Regulation No. 2012-01: Update III to Regulation No. 2007-07 and Update I to Regulation No. 2011-03

THE DEPUTY GENERAL MANAGER OF THE CENTRAL BANK OF THE REPUBLIC OF SAN MARINO

HAVING REGARD to Law No. 165 of 17 November 2005, and in particular Article 39, which grants the Central Bank of the Republic of San Marino the power to issue measures containing binding and general provisions;

HAVING REGARD to the Statute of the Central Bank of the Republic of San Marino approved by Law No. 96 of 29 June 2005, and in particular Article 30, paragraph 3 of the said Statute, according to which acts of the Central Bank regarding supervision, deliberated by the Supervisory Coordination, are issued by the General Manager, as well as Article 14, paragraph 5 of the said Statute, according to which, in the event of absence or impediment of the General Manager, his functions are performed by the Deputy Director;

HAVING REGARD to the Regulation on the collection of savings and banking activity No. 2007-07 and its subsequent updates;

HAVING REGARD to the Regulation on the activity of granting loans (financial companies) No. 2011-03;

HAVING REGARD to the resolutions of the Supervisory Coordination and the Board of Directors by which the text of Regulation No. 2012-01 constituting Update III of Regulation No. 2007-07 regarding the collection of savings and banking activity, as well as Update I of Regulation No. 2011-03 regarding the activity of granting loans (financial companies), was approved;

ISSUES the attached Regulation No. 2012-01 which enters into force on 30 June 2012.

San Marino, 21 June 2012 Signed: THE DEPUTY GENERAL MANAGER Daniele Bernardi

REGULATION ON THE COLLECTION OF SAVINGS AND BANKING ACTIVITY UPDATE NO. III REGULATION ON THE ACTIVITY OF GRANTING LOANS (FINANCIAL COMPANIES) UPDATE NO. I year 2012 / number 01

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Article 1 – Common modifications to Regulation No. 2007-07 and Regulation No. 2011-03.

1. At Article I.I.2, paragraph 1, the following definition is added: “25. bis “restructured credits”: exposures, both on-balance sheet and off-balance sheet, for which a [bank/FINANCIAL COMPANY], due to the deterioration of the debtor's economic-financial conditions, agrees to modifications of the original contractual conditions (for example: rescheduling of terms, reduction of debt and/or interest, etc.) that result in a loss. Exposures towards companies for which cessation of activity is planned (for example, cases of voluntary liquidation or similar situations) are excluded. Exposures whose anomalous situation is attributable exclusively to profiles related to Country Risk are also excluded from recording. The requirements relating to the “deterioration of the debtor's economic-financial conditions” and the presence of a “loss” are presumed to be satisfied if the restructuring concerns exposures already classified among non-performing loans or among matured and/or overdrawn credits. Restructured credits must be recorded as such until the extinction of the relationships subject to restructuring. The [bank/FINANCIAL COMPANY] may derogate from this rule if, at least two years after the date of signing the restructuring agreement, it attests by reasoned resolution of the competent corporate bodies that the debtor has recovered full solvency conditions and that there are no defaults on all credit lines. Without prejudice to the general criteria for classification as non-performing or doubtful, the [bank/FINANCIAL COMPANY] is required, upon the occurrence of the first default by the debtor, to classify the entire exposure among non-performing loans or doubtful items, depending on the degree of the debtor's anomaly. Any restructuring of credit exposures towards subjects classified as non-performing is presumed to be carried out with a liquidation intent and therefore does not fall under the definition of restructured credits but under that of non-performing loans. The same criterion applies to the restructuring of exposures classified as doubtful, if the renegotiation of contractual conditions essentially constitutes a repayment plan for the exposure (liquidation intent). In this latter case, the [bank/FINANCIAL COMPANY] is also required to verify whether the conditions for classifying the position towards the customer among non-performing loans are met. In the case of total restructurings of doubtful exposures, carried out without liquidation intent, the entire exposure towards the debtor must be classified as restructured. Conversely, in the case of partial restructurings of doubtful exposures, the entire exposure remains classified in its category of origin. If the object of restructuring (total or partial) is exposures classified as “in good standing” or matured/overdrawn, the entire exposure towards the debtor is classified as restructured;”

2. Article III.III.4, paragraph 2, is replaced as follows: “2. Contributions other than in cash are not permitted, except for the possibility, within the scope of share capital increase operations, of contribution, by other FINANCIAL COMPANIES, of businesses, branches of businesses, or legal relationships identifiable as a block, provided they are instrumental to the contributing [bank/FINANCIAL COMPANY].”

