Regulation No. 2023-02 on the Update of Supervisory Provisions Regarding Credit Exposures

THE GENERAL DIRECTOR
OF THE CENTRAL BANK OF THE REPUBLIC OF SAN MARINO HAVING REGARD TO Law No. 165 of 17 November 2005 (Law on Banking, Financial and Insurance Enterprises and Services), 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, pursuant to which acts of the Central Bank in the field of supervision, deliberated by the Supervisory Coordination, are issued by the General Director; CONSIDERING the needs to:

• complete the harmonization process of the credit taxonomy provided for by current supervisory provisions with EU standards;
• introduce, based on the new definitional framework, first-pillar prudential supervisory measures aimed at preventing the accumulation of deteriorated credit exposures in bank balance sheets;
• advance the transposition of the EU acquis in the banking and financial sector with a view to greater integration in international markets;
  HAVING REGARD TO the resolutions of the Supervisory Coordination and the Board of Directors by which the text of Regulation No. 2023-02, named “Regulation on the update of supervisory provisions regarding credit exposures”, was approved; ISSUES the attached Regulation No. 2023-02, which enters into force on 15 May 2023. San Marino, 9 May 2023 Signed: THE GENERAL DIRECTOR Dr. Andrea Vivoli

REGULATION
ON THE UPDATE
OF SUPERVISORY PROVISIONS
REGARDING CREDIT EXPOSURES year 2023 / number 02

INDEX
Article 1 – Amendments to Regulations Nos. 2007-07 and 2011-03 regarding credit taxonomy ................................................................... 2
Article 2 – Integration to Regulation No. 2016-02 regarding credit taxonomy .......................................................... 2
Article 3 – Amendments to Regulation No. 2007-07 regarding prudential treatment of credits ......... 8
Article 4 – Amendments to Regulations Nos. 2007-07 and 2011-03 regarding overdue credits and real estate guarantees ............................................................................................................................................. 11
Article 5 – Amendments to Circular No. 2012-03 on periodic information obligations of banks regarding prudential supervision .............................................................................................................. 11
Article 6 – Amendments to Circular No. 2013-01 on periodic information obligations of financial companies regarding prudential supervision ......................................................................................... 11
Article 7 – Amendments to Regulation No. 2014-02 regarding the detection of threshold rates for anti-usury purposes, ex Article 207 C.P. ................................................................................................................................ 12
Article 8 – Amendments to Circular No. 2015-02 regarding information obligations concerning the risk central registry ............................................................................................................................................................... 12
Article 9 – Amendments to Circular No. 2017-03 regarding information obligations concerning the business balance sheet ............................................................................................................................................................... 13
Article 10 – Amendments to Circular No. 2017-04 regarding information obligations concerning the accounting situation (SC) ......................................................................................................................................... 23
Article 11 – Final and transitional provisions .................................................................................................. 23
Article 12 – Consolidated texts ................................................................................................................ 24

Article 1 – Amendments to Regulations Nos. 2007-07 and 2011-03 regarding credit taxonomy

1. In Article I.I.2, paragraph 1, of Regulations Nos. 2007-07 and 2011-03, the following definitions are repealed:

• “doubtful credits”;
• “troubled credits”;
• “bad debts”;
• “unsecured credits towards risky countries”;
• “restructured credits”;
• “overdue and/or overdrawn credits”.

2. In Article I.I.2 of Regulations Nos. 2007-07 and 2011-03, paragraph 3 is replaced as follows:
   “3. For all terms not subject to definition in paragraph 1, reference is made to the definitions and notions contained in the articles of the LISF, as well as to Article I.I.3 of Regulation No. 2016-02 regarding the taxonomy of credit exposures and the elements instrumental to their definition.”
3. In Regulations Nos. 2007-07 and 2011-03, every expression “doubtful credits” is replaced with “deteriorated credit exposures”.

