JPRF-F-2024-0128 — Requirement for Additional Counter-Cyclical Technical Equity

Address: Av. Amazonas between Pereira and Unión Nacional de Periodistas, Governmental Financial Management Platform. Red Block, 8th floor | Postal Code: 170507 | Quito - Ecuador | Resolution No. JPRF-F-2024-0128 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 production and sustainable 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 authorization from the State, 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 solidarity 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 Reformatory Law to 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 integrated 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 system, securities, insurance, and integrated health care services 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 Code determines as a function of the Financial Policy and Regulation Board to issue macroprudential regulations within the scope of its competence; That Article 150 of the mentioned legal body prescribes that entities of the national financial system will be subject to the regulation issued by the Financial Policy and Regulation Board;

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Address: Av. Amazonas between Pereira and Unión Nacional de Periodistas, Governmental Financial Management Platform. Red Block, 8th floor | Postal Code: 170507 | Quito - Ecuador | 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 solidarity sector. That the third paragraph of Article 190 of the cited Organic Code determines: “Each superintendency, both the Superintendency of Banks and the Superintendency of Popular and Solidarity Economy, may establish an additional requirement for primary technical equity for the following concepts, per institution or segment as applicable: an increase between 0.5 and 2.5 percentage points, due to 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 dictated by the Financial Policy and Regulation Board for this effect, prior to a report from the respective superintendency.”; That, through Office No. SB-DS-2024-0152-O of April 3, 2024, the Superintendency of Banks submits to the Financial Policy and Regulation Board Report No. SB-INRE-2024-0200-M of April 1, 2024, with the “Methodology for the calculation of additional capital requirement due to 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 the entities of the National Financial System; That, in Office No. JPRF-JPRF-2024-0312-O of November 12, 2024, the Financial Policy and Regulation Board requested the Superintendency of Banks to send the Technical Report that supports the “Methodology for the calculation of the additional capital requirement due to counter-cyclical effect”; That, by Office No. SB-DS-2024-0431-O of November 12, 2024, sent to the Financial Policy and Regulation Board by the Superintendency of Banks, it was indicated that: “In a joint effort, the Superintendency of Banks (SB) and the Superintendency of Popular and Solidarity Economy (SEPS) carried out the update of the proposal for the ‘Methodology for additional capital requirement due to counter-cyclical effect’. This proposal was developed with the technical team of the International Monetary Fund (IMF) within the framework of the technical assistance provided to the country, which has allowed obtaining a definitive version, which incorporates the suggestions and contributions of the various technical teams that participated in this inter-institutional effort, (…)”; That, the Technical Secretary of the Financial Policy and Regulation Board, through Memorandum No. JPRF-ST-2024-0103-M of November 27, 2024, sends to the President of the Board the Technical Report No. JPRF-CTSF-2024-011 and the Legal Report No. JPRF-CJF-2024-054, both of November 27, 2024, and the corresponding resolution project; That, the Financial Policy and Regulation Board, in an extraordinary session held by technological means, convened on November 28, 2024, and carried out through video conference on November 29, 2024, reviewed the Memorandum JPRF-ST-2024-0103-M of November 27, 2024, issued by the Technical Secretary of the Board; as well as the Technical Report No. JPRF-CTSF-2024-011 and the Legal Report No. JPRF-CJF-2024-054 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 resolution project; That, the Financial Policy and Regulation Board, in an extraordinary session held by technological means, convened on November 28, 2024, and carried out through video conference on November 29, 2024, reviewed and approved the following Resolution; and, In exercise of its functions,

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Address: Av. Amazonas between Pereira and Unión Nacional de Periodistas, Governmental Financial Management Platform. Red Block, 8th floor | Postal Code: 170507 | Quito - Ecuador | RESOLVES: ARTICLE FIRST.- Incorporate Article 8.1 immediately after Article 8 of 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: “Art. 8.1.- Entities belonging to the public and private financial sectors must maintain at all times, as a minimum, six percent (6%) of the relationship between primary technical equity and risk-weighted assets and contingents.” ARTICLE SECOND.- Incorporate Article 82.1 immediately after Article 82 of Subsection II “Technical Equity and Risk-Weighted Assets”, Section VI “Solvency Norm, Technical Equity, and Risk-Weighted Assets and Contingents for Savings and Credit Cooperatives, Central Caisses, and Mutual Associations for Savings and Credit for Housing”, Chapter XXXVI “Popular and Solidarity Financial Sector”, 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: “Art. 82.1.- Entities belonging to the popular and solidary financial sector must maintain at all times, as a minimum, six percent (6%) of the relationship between primary technical equity and risk-weighted assets and contingents.” ARTICLE THIRD.- Incorporate Chapter LXIV “Norm that regulates the requirement for additional primary technical equity due to counter-cyclical effect in entities of the national financial system” immediately after Chapter LXIII “Norm that regulates specialized societies for deposits and electronic payments”, 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: “CHAPTER LXIV: NORM THAT REGULATES THE REQUIREMENT FOR ADDITIONAL PRIMARY TECHNICAL EQUITY DUE TO COUNTER-CYCLICAL EFFECT IN ENTITIES OF THE NATIONAL FINANCIAL SYSTEM SECTION I: OBJECT AND SCOPE Art. 1.- Object.- This norm has the purpose of regulating the additional requirement for primary technical equity due to counter-cyclical effect in financial entities of the national financial system, in accordance with what is provided in Article 190 of the Organic Monetary and Financial Code, Book I, to guarantee equity sufficiency, mitigate macroeconomic risks, and preserve the stability of the financial system. Art. 2.- Scope.- This norm is applicable to all entities of the national financial system and financial groups, in accordance with what is provided in Article 190 of the Organic Monetary and Financial Code, Book I.

