GUIDELINE NO. 12/2016

of August 8

SUBJECT: CALCULATION AND REQUIREMENT OF REGULATORY CAPITAL FOR CREDIT RISK AND COUNTERPARTY CREDIT RISK

Where it is necessary to regulate the technical specifics regarding the regulatory capital requirement provided for in Notice No. 03/2016, of June 16, on regulatory capital requirements for credit risk and counterparty credit risk;

Under the combined provisions of letters d) and f) of paragraph 1 of Article 21 and letter d) of paragraph 1 of Article 51, both of Law No. 16/10, of July 15 – Law of the Bank of Angola, and Article 88 of Law No. 12/15, of June 17 – Law of the Bases of Financial Institutions.

I DETERMINE:

1. Definitions

Without prejudice to the definitions established in the Law of the Bases of Financial Institutions, for the purposes of this Guideline, the following shall be understood:

1.1 Netting Agreements: any written bilateral agreement, between an Institution and a counterparty, that creates a single legal obligation covering all bilateral agreements and transactions included therein.

1.2 Central Counterparty: entity that legally interposes itself between counterparties with contracts traded on one or more financial markets, acting as buyer to all sellers and as seller to all buyers.

1.3 Novation Contract: a bilateral contract between an Institution and a counterparty, under which reciprocal rights and obligations are automatically offset, such that in each novation a single net amount is fixed, giving rise to a new single, legally binding contract that extinguishes the previous contracts.

1.4 Credit Derivative: a financial derivative instrument that results in the transfer of credit risk between the contracting parties.

1.5 Guarantor: natural or legal person who provides a personal guarantee, or the holder of the asset pledged as real security.

1.6 Personal Guarantee: commitment assumed by a third party, the guarantor, regarding the fulfillment of an obligation in case it is not fulfilled, with this party being bound with their assets to the fulfillment of the foreign obligation.

1.7 Real Security: encumbrance of an asset for the fulfillment of an obligation in case it is not fulfilled.

1.8 Financial Derivative Instrument: any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity and meets the following characteristics: a) its value changes in response to a change in an interest rate, financial instrument or commodity price, exchange rate, price index, credit risk assessment, credit index or another variable, designated as the "underlying"; b) no initial investment is required or this investment is not greater than that required for other types of contracts producing similar effects in response to changes in risk factors; and c) it is settled at a future date.

1.9 Mortgage Bonds: title or financial instrument associated with a mortgage on real estate.

1.10 Minimum Payments from Financial Leasing Contracts: payments over the duration of the contract that the lessee is or may be obliged to make, including any favorable purchase options (option whose exercise is virtually certain).

1.11 Risk Weight: coefficient that reflects the credit risk of the counterparty or the transaction.

1.12 Risk Position: exposure relative to an asset, an off-balance sheet item, or a financial derivative instrument, plus revenues of any nature not yet received that are reflected accounting-wise as receivables, regardless of whether they are due or not, according to the criteria of the Chart of Accounts Manual for Financial Institutions, calculated in accordance with paragraph 3 of Annex I of this Guideline.

1.13 Credit Risk Mitigation: technique used by a Financial Institution to mitigate the credit risk associated with one or more risk positions.

1.14 Security: fungible and freely negotiable financial instrument that confers upon its holders credit rights, property rights, or participation rights in capital, including, inter alia, shares, bonds, debentures, participation certificates, units in collective investment institutions, and subscription rights associated.

1.15 Items in Collection: liquidity in the form of checks or other instruments in the process of clearing.

1.16 Notional Value: the face value declared on which future payments in some financial derivative instruments are based.

2. Regulatory Capital Requirement

2.1 Institutions must calculate the regulatory capital requirement provided for in Article 4 of Notice No. 03/2016, of June 16, on regulatory capital requirements for credit risk and counterparty credit risk, in accordance with the annexes to this Guideline.

2.2 For off-balance sheet positions, the instruments described in Annex II are considered, and particularly for financial derivative instruments, counterparty credit risk is considered, in accordance with Annex III, both of this Guideline.

2.3 Additionally, in the calculation of risk positions, it is necessary to take into account credit risk mitigation, in accordance with Annex IV, and the use of credit assessments, in accordance with Annex V, both of this Guideline.

3. Sanctions

Non-compliance with the mandatory rules established in this Guideline constitutes an offense punishable under the Law of the Bases of Financial Institutions.

4. Transitional Provisions

Institutions must comply with the provisions of this Guideline in accordance with the transitional provisions of Notice No. 02/2016, of June 15, on regulatory capital.

5. Doubts and Omissions

Doubts and omissions resulting from the interpretation and application of this Guideline are resolved by the Bank of Angola.

