and private financial system without deducting the provision for uncollectible credits. 12.3.4. Service points: territorial presence of public and private financial entities, measured through the number of service points. 12.4. Complexity: refers to the degree of difficulty in performing the products and operations that characterize the activity of financial entities. For this purpose, the following indicators are considered: 12.4.1. Total investments: balance of investments considering securities held at fair value, for sale, and until maturity. 12.4.2. Investments in shares and participations: balance of investments corresponding to shares and participations. 12.4.3. Financial obligations: balance of financial obligations, including those with financial institutions in the country, abroad, the public sector, the popular and solidary group, and multilateral organizations. 12.5. Weighting of categories and indicators for the Systemic Importance Index (IIS): The weighting for the categories and indicators for the identification of entities of the private and public financial sector of systemic importance will be as follows:

Category (weighting)	Individual Indicator	Indicator Weighting
Size (20%)	Total assets within the financial system	20%
Interconnectedness (30%)	Intra-financial assets	12%
Intra-financial liabilities	12%
Securities in circulation	6%
Substitutability (30%)	Assets under custody	5%
Demand and time deposits	10%
Gross portfolio	8%
Service points	7%
Complexity (20%)	Total investments (at fair value, for sale, and until maturity)	6%
Investments in shares and participations	5%
Financial obligations (inter-jurisdictional and intra-financial liabilities)	9%

12.6 IIS Calculation Procedure: The IIS will be calculated with the average of the balances of the last 12 months of the size, interconnectedness, substitutability, and complexity indicators, using data with a cutoff date of November 30 of each year, as follows:

1. Calculate for each month, the individual participation per entity regarding the total of the public and private system, for each of the indicators detailed in the previous number.
2. Standardize the obtained participation values by indicator, multiplying by 10,000 to express them in basis points.
3. Execute a weighted sum of the indicators of each entity according to the weightings specified in number 12.5.
4. Average the resulting IIS values of each month to obtain a unique IIS for each entity.
5. Order the entities from highest to lowest according to their IIS value.” 12.7 Accounts and values for the calculation of the Systemic Importance Index (IIS): The accounts and values to be considered for the calculation of the IIS are as follows:

i. Size

Indicator	Accounting Account
Total assets within the financial system	Account 1

ii. Interconnectedness

Indicator	Accounting Account*
Intra-financial assets	Balance of assets maintained by the public and private financial subsystem, i.e., investments (portfolio) and available funds in other financial entities of the national financial system, such as private banks, public banks, savings and credit cooperatives, mutual savings and credit associations for housing, and other government entities. (Accounts 11 and 13)
Intra-financial liabilities	Balance of liabilities maintained by the public and private financial subsystem, referring to values captured for concept of financial obligations with other entities, such as private banks, public banks, savings and credit cooperatives, mutual savings and credit associations for housing; and, the balance of the 100 largest depositors in the country, which includes private banks, public banks, savings and credit cooperatives, mutual savings and credit associations for housing, government entities, Social Security entities, and the real sector of the national economy. (Account 26)
Securities in circulation	Account 27

*Accounts from which information on indicators and internal information structures is obtained.

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Address: Av. Amazonas between Pereira and Unión Nacional de Periodistas, Financial Government Management Platform. Red Block, 8th floor | Postal Code: 170507 | Quito - Ecuador | iii. Substitutability

Indicator	Accounting Account
Assets under custody	Account 7401
Demand and time deposits	Account 2101
Account 2103
Gross portfolio	Account 14 – Account 1499
Service points*	Comes from internal information structure

• The number of authorized and registered service points in the control body is considered.

iv. Complexity

Indicator	Accounting Account
Total investments (at fair value, for sale, and until maturity)	Account 13
Investments in shares and participations	Account 1901
Financial obligations (inter-jurisdictional and intra-financial liabilities)	Account 26

12.8. Identification of systemic entities: Systemic entities will be those that exceed 600 basis points of the Systemic Importance Index (IIS). 12.9. Degree of systemic importance: To determine the degree of systemic importance of each financial entity, each is assigned to a specific group (bucket) according to its score in the Systemic Importance Index (IIS). The limits of each group are calculated as follows: 12.9.1. Upper limit: Obtained by adding the highest IIS obtained, plus the IIS corresponding to the last entity considered as systemic. 12.9.2. Lower limit: Calculated as the average between the D-SIB threshold and the IIS of the immediately lower entity. 12.9.3. Distance: Is the difference between the upper and lower limit. Determines the distance of each group. 12.9.4. Buckets: Corresponds to the number of groups (5) that define the degree of systemic importance and to which an additional primary technical equity requirement will subsequently be assigned. 12.9.5. Ranges between groups: The distance is divided by the number of buckets to obtain the size of each interval or bucket. 12.10. Establishment of buckets: The upper and lower limits for each of the five buckets will be established as follows:

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Address: Av. Amazonas between Pereira and Unión Nacional de Periodistas, Financial Government Management Platform. Red Block, 8th floor | Postal Code: 170507 | Quito - Ecuador |

1. The upper limit of the first bucket corresponds to that established in number 12.9.1. The lower limit will be calculated by subtracting the upper limit minus the range between groups, and so consecutively with the subsequent degrees.
2. The upper limit of the following buckets corresponds to the lower limit of the previous bucket.

Lower Limit	Upper Limit	Systemic Index Ranges	Degree of Systemic Importance
xxxx <= IIS < xxxx			I
xxxx <= IIS < xxxx			II
xxxx <= IIS < xxxx			III
xxxx <= IIS < xxxx			IV
xxxx <= IIS < xxxx			V

12.11. Capital requirement for systemic importance: Once financial entities are categorized according to their degree of systemic importance, an additional primary technical equity requirement will be established, expressed as a percentage of risk-weighted assets, according to the following table:

Degree of Systemic Importance	Primary Technical Equity as % of Risk-Weighted Assets
I	3.50%
II	2.50%
III	2.00%
IV	1.50%
V	1.00%

This percentage will be added to the 6% minimum percentage required by regulation, for which the Superintendency of Banks will determine, if applicable, the additional primary technical equity requirement in accordance with the following formula:

y = [PT1 / APR]_min + %sist - [PT1 / APR]_ent

Where y = percentage of required primary technical equity. [PT1 / APR]_min = percentage of minimum primary technical equity, which is 6%. %sist = Additional percentage for systemic importance. [PT1 / APR]_ent = percentage of primary technical equity with which the entity is endowed.

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Address: Av. Amazonas between Pereira and Unión Nacional de Periodistas, Financial Government Management Platform. Red Block, 8th floor | Postal Code: 170507 | Quito - Ecuador | 12.12. Additional primary technical equity requirement for systemic importance: Determined the primary technical equity requirement...