Regulation (NAP) - Recovery, Remediation and Resolution Plans

Monday, July 10, 2017 Number 97 OFFICIAL GAZETTE SÃO TOMÉ AND PRÍNCIPE S U M M A R Y CENTRAL BANK OF SÃO TOMÉ AND PRÍNCIPE NAP No. 14/2017 Immediate corrective measures. NAP No. 15/2017 Measures in the context of resolution. NAP No. 16/2017 Recovery, remediation and resolution plans. NAP No. 17/2017 Guidance manual on corporate governance.

No. 97 – July 10, 2017 SÃO TOMÉ AND PRÍNCIPE - OFFICIAL GAZETTE 1327 CENTRAL BANK OF SÃO TOMÉ AND PRÍNCIPE Permanent Application Norms – NAP No. 14/2017 Subject: Immediate corrective measures Given the demands of the current financial climate, it is imperative that the Central Bank has at its disposal instruments that enable the timely identification of potential problems in banking institutions, thereby granting the supervisory authority greater flexibility, alternatives, and discretion in resolving them, aiming to preserve the value of the institution's assets, with the least possible interruption to its operations and minimizing potential costs and systemic impacts. Thus, Law 6/2015, of December 30, on Special Measures for the Remediation, Resolution and Liquidation of Banking Institutions, reinforced the powers of the Central Bank so that its intervention would be timely, current and opportune, with regard to the remediation of banking institutions, and established a set of corrective measures that must be applied to them. It becoming necessary to regulate measures or actions proportionate to the severity of situations that hinder the normal functioning of banking institutions; In these terms, in the exercise of the powers conferred upon it by letters d) and f) of paragraph 2 of Article 8 of its Organic Law - Law 8/92, combined with Articles 3 and 2 of Article 6 of Law No. 6/2015 "Law on Special Measures for the Remediation, Resolution and Liquidation of Banking Institutions", the Board of Directors of the Central Bank of S. Tomé and Príncipe determines the following:

CHAPTER I GENERAL PROVISIONS Article 1. Object This NAP establishes the immediate corrective measures to be applied by the Central Bank of São Tomé and Príncipe in its process of inspection, supervision and resolution of banking institutions. Article 2. Scope This NAP applies to banking institutions authorized to operate in the financial system, subject to the supervision of the Central Bank. Article 3. Purpose The adoption of the immediate corrective measures provided for in this NAP aims to safeguard the financial soundness of the banking institution, the interests of depositors and creditors, and the stability of the Financial System. Article 4. Definition For the purposes of this NAP, the following shall be considered: a) Significant growth: when the increase recorded in the value of the credit portfolio, securities and investments, short-term liabilities, long-term liabilities or off-balance sheet operations of banking institutions is equal to or greater than 30%; b) Leverage: ratio obtained by dividing Tier 1 by total assets. Article 5. Assumptions for Action

1. The Central Bank must identify potential problems in banking institutions at the initial stage, before they worsen, allowing for timely action.
2. Immediate corrective measures must be applied by the Central Bank in its process of inspection, supervision and resolution of banking institutions when: a) These institutions fail to comply with the regulations governing their activity; b) The Central Bank has information indicating that banking institutions are at risk of failing to comply with the regulations governing their activity within a period of up to one year; c) There is evidence of deterioration in the safety and soundness of the institution; d) The liquidity or solvency of the banking institution is compromised or is likely to be in the short term, unless there is a significant and timely improvement or adjustment in the availability of financial resources, its risk profile, its business model, its control and risk management systems or its governance; or e) There is a need to prevent, manage and resolve banking crises; f) The banking institution shows significant growth within a maximum period of 6 (six) months; g) It is necessary to preserve the value of the banking institution's assets, with the least possible interruption to its operations and to minimize potential costs and systemic impacts.

CHAPTER II SUPERVISION Article 6. Procedures

1. Supervisory action encompasses: a) The collection of quantitative and qualitative information regarding the risks incurred by the banking institution and the assessment of its capacity to control and mitigate these risks, through control and governance structures and the availability of minimum own funds and liquidity resources; b) The monitoring of key issues related to liquidity, solvency, asset quality, profitability, capital availability, leverage level and risk exposure. c) The assessment of the economic-financial situation, risk profile and business model of a banking institution in a prospective, detailed and complete manner, based on its systemic importance. d) The conduct of stress tests, idiosyncratic and systemic, that allow identifying potential weaknesses or problems in banking institutions. e) The assessment of the quality of reported information as stipulated in Article 7 of this NAP.
2. Banking supervision must have the following information regarding: a) Level or value of exposure to the most relevant risks, namely credit risk, market risk, operational risk and liquidity risk; b) Provisions and losses arising from credit operations; c) Capital requirement to mitigate incurred risks; d) Corporate governance, including the risk management and control system; e) Remuneration/compensation policies; f) Concentration regarding funding sources, income or risk, such as resource mobilization, on-balance sheet or off-balance sheet exposure, and geographic or sectoral concentration; g) Compliance with internal limits and policies; h) Main sources of income and expenses, as well as profits and losses, observing historical variations and volatilities; i) Past, recent and projected growth, both of results and of the value of active and passive operations; j) Business plan and strategic plan of the institution. Article 7. Duties of the Banking Institution
3. The banking institution is responsible for assessing its capital needs and for determining its capital projections.
4. The banking institution must have information management systems that allow collecting, separating, aggregating and reporting data and other information efficiently, timely, consistently and reliably, by business line and on a consolidated basis.
5. The banking institution must submit to the Central Bank this information and that contained in paragraph 2 of Article 6 of this NAP, within the timeframe stipulated by the latter.