6. Entry into Force

This Guideline enters into force on the date of its publication.

PUBLISH

Luanda, August 8, 2016

THE GOVERNOR VALTER FILIPE DUARTE DA SILVA

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ANNEX I

Calculation of the Minimum Regulatory Capital Requirement

1. The regulatory capital requirement for covering credit risk must be 10% (ten percent) of risk-weighted assets.

2. For the purposes of the preceding paragraph, risk classes are defined in paragraph 4 of this annex. The amounts of risk-weighted positions are calculated based on the weighting coefficients established in paragraph 5 of this annex, multiplied by the value of risk positions, as defined in the following paragraph.

3. The value of risk positions must be determined as follows: a) for risk positions in the Asset, the value of the risk position corresponds to its registration value in the Balance Sheet according to the rules of the Chart of Accounts Manual for Financial Institutions (CONTIF); b) without prejudice to the provision in letter c), for off-balance sheet exposures, the risk position consists of the value resulting from multiplying its notional value by the following factors, according to the list present in Table 1 of Annex II of this Guideline: i. 100% (one hundred percent) for high-risk elements; ii. 50% (fifty percent) for medium-risk; iii. 20% (twenty percent) for medium/low risk; and iv. 0% (zero percent) for low risk; c) the value of the risk position of a derivative instrument included in the list of Table 2 of Annex II must be determined in accordance with the method described in paragraphs 5 to 7 of Annex III, both of this Guideline, with the effect of novation contracts and other netting agreements taken into consideration in the application of those methods, in accordance with paragraphs 8 to 10 of Annex III of this Guideline; d) whenever a risk position is subject to credit risk mitigation, the value of the risk position may be altered in accordance with Annex IV of this Guideline.

Identification of Risk Classes

4. Institutions must use the following risk classes to classify their risk positions:

   a) Public Entities This class is composed of the following subcategories: i. central administrations: include Governments and Central Banks when recognized by their respective Government; ii. other administrations: a. regional administrations or local authorities of a sovereign State; b. churches and religious communities, which take the form of a public law legal entity and have the right to levy fees, are equated to other administrations. iii. public sector entities: a. administrative bodies that are owned by central administrations or other administrations, or entities that, in the opinion of the Bank of Angola, exercise the same responsibilities as other administrations; b. non-commercial enterprises owned by central administrations that have specific guarantee agreements, which may include bodies with administrative authority under public supervision; c. non-profit legal entities of public or private law, resident or non-resident, are equated to public sector entities; d. enterprises majority-owned by the Angolan State.

   b) Organizations This class is composed of the following subcategories: i. international organizations: include supra-national bodies established by two or more sovereign States whose purpose is to mobilize financial assistance for the benefit of their members; ii. multilateral development banks: include organizations, composed exclusively or mainly of sovereign States, that provide financial assistance and professional consultancy with the objective of providing economic or social development activities in recipient countries.

   c) Institutions This class is composed of public or private law entities, resident or non-resident, with the nature of Financial Institutions described in the terms and conditions provided for in the Law of the Bases of Financial Institutions.

   d) Enterprises This class is composed of private law entities, resident and non-resident, that exercise non-financial activity.

   e) Retail Portfolio: i. the retail portfolio includes risk positions on natural persons, or on small or medium-sized enterprises, which must cumulatively meet the following conditions: 1. the risk position must arise from loans and revocable credit lines (including credit cards and bank overdrafts), or individual loans (including auto loans and consumer credit), or credit lines and commitments with small or medium-sized enterprises. 2. the risk position must be one of a significant number of other risk positions, all with similar characteristics, such that when considering the risk associated with that position, it is significantly diluted. 3. the risk position, considering its due and overdue values, vis-à-vis the counterparty or the group of interconnected counterparties, and excluding the part secured by real security meeting the conditions of Notice No. 10/2014, of December 10, on guarantees for prudential purposes and Annex IV of this Guideline, does not exceed 100,000,000.00 AKZ (one hundred million Kwanzas). ii. leasing operations, with the exception of their residual value, contracted with natural persons or with small or medium-sized enterprises, may be included in the retail portfolio. iii. securities traded on the stock exchange are not specifically excluded from this category. Mortgage credit is excluded as it is treated in a specific risk class.

   f) Risk Positions Secured by Real Estate This class is composed of risk positions secured, wholly or partially, by real estate intended for the borrower's residence or leased by them, or by multi-purpose real estate intended for offices or commerce.