Article 2 – Integration to Regulation No. 2016-02 regarding credit taxonomy

1. To Part I, Title I, of Regulation No. 2016-02, the following Article is added:
   “Article I.I.3 – Credit Taxonomy
2. Credit exposures are understood as credits towards credit institutions and credits towards customers, guarantees issued and commitments, with certain and uncertain usage, revocable or irrevocable, thus excluding exposures arising from financial instruments.
3. Credit exposures are defined as retail when towards:
   a) natural persons; b) small and medium-sized enterprises (SMEs), i.e., enterprises employing fewer than 250 persons, whose annual turnover does not exceed 50 million euros or whose annual total balance sheet does not exceed 43 million euros, provided that the amount owed to the creditor by the SME or the group of connected debtor customers – including any past overdue exposures, but excluding exposures secured by residential real estate – does not exceed 1 million euro, that the creditor verifies by adopting all reasonable measures, provided that they are part of a significant number of exposures having similar characteristics, so that the risks associated with each of them are substantially reduced and that the creditor, in risk management, treats such exposures in an analogous and consistent manner over time.
4. Credit exposures are defined as performing when they do not fall among deteriorated ones. Credit exposures are considered deteriorated in the following cases:

a) exposures relating to a debtor in default; b) exposures subject to impairment in accordance with this Regulation; c) exposures on trial that have been overdue for more than 30 days or for which additional concession measures have been granted; d) exposures in the form of a commitment that, if used or otherwise activated, would probably not be repaid in full without enforcement of real guarantees; e) exposures in the form of a financial guarantee that would probably be activated by the guaranteed party, including cases where the underlying guaranteed exposure meets the criteria to be considered deteriorated. For the purposes of the information obligations under Circular No. 2017-03 and supervisory reporting, deteriorated credit exposures are nevertheless classified into the following three sub-categories: “bad debts”, “probable defaults”, “overdue and/or overdrawn”, with consequent separation of the former from the latter, preserving greater detail and continuity of historical series related to the sub-categories used previously. This allows highlighting the subset of deteriorated credit exposures (bad debts) characterized by greater severity.
4. For the purposes of the previous paragraph 3, letter a), a debtor is defined as in default if one or more of the following conditions occur:
a) the creditor judges it unlikely that, without recourse to actions such as enforcement of guarantees, the debtor will fully comply with its credit obligations towards the creditor itself (probable default); b) the debtor is in arrears (overdue and/or overdrawn) for more than 90 consecutive days in the payment of a relevant credit obligation towards the creditor, unless it is a retail credit exposure secured by real estate or a credit exposure towards public sector entities (central and local), in which case the period of 180 consecutive days applies. In the case of retail credit exposures, the creditor may apply the definition of default under letters a) and b) at the level of a single credit line rather than in relation to the total obligations of a debtor. If the creditor has on-balance sheet credit exposures towards a debtor in arrears for more than 90 or 180 days, as provided in the previous letter b), which represent more than 20 percent of the total on-balance sheet credit exposures towards the same debtor, all on-balance sheet and “off-balance sheet” credit exposures towards such debtor are considered overdue and/or overdrawn (so-called pulling effect). If a debtor belongs to a group, the need to consider overdue and/or overdrawn also exposures towards other subjects in the group is evaluated, except for exposures subject to isolated disputes that are not linked to the solvency of the counterparty. For the purposes of letter a), among the elements to be considered as indicative of unlikely compliance are the following circumstances:

1. the creditor includes the credit among bad debts;

2. the creditor performs a specific impairment on credits resulting from a significant deterioration in creditworthiness subsequent to the assumption of the exposure;

3. the creditor sells the credit suffering a significant economic loss;

4. the creditor agrees to an onerous restructuring of the credit, which implies a likely reduced financial obligation due to a substantial debt forgiveness or deferral of payments of capital, interest, or, if applicable, fees;

5. the creditor has filed a petition for the opening of judicial insolvency proceedings for the debtor or has initiated an analogous procedure;

6. the debtor has requested or has been subjected to judicial insolvency proceedings or an analogous situation, where this prevents or delays the repayment of the obligation towards the creditor;
   For the purposes of letter b), the following applies:

