Technical Standards for the Establishment of Country Risk Reserves

Alameda Juan Pablo II, between 15 and 17 Av. Norte, San Salvador, El Salvador. Tel. (503) 2281-8000 www.bcr.gob.sv Page 1 of 10 NBCR-11/2023 NCF-02 TECHNICAL STANDARDS FOR THE ESTABLISHMENT OF RESERVES FOR COUNTRY RISK Approval: 12/14/2023 Effective Date: 01/01/2024

THE COMMITTEE OF STANDARDS OF THE CENTRAL BANK OF RESERVE OF EL SALVADOR,

CONSIDERING: I. That Article 7 of the Law on Supervision and Regulation of the Financial System establishes the entities subject to the supervision of the Superintendence of the Financial System. II. That Article 99 of the Law on Supervision and Regulation of the Financial System establishes that the Central Bank of Reserve, by virtue of said Law, is the institution responsible for the approval of the technical regulatory framework to be issued in accordance with this Law and other laws regulating supervised entities. In fulfilling this responsibility, the Central Bank of Reserve must ensure that the regulatory framework applicable to the financial system is periodically reviewed, seeking timely updates. III. That Article 99, third paragraph, letter a), of the Law on Supervision and Regulation of the Financial System establishes that it is the responsibility of the Committee of Standards of the Central Bank of Reserve of El Salvador to approve technical standards on any other aspect inherent to risk management by supervised entities. IV. That Article 99, third paragraph, letter c), of the Law on Supervision and Regulation of the Financial System establishes that it is the responsibility of the Committee of Standards of the Central Bank of Reserve of El Salvador to establish criteria for the valuation of assets, liabilities, and the establishment of provisions and reserves for risks, all of the foregoing in accordance with what is established in this Law and other applicable laws, with the aim of reflecting the real liquidity and solvency situation of the regulated entities.

THEREFORE, by virtue of the regulatory powers conferred upon it by Article 99 of the Law on Supervision and Regulation of the Financial System, AGREES to issue the following:

Alameda Juan Pablo II, between 15 and 17 Av. Norte, San Salvador, El Salvador. Tel. (503) 2281-8000 www.bcr.gob.sv Page 2 of 10 NBCR-11/2023 NCF-02 TECHNICAL STANDARDS FOR THE ESTABLISHMENT OF RESERVES FOR COUNTRY RISK Approval: 12/14/2023 Effective Date: 01/01/2024

TECHNICAL STANDARDS FOR THE ESTABLISHMENT OF RESERVES FOR COUNTRY RISK

CHAPTER I OBJECT, SUBJECTS, AND TERMS

Object Art. 1.- These Standards aim to determine the criteria for establishing policies and procedures for the identification, review, and control of country risk in activities involving the placement of resources abroad; as well as to establish the calculation bases and timing for the establishment of accounting reserves to represent said risk.

Subjects Art. 2.- The subjects obligated to comply with the provisions established in these Standards are: a) National or foreign subsidiaries of banks or exclusive-purpose holding companies incorporated in El Salvador; b) Insurance companies incorporated in El Salvador and their subsidiaries; c) Branches of foreign insurance companies operating in El Salvador; d) Cooperatives providing insurance services; e) Official credit institutions; (2) f) Any entity subject to the supervision of the Superintendence of the Financial System, authorized to make placements abroad; and (2) g) National or foreign subsidiaries of investment banks incorporated in El Salvador. (2)

Terms Art. 3.- For the purposes of these Standards, the terms indicated below have the following meaning: a) Central Bank: Central Bank of Reserve of El Salvador; b) Entity(ies): Subject obligated to comply with these Standards; and c) Superintendence: Superintendence of the Financial System.

CHAPTER II CONCEPT, ASSETS SUBJECT TO RESERVES, AND POLICIES

Concept of Country Risk Art. 4.- "Country risk" shall be understood as the risk assumed by maintaining or committing resources in a foreign country, due to potential impediments to their recovery derived from adverse effects in the economic, social, political environment, or natural disasters occurring in the country where the source generating the counterparty's cash flows is located. Country risk comprises sovereign risk, political risk, and transfer risk. a) Sovereign risk: is represented by the difficulties an entity might face in carrying out recovery actions against the debtor, for reasons of sovereignty; b) Political risk: comprises all human acts that make it difficult for debtors of a country to fulfill their obligations, for example: wars, civil unrest, terrorism, drug trafficking, legal provisions, and other similar events; and c) Transfer risk: is the situation that prevents debtors of a country from fulfilling their obligations due to the scarcity of the currency in which the obligation is denominated or that can be accepted by the creditor.

