Agreement No. 7 (2025): Guidelines for the Establishment and Management of a Capital Buffer for Locally Systemic Banks

Republic of Panama Banking Superintendence of Panama AGREEMENT No. 7-2025 (August 5, 2025) "By which guidelines are established for the establishment and management of a capital buffer applicable to locally systemic banks"

THE BOARD OF DIRECTORS in the exercise of its legal powers, and

CONSIDERING:

That following the issuance of Decree-Law No. 2 of February 22, 2008, the Executive Branch prepared a systematic compilation in the form of a Single Text of Decree-Law No. 9 of February 26, 1998, and all its modifications, which was approved by 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, the objectives of the Banking Superintendence are to ensure the maintenance of the solidity and efficiency of the banking system, as well as to promote public confidence in the banking system;

That in accordance with item 1 of Article 6 of the Banking Law, the Superintendence must ensure that banks maintain appropriate solvency and liquidity ratios to meet their obligations;

That in accordance with items 3 and 5 of Article 11 of the Banking Law, it is the technical competence of the Board of Directors to approve the general criteria for the classification of risk assets and the guidelines for the establishment of reserves to cover risks, and to fix, within the administrative sphere, the interpretation and scope of legal or regulatory provisions in banking matters;

That in accordance with Article 67 of the Banking Law, banks must hold the capital funds established by the Law and the regulations that develop it;

That Agreement No. 1-2015 of February 3, 2015, and its modifications, establish the capital adequacy rules applicable to banks and banking groups;

That in accordance with Articles 10 and 11 of Agreement No. 1-2015, the capital adequacy ratio that an individual bank must maintain shall not, at any time, be less than 8% of the sum of its risk-weighted assets, of which Common Equity Tier 1 capital shall not be less than 4.5% of its risk-weighted assets, and Tier 1 capital shall not be less than 6% of its risk-weighted assets;

That Agreement No. 3-2016 of March 22, 2016, and its modifications, establish the rules for determining risk-weighted assets for credit risk and counterparty risk;

That Agreement No. 5-2023 of October 10, 2023, establishes the rules regarding the capital conservation buffer;

That Article 6 of Agreement No. 5-2023 provides that banking entities must establish a capital conservation buffer of 2.5% of risk-weighted assets (credit, market, and operational), formed by Common Equity Tier 1 capital and in addition to all minimum regulatory capital requirements that are established;

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That during the financial crisis that began in 2007, the repercussions of the bankruptcy or financial deterioration of several global and large financial institutions reached the entire financial system, which in turn harmed real economic activity, leading the Basel Committee on Banking Supervision to publish in November 2011 the document "Global Systemically Important Banks: Assessment Methodology and the Additional Loss Absorption Requirement" and the document "Framework for Locally Systemically Important Banks," which addresses the potential impact that the deterioration or bankruptcy of banks at the local level can cause on the financial system and local economy, even if not significant on an international scale;

That the Basel Committee on Banking Supervision, through the document "Framework for Locally Systemically Important Banks," has developed a series of principles revolving around the methodology for assessing locally systemically important banks and the greater additional loss absorption that can be required of these banks, which offer sufficient national discretion to accommodate the structural characteristics of the local financial system;

That in working sessions of this Board of Directors, the need and convenience of establishing a regulatory framework containing guidelines for the establishment and management of a capital buffer applicable to banks classified as locally systemically important, in addition to all regulatory capital requirements established by this Superintendence, has been highlighted.

AGREES:

ARTICLE 1. OBJECTIVE AND CRITERIA. This Agreement establishes the minimum general principles and criteria that will be considered to evaluate and determine the degree of systemic importance from the local context that the banks described in Article 2 of this regulation have.