7. for overdrafts, the count of days in arrears begins from the moment the debtor exceeded the granted limit, received notification of a lower limit than the existing negative balance, or used credit without authorization and the overdraft amount is considerable;

8. for the purposes of the previous point, the granted limit includes any credit threshold determined by the creditor and regarding which the debtor has been informed by the creditor itself;

9. the count of days in arrears for credit cards starts from the date of debit of the minimum payment;

10. the overdue credit obligation is evaluated applying specific relevance thresholds.
    If the creditor judges that a credit exposure previously classified as in default is such that none of the circumstances provided in the definition of default apply anymore, the creditor classifies the debtor or the operation as if it were a performing exposure. If any of the aforementioned circumstances occur subsequently, another default is deemed to have occurred.

5. For the purposes of the previous paragraph 3, letter c), “credit exposures on trial” are those that have ceased to be classified as deteriorated credit exposures, pursuant to the subsequent paragraph 12, letter b), until all the following conditions are met:
   a) at least two years have passed from the date on which the exposure subject to concession measures was reclassified as a performing exposure; b) regular and due payments have been made for at least half of the period during which the exposure is on trial, resulting in the payment of a substantial aggregate amount of capital or interest; c) none of the exposures towards the debtor are overdue for more than 30 days.
6. For the purposes of the previous paragraph 5, “concession measures” are understood as concessions granted by the creditor to the debtor who has encountered or risks encountering difficulties in meeting its financial commitments. The concession, which may entail a loss for the creditor, refers to one of the following actions:
   a) the modification of the terms and conditions of the debt obligation, when the modification would not have been granted if the debtor had not encountered difficulties in meeting its financial commitments; b) the full or partial refinancing of the debt obligation, when the refinancing would not have been granted if the debtor had not encountered difficulties in meeting its financial commitments. At least the following situations are considered concession measures:
   a) new contractual terms more favorable for the debtor compared to previous contractual terms, in case the debtor encounters or could reasonably encounter difficulties in meeting its financial commitments;

b) new contractual terms more favorable for the debtor compared to contractual terms offered at the same time by the creditor to debtors with the same risk profile, in case the debtor encounters or could reasonably encounter difficulties in meeting its financial commitments; c) pursuant to the initial contractual terms, the exposure was classified as a deteriorated credit exposure before the modification of contractual terms or would have been classified as a deteriorated credit exposure in the absence of modification of contractual terms; d) the measure entails the total or partial cancellation of the debt obligation; e) the creditor approves the exercise of clauses that allow the debtor to modify contractual terms and the exposure was classified as a deteriorated credit exposure before the exercise of the relevant clauses, or would be classified as a deteriorated credit exposure if the clauses were not exercised; f) at the time or near the granting of the credit, the debtor made payments of capital or interest for another debt obligation towards the creditor and classified as a deteriorated credit exposure or that would have been classified as a deteriorated credit exposure in the absence of said payments; g) the modification of contractual terms provides for repayment made through taking possession of the real guarantee, if the modification constitutes a concession. The following circumstances constitute a rebuttable presumption that concession measures have been adopted:
a) the initial contract recorded a payment delay of more than 30 days, at least once during the three months preceding the modification or would be in payment delay of more than 30 days without the modification; b) at the time or near the conclusion of the credit contract, the debtor made payments of capital or interest for another debt obligation towards the bank overdue by 30 days, at least once in the three months preceding the granting of the new credit; c) the creditor approves the exercise of clauses that allow the debtor to modify contractual terms and the exposure is overdue by 30 days or would be overdue by 30 days if the clauses were not exercised. For the purposes of this definition, the difficulties encountered by the debtor in meeting its financial commitments are evaluated at the debtor level, taking into account all legal entities of the debtor’s group included in the group’s accounting consolidation and the natural persons controlling the group.
7. For the purposes of the previous paragraph 4, letter a), “probable defaults” (“unlikely to pay”) are understood as credit exposures for which, in the creditor’s judgment, it is unlikely that, without recourse to actions such as enforcement of guarantees, the debtor will fully comply (in capital and/or interest) with its credit obligations, regardless of the presence of any overdue and unpaid amounts (or installments). It is therefore not necessary to wait for the explicit symptom of anomaly (non-repayment), where there are elements implying a situation of debtor default risk (for example, a crisis in the sector in which the debtor operates).
Within the credit exposure qualified as a probable default, all on-balance sheet and “off-balance sheet” exposures towards the same debtor in the aforementioned situation must be included.