Assets Subject to Reserves Art. 5.- For the purposes of these Standards, assets or rights of the entity in which the resources granted or committed are used abroad or where the source of payment is located outside El Salvador are considered subject to country risk reserves. Country risk reserves are exempted for: a) Placements on behalf of third parties that do not result in commitments for the entity; b) Operations that have been guaranteed with funds in the same creditor entity, except for the portion of risk not covered; c) The portion of operations guaranteed by a co-debtor domiciled in the country of the creditor entity; and d) Securities and any other type of investment in instruments issued by Institutions with Supranational status or International Organizations according to their constitutive agreement; as well as deposits made in said Institutions.

Attribution of Country Risk Art. 6.- Country risk is attributable to the country where the debtor or payment obligor is domiciled and from which the return on invested resources must be obtained. Notwithstanding, the risk of a country different from that of the debtor may be used in the following cases: a) The country risk of the parent company will be considered in the case of branches and subsidiaries, when the former has the quality of co-debtor; and b) The country risk of the guarantor will be considered, when this has an investment-grade rating from one of the internationally recognized risk rating agencies.

Alameda Juan Pablo II, between 15 and 17 Av. Norte, San Salvador, El Salvador. Tel. (503) 2281-8000 www.bcr.gob.sv Page 3 of 10 NBCR-11/2023 NCF-02 TECHNICAL STANDARDS FOR THE ESTABLISHMENT OF RESERVES FOR COUNTRY RISK Approval: 12/14/2023 Effective Date: 01/01/2024

Policies and Criteria for Country Risk Art. 7.- It is the responsibility of the Senior Management Body of the entities to establish: a) Policies regarding the use of resources in foreign assets, setting adequate diversification and imposing credit and investment limits by country; as well as policies related to the monitoring and control of country risk; b) An administrative unit responsible for the control and monitoring of country risk, formed by qualified personnel according to their internal policies; c) Periodic evaluations, at least monthly, of country risk reserves, according to the methodology mentioned in these Standards; and d) Reports that reveal and ensure that the country risk reserve is determined by an adequate technical evaluation and that there is permanent monitoring of its coverage. The guidelines and agreements of the Senior Management Body on this matter must be duly expressed in the respective minutes book.

CHAPTER III INFORMATION, EVALUATION, AND RATING OF COUNTRY RISK

Information on Country Risk Art. 8.- The entity must keep available to Internal Audit, External Audit, and the Superintendence, information related to the country risk evaluation, in accordance with the policies of Article 7 of these Standards. To this effect, it must keep the following information updated: a) File for each country in which the entity maintains placements in assets or commitments; b) Report containing relevant aspects and conclusions that determine the risk category of the country under evaluation; c) Organization manual of the unit in charge of country risk and the procedures manual in question; d) The updated report for each country issued by internationally recognized risk rating agencies; and e) Any other information necessary to evidence the country risk rating.

Evaluation of Country Risk Art. 9.- Entities that place or commit their resources in other countries will use, to determine the degree of country risk, the sovereign risk ratings of countries issued by internationally recognized risk rating agencies, for long-term obligations.

Below, the country risk categories, the equivalences between the nomenclature of long-term obligations used by internationally recognized risk rating agencies, and the minimum reserve percentages that must be established for each category are established:

Categories	Standard & Poor's	FITCH	MOODY'S	% of Reserves
1. Countries with low risk	AAA<br>AA (+ -)	AAA<br>AA (+ -)	Aaa<br>Aa (1,2,3)	0%
2. Countries with normal risk	A (+ -)	A (+ -)	A (1, 2, 3)	0%
3. Countries with moderate risk	BBB (+ -)	BBB (+ -)	Baa (1, 2, 3)	1%
4. Countries with difficulties	BB (+ -)	BB (+ -)	Ba (1, 2, 3)	10%
	B+	B+	B1	20%
	B	B	B2	30%
	B -	B -	B 3	40%
5. Dubious Countries	CCC+	CCC+	Caa1	50%
	CCC	CCC	Caa2	60%
	CCC -	CCC -	Caa 3	70%
6. Countries with serious problems or unranked.	CC<br>C<br>D	CC<br>C<br>D	Ca<br>C	100%

The ratings considered to determine the country risk category must be the most recent ones issued by the risk rating agencies.

Use of Internal Models Art. 10.- Entities may use internal measurement models to assign the risk rating of the countries in which they operate; the resulting reserves cannot be lower than those established based on Article 9 of these Standards; the methodology must contain the following six categories:

Category 1: Countries with low risk. Countries denoting the lowest expectation of credit risk are located in this category. It is assigned only in case of punctual payment capacity, exceptionally strong for external financial commitments. This capacity is very unlikely to be affected by foreseeable events.