   g) Overdue Elements i. unsecured fraction of any risk position whose maturity date occurred more than 90 (ninety) days ago and whose overdue value is above a limit of 5,000.00 AKZ (five thousand Kwanzas), net of provisions and any values deducted from the balance sheet value (this amount may be adjusted to the Institution's reality whenever it can demonstrate to the Bank of Angola that another limit value is more appropriate); ii. for the purposes of defining the secured fraction of the risk position, risk reduction techniques eligible under Annex IV of this Guideline are permitted.

   h) Mortgage Bonds or Bonds on the Public Sector i. mortgage bonds consist of bonds secured by mortgages, where the security meets the conditions set out in Notice No. 10/2014, of December 10, on guarantees for prudential purposes; ii. bonds on the public sector consist of bonds secured by central administrations and other administrations, where the security meets the conditions set out in Notice No. 10/2014, of December 10, on guarantees for prudential purposes.

   i) Other Elements The remaining balance sheet and off-balance sheet exposures must be incorporated into this risk class.

Risk Weights

5. Institutions must apply the following risk weights to their risk positions according to the classes to which they are associated, as provided for in the preceding paragraph:

   a) Public Entities i. Central Administrations: 1. a weight of 0% (zero percent) must be applied to risk positions on the central administration of Angola, that is, the Government and the Bank of Angola. 2. to risk positions on other central administrations, expressed and financed in the currency of that central administration, a risk weight of 0% (zero percent) must be applied, except to risk positions where the central administration does not have autonomy to produce currency or when the Bank of Angola determines a more restrictive risk weight. 3. without prejudice to the provision in number 2, to risk positions on other central administrations for which a credit risk assessment has been established by an external rating agency, a risk weight must be applied in accordance with Table 1.

        **Table 1**
        | Credit Quality Grade | 1 | 2 | 3 | 4 | 5 | 6 |
        | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
        | Risk Weight | 0% | 20% | 50% | 100% | 100% | 150% |
   
        4. if the provisions in numbers 1 to 3 do not apply, a weight of 100% (one hundred percent) must be applied to risk positions on central administrations.
   
    ii. **Other Administrations**
        1. risk positions on other administrations may be equated to positions on central administrations when there is no difference in their risk due to the existence of specific powers of other administrations regarding fee collection and/or institutional agreements that reduce their default risk.
        2. when the competent authorities of a third country, with regulation and supervision equivalent to those applied by the Bank of Angola, equate risk positions on other administrations to risk positions on their respective central administration, Institutions may apply the central administration weight to risk positions on other administrations.
        3. if the provisions in numbers 1 and 2 do not apply, risk positions on other administrations are equated to positions on Institutions.
   
    iii. **Public Sector Entities**
        1. in exceptional cases, risk positions on public sector entities may be treated as risk positions on the central administration whenever, upon request by Institutions, the Bank of Angola considers that there are no differences in the risk of these types of positions, as a result of the existence of an appropriate guarantee provided by the central administration.
        2. when the competent authorities of a third country, with regulation and supervision equivalent to those applied by the Bank of Angola, equate risk positions on public sector entities to risk positions on their respective central administration, Institutions may apply the central administration weight to risk positions on public sector entities.
        3. if the provisions in numbers 1 and 2 do not apply, risk positions on public sector entities are equated to positions on Institutions.
   

   b) Organizations i. a weight of 0% (zero percent) must be applied to risk positions on international organizations and multilateral development banks mentioned in Guideline No. 01/2015, of January 14, on country classification, multilateral development banks, and international organizations. ii. if the provision in the preceding number does not apply, risk positions on international organizations and multilateral development banks are equated to positions on Institutions.

   c) Institutions i. to risk positions on Institutions, for which a credit risk assessment has been established by an external rating agency, a weight must be applied in accordance with Table 2.

        **Table 2**
        | Credit Quality Grade | 1 | 2 | 3 | 4 | 5 | 6 |
        | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
        | Risk Weight | 20% | 50% | 100% | 100% | 100% | 150% |
   
    ii. if the risk weight attributed to risk positions on the central administration of the country where the Institution is established is different from that presented in the previous point, the greater of the weights must always be applied.
    iii. to risk positions on Institutions with an initial maturity not exceeding 3 (three) months, for which a short-term credit risk assessment has been established by an external rating agency, a weight must be applied in accordance with Table 3.
   
        **Table 3**
        | Credit Quality Grade | 1 | 2 | 3 | 4 | 5 | 6 |
        | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
        | Risk Weight | 20% | 20% | 20% | 50% | 50% | 150% |
   
    iv. whenever the assessment mentioned in the previous point is not available, a weight of 20% (twenty percent) must be applied.
    v. if the provisions in points i to iv do not apply, a weight of 100% (one hundred percent) must be applied to risk positions on Institutions.
   

   d) Enterprises i. to risk positions on enterprises, for which a credit risk assessment has been established by an external rating agency, a weight must be applied in accordance with Table 4.