3. Article III.V.9, paragraph 1, letter a), is replaced as follows: “a) to stably possess human resources in sufficient number, and with suitable professional profiles, to ensure sound and prudent management in the startup phase of the [banking activity/CREDIT ACTIVITY];”

4. Article IV.II.3, paragraph 2, is replaced as follows: “2. For the purposes of letter a), bankruptcy proceedings, or extraordinary proceedings, or equivalent foreign procedures, are relevant only if initiated during the period in which the subject held, for at least one year, positions of administration, direction, or control in the company or in the year following the cessation of the same positions.”

5. The following paragraph is inserted into Article IV.II.3: “4. For the member of the Board of Directors who, in the absence of the General Manager, is delegated to perform the functions of HEAD OF THE EXECUTIVE STRUCTURE, the professional requirements are those set out in the following article.”

6. The following paragraph is inserted into Article V.II.6: “4. In cases where the APPLICANT SUBJECT is itself an authorized subject, the exemption regime provided for in Article V.II.5 also applies with regard to the documentation required to prove its ability to ensure sound and prudent management, if already produced to the CENTRAL BANK for other supervisory purposes.”

7. Article V.III.2, paragraph 4, is replaced as follows: “4. Without prejudice to what is established in the previous paragraphs, for operations that involve a modification of the shareholding chain, a request for prior authorization must be made only if such modifications determine the exceeding of relevant thresholds by the subjects directly holding the shares and/or by their trustees and/or CONTROLLING SUBJECTS, that is, those subjects located respectively at the beginning and at the end of the chain.”

8. Article V.V.3, paragraph 1, is replaced as follows: “1. Pursuant to Article 22 of the LISF, the CENTRAL BANK, in cases of: a) lack of authorization pursuant to Article V.III.6; b) revocation of authorization pursuant to Article V.V.1; c) lack of honorability requirements; can order the alienation of the holdings held in violation of legal and supervisory obligations, assigning to the shareholder a term not exceeding one hundred and eighty days to complete the operation; the expiration of the

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term is suspended from the date of presentation, by the potential buyer, of the authorization request referred to in the previous Title III, provided it is complete in accordance with Articles V.III.3 and V.III.4.”

9. Article V.V.4, paragraph 1, is replaced as follows: “1. For the purposes of verification referred to in the previous Article V.V.1, SHAREHOLDERS of [banks/FINANCIAL COMPANIES] must retransmit to the CENTRAL BANK every three years the certificates referred to in Articles:

• V.II.2, paragraphs 1 and 2;
• V.II.7, paragraph 1, letters a) and b);
• V.II.8, paragraph 1.”

10. Article VII.II.4, paragraph 4, is replaced as follows: “4. From the sum of “basic capital” and “supplementary capital”, in addition to what is reported in the first two paragraphs of this article, the assets that consist in the EXPOSURE, direct or INDIRECT, towards SHAREHOLDERS of the [bank/FINANCIAL COMPANY] and/or towards subjects connected to them on a legal and/or economic basis pursuant to Article I.I.2, are deducted:

• with the exception of FINANCIAL COMPANIES controlled by the [bank/FINANCIAL COMPANY]
• including legal persons or intermediary subjects who are shareholders of the [bank/FINANCIAL COMPANY]
• net of any liabilities towards the same subjects
• within the limits of contributions referable to them
• using the same weighting factors adopted for the calculation of the solvency ratio.”

11. Letters d), g), and h) of Article VII.III.4, paragraph 1, are replaced as follows: “d) 50% for credits arising from financial leasing contracts having as object “real estate” used, or intended to be used, directly by the lessee as residence or headquarters of its economic activity;” “g) 150% for holdings in NON-FINANCIAL COMPANIES with negative balance sheet results in the last two financial years; h) 150% for NON-PERFORMING LOANS with the exception of those referred to in the previous letters d) and e) for which the multiplier factor changes from 50% to 100%.”

12. Paragraphs 1 and 2 of Article VII.VII.2 are replaced as follows: “1. [Banks/FINANCIAL COMPANIES] are allowed to exceed the general limit referred to in Article VII.VI.1, only in cases where the acquisition of real estate is due to the protection of their credit rights. Real estate acquired in this capacity must nevertheless be divested within:

• 24 months from their acquisition, when vacant or otherwise unused;
• 36 months from their acquisition, when occupied for residential use or as business headquarters.