CHAPTER III CORRECTIVE MEASURES Article 8. Classification Criteria

1. For the purposes of this norm, banking institutions are classified into five categories, from A to E respectively.
2. Banking institutions that cumulatively meet the following requirements are included in Category A: a) The liquidity ratio is at least 25%; b) The solvency ratio is at least 20%; c) The value of own funds is more than 50% above the minimum share capital; d) It is not subject to a corrective measure requiring the maintenance of a minimum level of its solvency or liquidity ratio; e) There are no concerns regarding the capacity to maintain solvency and liquidity levels; f) It does not fall under letters a) to c) of paragraph 2 of Article 5 of this NAP; or g) It is classified as "rating" 1 according to the CAMELS system used by the Central Bank.
3. Banking institutions that are in any of the following situations are included in Category B: a) The liquidity ratio is at least 23%; b) The solvency ratio is at least 15%; c) The value of own funds is more than 13% above the minimum share capital. d) Reduction of the solvency or liquidity ratio by at least 20% in a period equal to or less than 6 (six) months; e) Significant growth; f) It falls under letters a) to c) of paragraph 2 of Article 5 of this NAP; g) It is classified as "rating" 2 according to the CAMELS system used by the Central Bank; or h) It does not fall into Category A;
4. Banking institutions that are in any of the following situations are included in Category C: a) The liquidity ratio is at least 20%; b) The solvency ratio is at least 12%; c) The value of own funds is equal to or greater than the minimum share capital. d) There are concerns regarding the capacity to maintain solvency and liquidity levels; e) It is classified as "rating" 3 according to the CAMELS system used by the Central Bank; or f) It does not fall into Category B;
5. Banking institutions that are in any of the following circumstances are included in Category D: a) The liquidity ratio is less than 20%; b) The solvency ratio is less than 12%; c) Capital is below the regulatory minimum; or d) It is classified as "rating" 4 according to the CAMELS system used by the Central Bank;
6. Banking institutions that are in any of the following circumstances are included in Category E: a) The liquidity ratio is less than 10%; b) Its solvency ratio is less than 6%; c) The value of own funds is less than 50% of the minimum share capital; or d) It is classified as "rating" 5 according to the CAMELS system used by the Central Bank.
7. Supervision communicates to the banking institution the category in which it is classified for the purposes of applying corrective measures.
8. The banking institution must not communicate its classification to the public. Article 9. Reclassification of Banking Institutions
9. The Central Bank may reclassify a banking institution classified in Category A and Category B to lower categories, relative to the original classification, based on the ratios provided for in Article 8, if it considers that the institution is in a situation of greater risk or greater threat to its soundness or solvency.
10. The Central Bank may not reclassify an institution, under paragraph 1, if: a) The institution has increased its capital or has been able to demonstrate current efforts to increase its capital in a short period of time, in order to remain well-capitalized in the future; b) The institution has been striving to comply with the Central Bank's directives or to resolve existing problems in a satisfactory and notable manner; c) The economic-financial condition of the institution is stable and shows signs of improvement. Article 10. Graduation of Applicable Corrective Measures
11. Banking institutions classified in Category B are subject to the following mandatory corrective measures: a) Submission of information and explanations to the Central Bank regarding operations carried out and business plan, if requested; or b) More frequent supervisory action, directly or indirectly.
12. Banking institutions classified as Category C are subject to the following mandatory corrective measures: a) Submission of information and explanations to the Central Bank regarding operations carried out and business plan, if requested; b) More frequent supervisory action, directly or indirectly; c) Prohibition on distribution of dividends, social assets, or capital, under any title, when the solvency ratio is determinative for its classification in this category, pursuant to letter b) of paragraph 4 of Article 8 of this norm; d) Prohibition on remunerating controlling shareholders by way of bonus, when the solvency ratio is determinative for its classification in this category, pursuant to letter b) of paragraph 4 of Article 8 of this norm.
13. Banking institutions classified as Category C are subject to the following discretionary corrective measures: a) Signing a memorandum with the Central Bank aiming to adopt measures that address potential concerns regarding the capacity to maintain levels of own funds adequacy and solvency or liquidity, or regarding corporate governance, control and risk management, asset quality, profitability or the institution's strategy. b) Prohibition on distribution of dividends, social assets, or capital, under any title, when the levels of own funds adequacy and solvency are not determinative for its classification in this category, pursuant to letters b) and c) of paragraph 4 of Article 8 of this norm; c) Prohibition on remunerating controlling shareholders by way of bonus, when the levels of own funds adequacy and solvency are not determinative for its classification in this category, pursuant to letters b) and c) of paragraph 4 of Article 8 of this norm.