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Address: Av. Amazonas between Pereira and Unión Nacional de Periodistas, Governmental Financial Management Platform. Red Block, 8th floor | Postal Code: 170507 | Quito - Ecuador | SECTION II: PROCESS OF ACTIVATION OF THE ADDITIONAL PRIMARY TECHNICAL EQUITY REQUIREMENT DUE TO COUNTER-CYCLICAL EFFECT Art. 3.- Activation of the counter-cyclical requirement.- The additional primary technical equity requirement due to counter-cyclical effect will be activated only by resolution of the Financial Policy and Regulation Board, prior to a supported technical report presented jointly by the Superintendency of Banks and the Superintendency of Popular and Solidarity Economy, in which they present the model for the activation of the additional counter-cyclical equity requirement. The Financial Policy and Regulation Board may request the Superintendency of Banks and the Superintendency of Popular and Solidarity Economy to evaluate the need to establish additional primary technical equity requirements due to counter-cyclical effect. Art. 4.- Content of the technical report.- The technical report presented jointly by the superintendencies must include, at least, the following elements:

1. The model for additional counter-cyclical primary technical equity requirement (MCCA) which will be developed jointly by the Superintendency of Banks and the Superintendency of Popular and Solidarity Economy, and must align with international best practices, adapting to the conditions of the national financial and macroeconomic system.
2. Analysis of current and forecasted conditions that justify the activation of the counter-cyclical requirement. The Superintendencies must request information from the Central Bank of Ecuador regarding the phase of the economic and financial cycle in progress, with short and long-term forecasts.
3. Proposal of the additional percentage of primary technical equity applicable, within the ranges established in Article 190 of the Organic Monetary and Financial Code, Book I, justified based on the impact expected on them.
4. Evaluation of the impact on entities of the national financial system.
5. Proposed deadline for entities to implement additional primary technical equity requirements due to counter-cyclical effect.
6. Conditions for its deactivation. Art. 5.- Model for additional counter-cyclical primary technical equity requirement (MCCA).- Model used to determine the counter-cyclical requirement, based on the following categories, which may include indicators such as:
7. Macroeconomic: Short and long-term GDP, inflation, unemployment
8. Macrofinancial: Year-on-year variation of the gross portfolio, sight deposits, Portfolio Gap for GDP and its long-term trend.
9. Market and sectoral: Market expectation indicators, considering the manufacturing, construction, and commerce sectors.
10. Financial system: Solvency, portfolio quality, financial margin, absorption degree, short-term liquidity, and profitability. Art. 6.- Approval and communication.- The Financial Policy and Regulation Board will evaluate the technical report presented by the superintendencies and, if deemed appropriate, will approve through a motivated resolution the activation of the additional counter-cyclical primary technical equity requirement, establishing the applicable percentage and corresponding deadlines.

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Address: Av. Amazonas between Pereira and Unión Nacional de Periodistas, Governmental Financial Management Platform. Red Block, 8th floor | Postal Code: 170507 | Quito - Ecuador | Art. 7.- Supervision and follow-up.- The Superintendency of Banks and the Superintendency of Popular and Solidarity Economy will be responsible for observing the compliance with the additional counter-cyclical primary technical equity requirement by entities of the national financial system, within the scope of their competence, and for carrying out quarterly follow-up of the conditions that justified its activation. FINAL PROVISION.- This Resolution will enter into force from the present date, without prejudice to its publication in the Official Register, and will be published on the institutional website of the Financial Policy and Regulation Board within a maximum term of two days from its issuance. NOTIFY.- Given in the Metropolitan District of Quito, on November 29, 2024. THE PRESIDENT, Mgs. María Paulina Vela Zambrano The preceding Resolution was processed and signed by Master María Paulina Vela Zambrano, President of the Financial Policy and Regulation Board, in the Metropolitan District of Quito, on November 29, 2024.- I CERTIFY. TECHNICAL SECRETARY, Mgs. Luis Alfredo Olivares Murillo