2. The terms referred to in paragraph 1, save for what is provided for in Article 148 of the LISF, also apply to cases of termination of active real estate financial leasing contracts, the assets of which must be divested within 24 months from the date of reacquisition of their full availability or anyway within 36 months from the date of termination of the contract.”

3. Letter b) of Article VII.IX.6, paragraph 2, is replaced as follows: “b) to regularly inform, with at least quarterly frequency, the Board of Directors, the Board of Statutory Auditors, and the HEAD OF THE EXECUTIVE STRUCTURE of the activity carried out and its results, sending a copy of their periodic reports to the CENTRAL BANK for information;”

4. Paragraph 6 of Article VII.IX.11 is replaced as follows: “6. Within the GENERAL INTERNAL REGULATIONS, the procedures and obligations referred to the credit monitoring phase, entrusted to structures with adequate autonomy, as well as the methods and timing for activating appropriate initiatives in case of detection of problematic credits, must be specified, as well as a periodicity of at least annual for the review of credit lines, with the sole exception of loans with a regularly ongoing financial amortization plan.”

5. Letter b) of Article VIII.II.5, paragraph 2, is replaced as follows: “b) recipient: Supervision Department;”

Article 2 – Specific modifications to Regulation No. 2007-07

1. Article II.III.6, paragraph 4, is replaced as follows: “4. For dematerialized certificates of deposit, the minimum content mentioned above must be reported in the form, signed by the CLIENT as a request for issuance, and a copy signed by bank staff endowed with the necessary powers must be delivered to the same.”

Article 3 – Specific modifications to Regulation No. 2011-03

1. The following paragraph is inserted into Article VII.IV.4: “4. The limits referred to in Articles VII.IV.2 and VII.IV.3 do not apply in cases where they are already subject to verification and limitation as INDIRECT EXPOSURES of the authorized subject exercising control over the FINANCIAL COMPANY, provided that the latter is financed predominantly by the controlling authorized subject.”

2. Letter b) of Article VII.IX.1, paragraph 1, is replaced as follows:

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“b) availability, in quantitative and qualitative terms, of adequate human resources possessing, especially with reference to PERSONNEL HOLDING ORGANIZATIONAL UNITS, professional skills consistent, in terms of training paths and work experience, with the duties assigned to them;”

3. Article XI.V.1, paragraph 1, is replaced as follows: “1. EXISTING COMPANIES must comply with prudential supervision rules, in the simplified form provided for LIMITED OPERATIONAL FINANCIAL COMPANIES, by 31/12/2012, with the exception of the parameter referred to in Article VII.VI.1 which, taking into account the prevailing supervisory provisions, must be satisfied, with reference to supervisory capital calculated in accordance with Part VII, Title II of this Regulation, starting from 30/09/2011. Without prejudice to the maximum deadline of 31/12/2012, taking into account also the option for early adoption of new supervisory provisions for the purposes of Article XI.II.4, paragraph 3, letter b), the milestones for gradual application are reported below for: a) the multiplier factor of NON-PERFORMING LOANS:

• 100% until 31/12/2011;
• 150% from 01/01/2012; b) the capital coverage coefficient for operational risks:
• 5% until 31/12/2011;
• 10% from 01/01/2012;
• 15% from 01/01/2013.”

4. Article XI.V.2, paragraph 4, is replaced as follows: “4. Without prejudice to what is specified in the previous paragraph, the credit granting processes adopted by EXISTING COMPANIES, within a term of 18 months from the entry into force of this Regulation, must comply with the supervisory provisions contained in Article VII.IX.11.”

Article 4 – Modifications to Regulation No. 2011-02

1. Pursuant to what is provided for in Article 1, paragraph 11 of this Regulation, Article 3, paragraph 3, is replaced as follows: “3. The new criteria for verifying prudential supervision requirements regarding capital coverage for debtor default risks and operational risks must be applied according to the following multi-year plan:

• multiplier factor for non-performing loans: 150% from 01/01/2012;
• coverage coefficient for operational risks: 5% from 01/07/2011 – 10% from 01/01/2012 – 15% from 01/01/2013.”.

Article 5 – Entry into force

1. This Regulation enters into force on 30 June 2012.

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Article 6 – Consolidated texts

1. The texts of Regulations Nos. 2007-07, 2011-02, and 2011-03, consolidated with the modifications introduced by this Regulation, will be made available on the website of the Central Bank of the Republic of San Marino (www.bcsm.sm)