ARTICLE 2. SCOPE OF APPLICATION. The provisions of this Agreement shall apply to banking entities, as follows:

1. Official banks.
2. General license banks.

PARAGRAPH. Branches of foreign general license banks and international license banks subject to host supervision, in compliance with what is provided in Article 18 of Agreement No. 1-2015 on Capital Adequacy, will continue to submit the certification stating what the origin regulatory ratio is. Likewise, they will incorporate in said certification the information corresponding to the capital buffer applicable to locally systemically important banks established by their home supervisor in the event that this is required.

ARTICLE 3. DEFINITION OF LOCALLY SYSTEMIC BANKS. For the purposes of this Agreement, a bank is considered of local systemic importance when its financial deterioration or eventual insolvency and failure to meet regulatory ratios generates negative externalities that, although not significant from an international point of view, may compromise the stability of the banking system, the local economy, and even generate effects that transcend to neighboring countries. Based on the above, locally systemic banks shall be those that meet the characteristics and conditions established in Articles 5 and 6 of this Agreement.

ARTICLE 4. NATURE OF THE CAPITAL BUFFER FOR LOCALLY SYSTEMIC BANKS. The capital buffer applicable to locally systemic banks aims to accumulate Common Equity Tier 1 capital above the regulatory capital requirements established in the Agreements on Capital Adequacy, the Agreement on the Capital Conservation Buffer, and the Credit Risk Agreement (dynamic provision). Once the buffer is constituted, it is maintained permanently, except during periods of stress or tension at the systemic level, as determined by this Banking Superintendence.

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In the event of any reduction below the level required by the established methodology, banks are subject to the restrictions indicated in Article 11 of this Agreement.

ARTICLE 5. METHODOLOGY FOR THE IDENTIFICATION OF LOCALLY SYSTEMIC BANKS. A bank will be considered locally systemic if the ratio of its size within the local economy, measured as the bank's assets divided by the Gross Domestic Product (GDP) of Panama, is equal to or greater than 6%. Total Assets / GDP => 6%

Once the identification of the locally systemic bank is made, the level of systemic importance will be assigned based on the factors established in Article 6 of this Agreement. The reference to the Gross Domestic Product mentioned in this article shall be the nominal GDP of December of the year prior to the analysis established in Article 12 of this Agreement.

ARTICLE 6. FACTORS FOR THE IDENTIFICATION OF LOCALLY SYSTEMIC BANKS. The degree of local systemic importance of a bank is established taking into consideration the category factors, their individual indicators, and their weighting percentages established in this article. The category factors are composed of the size, interconnectedness, substitutability, and complexity of each bank and their corresponding indicators, as follows:

1. Size: Measures the dimension of the bank in terms of the importance its activity represents in the financial system. The larger a bank is, the more difficult it will be for other banks to quickly assume its activities, and therefore, the greater the probability that its financial deterioration or bankruptcy will alter the normal functioning of the financial markets in which it operates. For the calculation of this category, the indicator considered is: Total assets of the bank.

2. Interconnectedness: Situations of financial deterioration or eventual insolvency of a bank could substantially increase the probability that other financial institutions also experience them due to the relationships or contractual obligations in which they operate in common. The probability of impact should be positively related to the degree of interconnectedness with that institution. For the calculation of this category, the following indicators are considered: Assets within the financial system and Liabilities within the financial system.

3. Substitutability: Is directly related to the degree to which the bank provides or participates in relevant financial infrastructures or services in the market it operates. The greater the role or participation of a banking entity in a specific line of business or as a provider of market infrastructure services (e.g., payment systems), the greater the negative effects that its financial deterioration or eventual insolvency will cause in terms of service deficiency, market liquidity fluidity, and infrastructure. For the calculation of this category, the following indicators are considered: Custody assets, issued debt, payment means indicator.

4. Complexity: The systemic impact of a bank going through financial difficulties or eventual insolvency is also related to the complexity of its business model, structural, and operational aspects. The more complex a bank is, the greater the costs and time necessary for its resolution.

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For the calculation of this category, the following indicators are considered: Fair value of derivatives, Investments at fair value with changes in Earnings (Earnings Statement), and Investments at fair value with changes in Other Comprehensive Income (OCI).