Category 2: Countries with normal risk. Countries showing a low expectation of credit risk are located in this category. It is assigned to cases of strong punctual payment capacity for external financial commitments. This capacity is slightly more susceptible to adverse conditions and situations than in the case of the immediately superior rating.

Alameda Juan Pablo II, between 15 and 17 Av. Norte, San Salvador, El Salvador. Tel. (503) 2281-8000 www.bcr.gob.sv Page 4 of 10 NBCR-11/2023 NCF-02 TECHNICAL STANDARDS FOR THE ESTABLISHMENT OF RESERVES FOR COUNTRY RISK Approval: 12/14/2023 Effective Date: 01/01/2024

Category 3: Countries with moderate risk. Countries showing a low expectation of credit risk are located in this category. It is assigned to cases of adequate punctual payment capacity for external financial commitments. This capacity is susceptible to deterioration under adverse conditions and situations.

Category 4: Countries with difficulties. Countries showing a possibility of development or significant credit risk are located in this category. It is assigned to cases of moderate or insufficient punctual payment capacity for external financial commitments. This capacity is contingent and sustained by the conditions of the economic environment.

Category 5: Dubious Countries. Countries in which the development of credit risk is very probable are located in this category. It is assigned to cases where the capacity for default is real and payment depends on the conditions of the economic environment.

Category 6: Countries with serious problems. Countries that have defaulted on some or all of their obligations, and the credit risk has materialized, are located in this category. This capacity is totally dependent on the conditions of the economic environment.

Minimum Elements of Internal Country Risk Evaluation Models Art. 11.- Internal models will include two analyses, the base and the complementary, which must consider the following elements to evaluate and classify country risk: a) Base Analysis: i. Analysis of the country's macroeconomic behavior regarding the existence or not of significant imbalances, for which the structure and economic performance, economic growth prospects, degree of fiscal flexibility, monetary stability, situation of the financial sector, macroeconomic policy, trade policy, direct investment policy, external liquidity, external debt, labor market, and dynamism of the private sector must be analyzed; ii. Analyze the country's financial commitments regarding whether it complies or not: 1. With the payment of international financial obligations; and 2. The payment of external debt service; iii. Consider whether the country has or does not have financing for foreign trade activities; and iv. Any other that is considered convenient to include and that has not been considered in the previous points.

b) Complementary Analysis: Will consider all other aspects of interest to examine the situation of each evaluated country, among them: i. Timeliness, reliability, and sufficiency of available economic and financial information; ii. Political and social stability; iii. Compliance with regulations; iv. Conflicts with other countries; v. Natural disaster; and vi. Any other that is considered convenient to include and that has not been considered in the previous points.

Countries rated must be downgraded at least to the category immediately below that resulting from the base analysis, when there are weaknesses or significant disturbing factors derived from the complementary analysis.

Timing for Country Ratings Art. 12.- Countries must be rated before the placement of resources is approved, and the country risk reserve must be established when the asset account has a balance in its favor, for which it must be assigned one of the categories indicated in Article 9 of these Standards. In the case that there is more than one classification, the one representing the highest level of risk will be considered. In the case that there are two equal classifications, the one that repeats the most will be considered. (1) If a country lacks a sovereign risk rating, it will be classified in category 6 referring to countries with serious problems, with a reserve requirement of 100%. When country risk is documented, the entity may change the rating and make the respective adjustments.

Calculation of Reserves by Risk Categories Art. 13.- Reserves for country risk ratings are independent of any other credit or banking risk reserve; therefore, they must be established on the uncovered risk. To this effect, the gross value of the corresponding asset according to accounting records must be considered, minus balances backed by guarantees related in Article 5 of these Standards; in no case can the total sum of reserves be greater than the gross value of the affected asset.

Voluntary Reserves Art. 14.- Subjects obligated to comply with these Standards may voluntarily establish additional country risk reserves, with no limitations other than their own will.

Alameda Juan Pablo II, between 15 and 17 Av. Norte, San Salvador, El Salvador. Tel. (503) 2281-8000 www.bcr.gob.sv Page 5 of 10 NBCR-11/2023 NCF-02 TECHNICAL STANDARDS FOR THE ESTABLISHMENT OF RESERVES FOR COUNTRY RISK Approval: 12/14/2023 Effective Date: 01/01/2024

Accounting Applications for the Establishment of Reserves Art. 15.- The accounting of increases and release of the country risk reserve will be made at least once a month, in the following manner: a) Increases will cause a debit in the income statement account to apply – prior years' profits and a credit in the restricted equity account – undistributable profits; and b) Decreases will cause a debit in the restricted equity account – undistributable profits and a credit in the income statement account to apply – prior years' profits. Increases or decreases will occur due to changes in risk categories, increases or decreases in the balances of instruments subject to reserves, or corrections determined by the Superintendence or external auditors.