14. Banking institutions classified as Category D are subject to the following mandatory corrective measures: a) Submission of information and explanations to the Central Bank regarding operations carried out and business plan, if requested; b) More frequent supervisory action, directly or indirectly; c) Prohibition on distribution of dividends, social assets, or capital, under any title, extending the prohibition to entities of the financial group; d) Prohibition on remunerating controlling shareholders and directors by way of bonus or variable remuneration; e) Submission of a specific recovery and remediation plan within 45 (forty-five) days, which must include at least one of the discretionary measures referred to in paragraph 6 of this article. f) Prohibition on acquiring stakes, opening or acquiring branches or agencies or starting a new line of business, unless: (i) the Central Bank has approved the plan defined in letter e) of this article; (ii) any increase in total assets is consistent with the plan set out in letter e) of this article; (iii) the levels of own funds adequacy and solvency increase at a sufficient rate for the institution to qualify as Category C within a reasonable timeframe.
15. Institutions that fail to submit the plan as stipulated in letter e) of paragraph 4 of this article are subject to the application of corrective measures pertaining to Category E.
16. Banking institutions classified in Category D are subject to the following discretionary corrective measures: a) Restriction on accepting new deposits or renewing existing deposits; b) Restriction on granting credit or investing funds in certain types of assets, including investments and capital expenditures; c) Temporary suspension, alteration, reduction or termination of an activity considered by the Central Bank as responsible for causing material losses or significant risk to the institution; d) Divestment of subsidiaries, affiliated institutions or specific operations; e) Alteration of the management structure or corporate governance; f) Implementation of changes to the business plan or submission of a new business plan; g) Recapitalization of the institution; h) Requirement to restore liquidity levels to values the Central Bank deems appropriate to the circumstances of the case; i) Requirement that the banking institution accept a purchase offer made by another institution or promote its divestment; j) Restriction on transactions carried out with institutions that have a controlling or group relationship with the banking institution in question, or other entities with which the banking institution in question has a controlling or group relationship; k) Restriction on the expansion of the institution's operations, its concentration or the increase in assets; l) Imposition of a reduction in total assets; m) Prohibition on carrying out activities that the Central Bank determines as presenting significant risk; n) Imposition of a new composition of the Executive Board, dismissal of one or more directors, or appointment of new directors; o) Requirement for improvements or specific treatment in provisioning policy or asset treatment, including imposition of special provisions; p) Strengthening of corporate governance, internal control and risk self-assessment; q) Requirement to apply net profits to strengthen core capital; r) Submission of certain transactions or activities to prior approval by the Central Bank; s) Requirement to carry out investments in subsidiaries or liquidation of branches; t) Suspension of voting rights of the majority shareholder(s), in case of non-compliance with prior instructions and directives until compliance is observed; u) Other measures deemed necessary; v) Other measures listed in paragraph 2 of Article 6, and paragraph 3 of Article 7, of Law No. 6/2015.
17. Banking institutions classified in Category E are subject to the following mandatory corrective measures: a) Submission of information and explanations to the Central Bank regarding operations carried out and business plan, if requested; b) More frequent supervisory action, directly or indirectly; c) Prohibition on distribution of dividends, social assets, or capital, under any title, extending the prohibition to entities of the financial group; d) Prohibition on remunerating controlling shareholders and directors by way of bonus or variable remuneration; e) Submission of a specific recovery and remediation plan within 45 (forty-five) days, which must include at least one of the discretionary measures referred to in paragraph 6 of this article; f) Prohibition on acquiring stakes, opening or acquiring branches or agencies or starting a new line of business, unless: (i) the Central Bank has approved the plan provided for in letter e) of this article; (ii) any increase in total assets is consistent with the plan referred to in letter e) of this article; (iii) the levels of own funds adequacy and solvency increase at a sufficient rate for the institution to qualify as Category C within a reasonable timeframe. g) Preventing remunerative interest rates on deposits from excessively exceeding comparable market rates in S. Tomé and Príncipe.
18. The discretionary corrective measures applicable to institutions in Category D, pursuant to paragraph 6 of this article, may be applied to institutions in Category E, subject additionally to the appointment of an Interim Special Administration.
19. The Central Bank must appoint provisional administrators to a banking institution when it continues to be classifiable in Category E for 12 (twelve) months, unless the institution: a) Is substantially complying with its specific recovery and remediation plan since the date of its approval by the Central Bank; b) Is profitable or shows a sustainable trend of increasing revenues; c) Has significantly reduced the ratio of non-performing loans relative to total loans; d) Is considered viable and without risk of bankruptcy.
20. Except with prior approval from the Central Bank, banking institutions classified in Category E are prohibited from: a) Paying capital or interest on its subordinate debt; and b) Making relevant changes to its accounting methods.
21. Supervision may adopt the measures listed in this article when a problem in a bank is detected, without necessarily waiting for a breach of one of the ratios provided for in Article 8 of this