Table of categories, indicators, and weighting percentage (%)

Category	Individual Indicator	Indicator Weighting
Size (30%)	Asset Size	30%
Interconnectedness (30%)	Assets within the financial system	15%
Liabilities within the financial system	15%
Substitutability (20%)	Custody assets	6.66%
Issued debt	6.67%
Payment means indicator	6.67%
Complexity (20%)	Fair value of derivatives	6.66%
Investments at fair value with changes in Earnings	6.67%
Investments at fair value with changes in OCI	6.67%

When the Banking Superintendence deems it convenient, it may include other categories and indicators for the determination of a bank's degree of systemic importance and make adjustments to the relative weightings of each of these factors.

ARTICLE 7. CAPITAL CHARGE FOR LOCALLY SYSTEMIC BANKS. The determination of the degree or level of systemic importance that a bank maintains in the local context and its corresponding capital buffer requirement will be defined in consideration to the value resulting from the calculation of each of the indicators corresponding to the categories indicated in Article 6 of this Agreement, as follows:

1. The weighted average of the bank's scores in the four categories indicated (Size, Interconnectedness, Substitutability, and Complexity).
2. The bank's score for each category will be equal to the weighted average of the percentage participation in each variable indicated in the previous item. These participations are multiplied by ten thousand.

Table of capital charge for banks classified as locally systemic

Systemic Level	Range	Capital Charge (% RWA)
1	Equal to or greater than 1000	1%
2	Less than 1000	0.5%

The capital buffer charge for locally systemic banks corresponds to the degree of systemic importance maintained as a result of the periodic evaluations carried out by this Superintendence on the banks. The indicator applied to the individual bank shall be applied to the bank and subsidiaries and at the holding level.

ARTICLE 8. CAPITAL REQUIREMENTS FOR LOCALLY SYSTEMIC BANKS. Locally systemic banks must establish a capital buffer according to the systemic level corresponding to them, based on risk-weighted assets (credit, market, and operational), formed by Common Equity Tier 1 capital and in addition to all regulatory capital requirements that are established.

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ARTICLE 9. CAPITAL BUFFER DEFICIT FOR LOCALLY SYSTEMIC BANKS. If Common Equity Tier 1 capital is insufficient to constitute the capital buffer for locally systemic banks at a reasonable pace in the judgment of this Superintendence, it will require the bank to submit a plan approved by its Board of Directors to obtain the necessary capital expansion to comply with the Agreement.

For these purposes, the bank must submit to this Superintendence an adequacy plan approved by the Board of Directors, in which the mechanisms to replenish the systemic buffer deficit must be indicated, as well as the deadlines in which such replenishment is carried out, according to the systemic level to which it belongs. This adequacy plan will be evaluated by this Superintendence, which may make observations and objections to it. If the aforementioned plan is not complied with, this Superintendence may apply other measures for which it is empowered according to current regulations. The Superintendent will establish by circular the deadline that banking entities will have to submit the adequacy plan. Capital expansion can only be carried out with Common Equity Tier 1 funds.

ARTICLE 10. RESPONSIBILITIES OF THE BOARD OF DIRECTORS. The board of directors of banking entities is responsible for the application of this Agreement, for which it must ensure: a. Internally evaluate the degree of compliance with the systemic buffer and define policies for compliance with the Agreement in the future. b. Design and implement immediately the adequate policies to cover any deficit presented by the bank, in compliance with the systemic buffer and what is established in Article 9 of this Agreement.

ARTICLE 11. RESTRICTIONS APPLICABLE IN CASE OF NON-COMPLIANCE WITH THE BUFFER REQUIREMENT FOR LOCALLY SYSTEMIC BANKS. Once the percentages established in the table of Article 7 are completed for the formation of the capital buffer, the bank must ensure that before declaring dividends, considering the amount to be distributed, the Common Equity Tier 1 capital ratio is recalculated for the purposes of compliance with the table established in Article 7 of this Agreement.

