Agreement No. 011-2022: Adding Item 13 to Article 4 of Agreement No. 8-2010 on Integrated Risk Management

Republic of Panama Banking Superintendence AGREEMENT No. 011-2022 (November 1, 2022)

"Adding Item 13 to Article 4 of Agreement No. 8-2010 on Integrated Risk Management"

THE BOARD OF DIRECTORS

in the exercise of its legal powers, and

CONSIDERING:

That following the issuance of Law Decree No. 2 of February 22, 2008, the Executive Branch prepared a systematic compilation in the form of a Single Text of Law Decree No. 9 of February 26, 1998, and all its modifications, which was approved through Executive Decree No. 52 of April 30, 2008, hereinafter referred to as the Banking Law;

That in accordance with items 1 and 3 of Article 5 of the Banking Law, it is the objective of the Banking Superintendence to ensure the maintenance of the solidity and efficiency of the banking system, as well as to foster public confidence in the banking system;

That in accordance with items 5 and 11 of Article 11 of the Banking Law, it is the technical authority of the Board of Directors to establish, within the administrative scope, the interpretation and scope of legal or regulatory provisions in banking matters, as well as to issue necessary technical norms for the compliance with the Law;

That Agreement No. 8-2010 of December 1, 2010, establishes provisions on integrated risk management, so that banks and banking groups implement an integrated risk management process that allows them to identify, evaluate, monitor, and control or mitigate the different types of risk to which they are exposed according to the size and complexity of their operations, products, and services;

That through Agreement No. 9-2017 of November 7, 2017, Article 4 of Agreement No. 8-2010 was modified to incorporate the concept of social and environmental risk, which consists of the possibility that a bank incurs losses due to negative environmental and social impacts caused by granting credits for the financing of projects; as well as by activities arising from the environment in which it operates, significantly affecting the economic, social, or environmental system;

That this Banking Superintendence has considered since 2017 the importance and necessity of social and environmental risk within the types of risks that banking entities must take into consideration, in order to carry out correct management and administration of credit risk;

That the Basel Committee since 2020 has published reports and guidelines highlighting the importance of mitigating financial risks associated with climate as a potential source of risk that, if materialized, could have negative consequences for financial institutions and the proper functioning of the financial system;

That international standards and best practices developed on financial risks associated with climate guide the processes and actions that banks must consider for the adequate management and administration of such risks;

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That in working sessions of this Board of Directors, the need and convenience of modifying Agreement No. 8-2010 has been manifested, in order to include the concept of climate-related financial risks.

AGREES:

ARTICLE 1. ADDITION. Item 13 is added to Article 4 of Agreement No. 8-2010 of December 1, 2010, as follows:

"ARTICLE 4. TYPES OF RISK: For the purposes of this Agreement, without prejudice to what is established in other Agreements, it is understood as: ... 13. Climate-related Risk. These are the current or possible negative impacts that may arise from climate change or from efforts to mitigate climate change. These impacts include the economic and financial consequences on an entity or organization. These risks can be classified into physical, transition, and liability risks.

13.1 Physical Risks. These are those derived from potential losses caused by the occurrence of extreme weather events or by gradual and long-term changes in climate patterns.

Physical risks can be acute, when they are caused by a specific disaster or by an increase in meteorological phenomena, or they can be chronic when they are due to long-term changes in climate patterns, such as changes in precipitation regimes and extreme variability in climate patterns, increase in the average regional temperature, and increase in sea levels.

13.2 Transition Risks. These are those associated with the transition to a low-carbon emission economy, which can generate political, technological, and market changes to address mitigation and adaptation measures related to climate change. Depending on the nature, speed, and approach of these changes, transition risks can pose risks of different levels for organizations. Within transition risks, the following are defined:

a. Political and legal climate-related risks. These are those derived from measures that seek to limit actions that contribute to the adverse effects of climate change or that seek to promote adaptation to climate change, such as the establishment of carbon pricing to reduce greenhouse gas (GHG) emissions, the energy transition towards sources with fewer emissions, the implementation of energy, water, or land use efficiency measures.

b. Climate-related technological risk. This is that which derives from technological improvements or innovations that support the transition to a low-carbon economy, such as new, more efficient, and less polluting emerging technologies, mechanisms for energy storage and carbon capture, which could affect the competitiveness of certain companies or economic activities, their production and distribution costs, and the demand for their products and services.

c. Climate-related market risk. This is that derived from changes in the supply and demand of certain raw materials, products, and services, due to changes in behavior and preferences of clients, investors, or consumers.

d. Climate-related reputational risk: This is that derived from changing perceptions of clients or the community regarding the

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contribution of certain traditional companies or economic sectors to the transition towards a low-carbon emission economy.

13.3 Climate-related legal liability risks. These are those derived from potential losses that may be generated by actions or omissions that cause losses or damages associated with climate change and that through judicial processes seek compensation through the repair of the damage caused, the application of prevention and mitigation measures, and assuming the corresponding costs.

ARTICLE 2. VALIDITY. The provisions of this Agreement will begin to govern from its promulgation.

Given in the city of Panama, on the first (1) day of the month of November of two thousand twenty-two (2022).

NOTIFY, PUBLISH, AND COMPLY.

THE PRESIDENT THE SECRETARY

Rafael Guardia Pérez Felipe Echandi Lacayo