Retail exposures may be classified in the category of probable defaults at the level of a single credit line, provided that the creditor assesses that the conditions for classifying the entire set of exposures towards the same debtor in this category do not apply.
8. For the purposes of the previous paragraph 4, letter b), point 4), overdue and overdrawn deteriorated credit exposures are understood as those overdue credit obligations that exceed both of the following “relevance thresholds”:
a) 100 euros for retail exposures and 500 euros for exposures other than retail (absolute threshold); b) 1% of the total exposure towards a counterparty (relative threshold).
The absolute threshold is determined as the sum of all amounts of overdue credit obligations owed by the same debtor to the creditor.
The relative threshold is determined as the ratio between the amount of overdue credit obligations and the total amount of all credit exposures of the creditor towards the same debtor.
Once both thresholds are exceeded, the count of days of overdue status begins, as per the definition of debtor default reported in the previous paragraph 4.
In the determination of the thresholds, amounts in arrears relating to capital, interest, and fees are considered, and it is not permitted to offset the amounts of overdue credit obligations with available and unused credit lines. Creditors who, for the definition of default for retail exposures, adopt the single credit line approach (so-called transaction approach) instead of the debtor approach, determine the thresholds under points a) and b) with reference to the single credit line.
9. As a result of the combined application of the previous paragraphs 4 and 8, performing credit exposures are those that are overdue and/or overdrawn for no more than 90 days (or 180 in the provided cases) and/or that are overdue and/or overdrawn without exceeding the relevance thresholds. In all other cases, overdue and/or overdrawn credit exposures fall among “deteriorated” ones, and must be reclassified among “probable defaults” if the classification under the previous paragraph 7 better represents the deterioration of the debtor’s creditworthiness.
10. “Bad debts” are understood as the set of on-balance sheet and “off-balance sheet” credit exposures towards a subject in a state of insolvency (even if not judicially established) or in substantially equivalent situations, regardless of any loss provisions formulated by the creditor.
Reference is made without regard to the existence of any guarantees (real or personal) securing the exposures.
The entire exposure includes capitalized interest and expenses incurred for recovery activities.
Exposures whose anomaly situation is attributable to country risk profiles are excluded.
Also included are:
a) exposures towards public entities in a state of financial distress; b) exposures arising from leasing contracts terminated due to the lessee’s default, until new financial leasing of the same goods to another lessee or sale of said goods to third parties, with consequent recovery of the credit up to the sum collected from the sale or computed in a new leasing contract, regardless of the repurchase of full ownership of the good and subject to cases of extinction of every credit right through settlement agreements, which provide for datio in solutum by the former lessee in favor of the former lessor of the appraised economic value of their right to the return of any potential surplus deriving from the sale or re-leasing of the good, with broad and reciprocal releasing effect; c) exposures towards subjects for whom the conditions for their classification among bad debts occur and which present one or more credit lines that meet the definition of deteriorated credit exposures subject to concession measures.
11. Credit exposures subject to concession measures (forbearance) are understood as credit exposures, deteriorated or performing, to which a concession measure under the previous paragraph 6 has been applied. Exposures are not considered subject to concession measures if the requirement of the debtor’s difficulty in meeting its financial commitments does not exist.
If the concession concerns exposures towards performing debtors or performing overdue and/or overdrawn exposures, the requirement of the debtor’s difficulty in meeting its financial commitments is presumed satisfied if the concession concerns a pool of intermediaries. A credit exposure subject to concession measures may be considered performing from the date of application of the concession measures if both of the following conditions are met:
a) such application did not result in the classification of the exposure as a deteriorated exposure; b) the expos