In the event that a banking entity presents a deficit in the systemic buffer, it cannot repurchase its own shares, nor distribute profits, until the systemic buffer deficit percentage is replenished.

ARTICLE 12. PERIODIC EVALUATIONS OF LOCALLY SYSTEMIC BANK QUALITY. The Banking Superintendence will review annually the list of systemically important banks, based on the data corresponding to the figures of December of each year reported in January and the factors established in Article 6 of this Agreement.

Without prejudice to the annual review, the Banking Superintendence may also carry out special evaluations as a consequence or on the occasion of significant structural changes in the banking system or other events that justify it.

Banking entities that, upon the entry into force of this Agreement and subsequently, according to the review established in previous provisions, are identified as locally systemic banks, will remain under this classification until the next evaluation.

PARAGRAPH. The Superintendent of Banks, during the month of May of each year, will inform the banking entities identified as locally systemic banks of the results of the annual evaluations carried out, the systemic level, and the capital buffer charge corresponding to each entity.

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ARTICLE 13. QUALIFICATION OF THE CONDITION OF LOCALLY SYSTEMIC BANK. The Banking Superintendence, through a reasoned resolution, will determine the condition of locally systemic of a bank and the specific level of capital required according to the criteria established in this Agreement, from which they must comply with the requirements of this while maintaining said condition.

In the event that within the reevaluation process it is determined that a bank considered of local systemic importance no longer meets the conditions and characteristics established in this Agreement to remain classified as a locally systemic bank, the Banking Superintendence will communicate the exclusion of said condition.

In the event that a change in the systemic bank qualification entails a variation in the systemic tier level and in the capital requirement established in Article 7, the bank must adjust compliance with the provisions of this Agreement to the capital requirements associated with the corresponding level.

The exclusion of a bank from the condition of locally systemic or the change in the systemic level of a bank will be communicated by this Superintendence through a reasoned resolution.

PARAGRAPH. In the event that within the evaluation process referred to in this article, it is identified that a bank considered locally systemic has carried out a banking movement or operation with the intention of losing its condition as a locally systemic bank or changing its qualification level, this Superintendence will maintain said entity as a bank considered locally systemic until a new evaluation is carried out.

ARTICLE 14. INFORMATION REQUIREMENTS. For the purposes of this Agreement, banking entities must inform this Superintendence, in the format and frequency established, of the information referred to in this Agreement.

ARTICLE 15. SANCTIONS. Non-compliance with the provisions established in this Agreement will be sanctioned in accordance with what is provided in Title IV of the Banking Law.

ARTICLE 16. VALIDITY. This Agreement will enter into force on July 1, 2027.

ARTICLE 17. ADEQUACY PERIOD (TRANSITIONAL). Banking entities identified as locally systemic will have an adequacy period to complete the systemic buffer requirement. This adequacy is carried out according to the following schedule:

Phases	Applicable Percentage/Systemic Buffer of Total Required
July 1, 2027	15%
July 1, 2028	25%
July 1, 2029	50%
July 1, 2030	75%
July 1, 2031	90%
July 1, 2032	100%

Banks that, within the corresponding adequacy deadlines, comply with the percentages established in the gradualness table indicated above, may distribute accumulated profits from any period provided that, after the distribution, the minimum percentage required on each date is not reduced.

In the event of foreseeing that Common Equity Tier 1 capital is insufficient to constitute the capital percentages established in the aforementioned table at a reasonable pace within the corresponding deadlines, the bank must present to this Superintendence a capital expansion plan approved by its Board of Directors, which will be subject to the guidelines established in Article 9 of this Agreement.

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Given in the city of Panama, on the fifth (5) day of the month of August of two thousand twenty-five (2025).

LET IT BE COMMUNICATED, PUBLISHED, AND COMPLIED WITH.

THE PRESIDENT, THE AD-HOC SECRETARY, Adriana Raquel Carles María de Lourdes Marengo