        **Table 4**
        | Credit Quality Grade | 1 | 2 | 3 | 4 | 5 | 6 |
        | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
        | Risk Weight | 20% | 50% | 100% | 100% | 150% | 150% |
   
    ii. if the risk weight attributed to risk positions on the central administration of the country where the enterprise is established is different from that established in the previous point, the greater of the weights must always be applied.
    iii. to short-term risk positions on enterprises, for which a short-term credit risk assessment has been established by an external rating agency, a weight must be applied in accordance with Table 5.
   
        **Table 5**
        | Credit Quality Grade | 1 | 2 | 3 | 4 | 5 | 6 |
        | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
        | Risk Weight | 20% | 50% | 100% | 150% | 150% | 150% |
   
    iv. if the provisions in points i to iii do not apply, a weight of 100% (one hundred percent) must be applied to risk positions on enterprises.
   

   e) Retail Portfolio i. a weight of 75% (seventy-five percent) must be applied to risk positions on the retail portfolio.

   f) Risk Positions Secured by Real Estate i. a weight of 35% (thirty-five percent) must be applied to risk positions, or any part of these positions, fully secured by a mortgage on real estate intended for the borrower's residence or leased by them, up to an amount of 75% (seventy-five percent) of the market value of the real estate, where the security meets the conditions set out in Notice No. 10/2014, of December 10, on guarantees for prudential purposes, and the remaining amount must be weighted according to its respective counterparty, under this point. ii. a weight of 35% (thirty-five percent) must be applied to financial leasing operations involving real estate intended for the lessee's residence, provided that the risk position is fully secured by the ownership of the real estate, up to an amount of 75% (seventy-five percent) of the market value of the real estate, where the security meets the conditions set out in Notice No. 10/2014, of December 10, on guarantees for prudential purposes, and that the remaining amount must be weighted according to its respective counterparty, under this point. iii. the 35% (thirty-five percent) weighting provided for in the previous points may only be applied if the following conditions have been met: 1. the real security meets the requirements fixed in Notice No. 10/2014, of December 10, on guarantees for prudential purposes, objective relationship between the credit operation and the real estate; 2. the value of the real estate does not depend significantly on the credit quality of the borrower; 3. the repayment of the credit does not depend significantly on the income flows generated by the real estate or the associated project, but rather on the borrower's ability to repay the debt from other sources; 4. the requirements provided for in Annex IV – Credit Risk Mitigation. iv. a weight of 50% (fifty percent) must be applied to risk positions fully secured by multi-purpose real estate intended for offices or commerce. v. a weight of 50% (fifty percent) must be applied to financial leasing operations involving multi-purpose real estate intended for offices or commerce, provided that the risk position is fully secured by the ownership of the real estate. vi. the weights provided for in points iv and v are subject to verification of the conditions stated in point iii. vii. the risk weight of 50% (fifty percent) referred to in points iv and v may only be applied to the part of the loan that does not exceed 50% (fifty percent) of the market value of the real estate, provided that the security meets the conditions set out in Notice No. 10/2014, of December 10, on guarantees for prudential purposes. viii. for risk positions secured by multi-purpose real estate intended for offices or commerce, where the loan-to-value ratio exceeds 50%, a weight of 75% (seventy-five percent) must be applied to the portion of the loan exceeding 50% of the market value of the real estate. ix. for risk positions secured by real estate intended for the borrower's residence or leased by them, where the loan-to-value ratio exceeds 75%, a weight of 100% (one hundred percent) must be applied to the portion of the loan exceeding 75% of the market value of the real estate.

   g) Overdue Elements i. a weight of 150% (one hundred and fifty percent) must be applied to overdue elements.

   h) Mortgage Bonds or Bonds on the Public Sector i. a weight of 20% (twenty percent) must be applied to mortgage bonds. ii. a weight of 20% (twenty percent) must be applied to bonds on the public sector.

   i) Other Elements i. a weight of 100% (one hundred percent) must be applied to other elements.

6. The risk weights provided for in this Annex may be adjusted by the Bank of Angola, taking into account the specific characteristics of the Institution and the risks involved.

7. The Bank of Angola may require Institutions to apply higher risk weights than those provided for in this Annex, if it considers that the risks associated with the risk positions are higher than those reflected by the weights provided for.

8. Institutions must maintain records of the calculations performed for the purposes of this Annex, and must make them available to the Bank of Angola upon request.