Coverage and Frequency of Evaluations Art. 16.- One hundred percent of placements in deposits, investments, loans, contingent operations, and any other balances representing country risk, must have their corresponding risk rating. To this effect, entities must keep perfectly identified all operations that require reservation according to these Standards and must associate each of them with the country to which the risk is attributed and with the other reserves established. Subjects obligated to comply with these Standards must keep their assets subject to country risk evaluated at all times; in the case that they have technological or operational limitations to comply with the foregoing, they must communicate this to the Superintendence and request permission to update it once a month while these limitations are overcome.

Summary of Assets with Country Risk Art. 17.- Obligated subjects must prepare at least monthly and make available to the Superintendence, the "Summary of Assets Subject to Country Risk" and the determination of adjustments to the reserve due to changes in asset balances or country ratings, according to the model of Annex No. 1 of these Standards.

CHAPTER IV OTHER PROVISIONS AND EFFECTIVE DATE

Sanctions Art. 18.- Non-compliance with the provisions contained in these Standards will be sanctioned in accordance with what is established in the Law on Supervision and Regulation of the Financial System.

Alameda Juan Pablo II, between 15 and 17 Av. Norte, San Salvador, El Salvador. Tel. (503) 2281-8000 www.bcr.gob.sv Page 6 of 10 NBCR-11/2023 NCF-02 TECHNICAL STANDARDS FOR THE ESTABLISHMENT OF RESERVES FOR COUNTRY RISK Approval: 12/14/2023 Effective Date: 01/01/2024

Repeal Art. 19.- These Standards repeal the "Standards to Establish Provisions for Country Risk" (NCES -02), approved on October 22, 2002, by the Superintendence of the Financial System, whose Organic Law was repealed by Legislative Decree No. 592, which contains the Law on Supervision and Regulation of the Financial System, published in the Official Diary No. 23, Volume 390, dated February 2, 2011.

Unforeseen Aspects Art. 20.- Aspects not provided for in the regulatory matter in these Standards will be resolved by the Central Bank through its Committee of Standards.

Effective Date Art. 21.- These Standards will enter into effect starting from January 1, 2024.

MODIFICATIONS: (1) Modifications to Article 12, approved by the Central Bank through its Committee of Standards, in Session No. CN-05/2025, on June 30, 2025, with effect from July 15, 2025. (2) Modifications to Article 2, approved by the Central Bank through its Committee of Standards, in Session No. CN-09/2025, on November 10, 2025, with effect from November 25, 2025.

Alameda Juan Pablo II, between 15 and 17 Av. Norte, San Salvador, El Salvador. Tel. (503) 2281-8000 www.bcr.gob.sv Page 7 of 10 NBCR-11/2023 NCF-02 TECHNICAL STANDARDS FOR THE ESTABLISHMENT OF RESERVES FOR COUNTRY RISK Approval: 12/14/2023 Effective Date: 01/01/2024

Annex No. 1 ENTITY: __________________________________________ SUMMARY OF ASSETS SUBJECT TO COUNTRY RISK, AT _____________ (Balances in thousands of United States dollars)

A. Country Information | Country "X" | Country "Y" | Country "Z" | Observations A.1 Classification A.2 Risk Rating Agency A.3 Date of Classification A.4 Source

B. Account Balances | Country "X" | Country "Y" | Country "Z" | Total | Observations B.1 Liquidity B.2 Repurchase Agreements B.3 Financial Investment Instruments B.4 Loans B.5 Other Assets B.6 Physical and Intangible Assets B.7 Financial Guarantees Granted B.8 Sub-Total B.9 Excluded Balances, according to Art. 5 of these Standards B.10 Total Affected Assets (B.8 - B.9)

C. Determination of Reserve | Country "X" | Country "Y" | Country "Z" | Total | Observations C.1 Required Reserve Percentage C.2 Country Risk Reserve (B.10 X C.1) C.3 Balance from Previous Month C.4 Monthly Adjustments (C.2 – C.3)

Notes: The country columns are established according to the needs of each entity. A.3: The most recent classification must be considered; in any case, the issuance date of the classification must not be more than six months old. A.4: The source refers to the evidence supporting the rating, for example: website, magazine published by the Rating Agency, copy of the rating document, etc. B.9: These balances must be fully identified and properly justified. C.1: The percentage of the required reserve is in accordance with the table detailed in Article 9 of these Standards.

Name and signature of the responsible executive: ___________________________________________________