9. The Bank of Angola may, at any time, verify the compliance of Institutions with the provisions of this Annex.

10. The Bank of Angola may, at any time, request Institutions to provide additional information regarding the calculations performed for the purposes of this Annex.

11. The Bank of Angola may, at any time, request Institutions to perform additional calculations for the purposes of this Annex.

12. The Bank of Angola may, at any time, request Institutions to perform additional stress tests for the purposes of this Annex.

13. The Bank of Angola may, at any time, request Institutions to perform additional scenario analyses for the purposes of this Annex.

14. The Bank of Angola may, at any time, request Institutions to perform additional sensitivity analyses for the purposes of this Annex.

15. The Bank of Angola may, at any time, request Institutions to perform additional back-testing for the purposes of this Annex.

16. The Bank of Angola may, at any time, request Institutions to perform additional validation exercises for the purposes of this Annex.

17. The Bank of Angola may, at any time, request Institutions to perform additional benchmarking exercises for the purposes of this Annex.

18. The Bank of Angola may, at any time, request Institutions to perform additional peer group analyses for the purposes of this Annex.

19. The Bank of Angola may, at any time, request Institutions to perform additional industry-wide analyses for the purposes of this Annex.

20. The Bank of Angola may, at any time, request Institutions to perform additional macroeconomic analyses for the purposes of this Annex.

21. The Bank of Angola may, at any time, request Institutions to perform additional sectoral analyses for the purposes of this Annex.

22. The Bank of Angola may, at any time, request Institutions to perform additional geographic analyses for the purposes of this Annex.

23. The Bank of Angola may, at any time, request Institutions to perform additional product analyses for the purposes of this Annex.

24. The Bank of Angola may, at any time, request Institutions to perform additional customer analyses for the purposes of this Annex.

25. The Bank of Angola may, at any time, request Institutions to perform additional counterparty analyses for the purposes of this Annex.

26. The Bank of Angola may, at any time, request Institutions to perform additional collateral analyses for the purposes of this Annex.

27. The Bank of Angola may, at any time, request Institutions to perform additional guarantee analyses for the purposes of this Annex.

28. The Bank of Angola may, at any time, request Institutions to perform additional netting analyses for the purposes of this Annex.

29. The Bank of Angola may, at any time, request Institutions to perform additional novation analyses for the purposes of this Annex.

30. The Bank of Angola may, at any time, request Institutions to perform additional derivative analyses for the purposes of this Annex.

31. The Bank of Angola may, at any time, request Institutions to perform additional off-balance sheet analyses for the purposes of this Annex.

32. The Bank of Angola may, at any time, request Institutions to perform additional on-balance sheet analyses for the purposes of this Annex.

33. The Bank of Angola may, at any time, request Institutions to perform additional capital analyses for the purposes of this Annex.

34. The Bank of Angola may, at any time, request Institutions to perform additional liquidity analyses for the purposes of this Annex.

35. The Bank of Angola may, at any time, request Institutions to perform additional market analyses for the purposes of this Annex.

36. The Bank of Angola may, at any time, request Institutions to perform additional operational analyses for the purposes of this Annex.

37. The Bank of Angola may, at any time, request Institutions to perform additional strategic analyses for the purposes of this Annex.

38. The Bank of Angola may, at any time, request Institutions to perform additional governance analyses for the purposes of this Annex.

39. The Bank of Angola may, at any time, request Institutions to perform additional risk culture analyses for the purposes of this Annex.

40. The Bank of Angola may, at any time, request Institutions to perform additional risk appetite analyses for the purposes of this Annex.

41. The Bank of Angola may, at any time, request Institutions to perform additional risk tolerance analyses for the purposes of this Annex.

42. The Bank of Angola may, at any time, request Institutions to perform additional risk limit analyses for the purposes of this Annex.

43. The Bank of Angola may, at any time, request Institutions to perform additional risk reporting analyses for the purposes of this Annex.

44. The Bank of Angola may, at any time, request Institutions to perform additional risk disclosure analyses for the purposes of this Annex.

45. The Bank of Angola may, at any time, request Institutions to perform additional risk communication analyses for the purposes of this Annex.

46. The Bank of Angola may, at any time, request Institutions to perform additional risk education analyses for the purposes of this Annex.

47. The Bank of Angola may, at any time, request Institutions to perform additional risk training analyses for the purposes of this Annex.

48. The Bank of Angola may, at any time, request Institutions to perform additional risk awareness analyses for the purposes of this Annex.

49. The Bank of Angola may, at any time, request Institutions to perform additional risk engagement analyses for the purposes of this Annex.

50. The Bank of Angola may, at any time, request Institutions to perform additional risk collaboration analyses for the purposes of this Annex.