Agreement No. 2 (2020) Establishing Additional, Exceptional, and Temporary Measures for Compliance with Credit Risk Provisions

Republic of Panama Superintendency of Banks AGREEMENT No. 002-2020 (March 16, 2020)

"Establishing Additional, Exceptional, and Temporary Measures for Compliance with the Provisions Contained in Agreement No. 4-2013 on Credit Risk"

THE BOARD OF DIRECTORS

In 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 organization in the form of a single text of Decree-Law 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 paragraphs 1 and 3 of Article 5 of the Banking Law, the objectives of the Superintendency of Banks are to ensure the solidity and efficiency of the banking system, as well as to promote public confidence in the banking system;

That paragraph 5 of Article 11 of the Banking Law provides that, within the technical attributions of the Board of Directors, lies the authority to establish, within the administrative scope, the interpretation and scope of legal or regulatory provisions in banking matters;

That through Agreement No. 4-2013 of May 28, 2013, provisions regarding the management and administration of credit risk inherent to the credit portfolio and off-balance sheet operations were established;

That Article 37 of Agreement No. 4-2013 establishes the amounts of dynamic provision that banks must maintain, as well as the other rules for its calculation and obtaining;

That following the outbreak of Coronavirus worldwide, and in follow-up to the international recommendations of the World Health Organization and the Pan American Health Organization, the National Government through the Ministry of Health issued Executive Decree No. 64 of January 28, 2020, which adopts necessary, indispensable, and urgent measures contained in the National Plan against the threat of the new Coronavirus outbreak; as well as extraordinary measures necessary to prevent the introduction and spread of this public health problem;

That in the face of the threat of an emergency situation in the territory due to the risk of spread of the coronavirus outbreak, the Cabinet Council through Cabinet Resolution No. 6 of January 28, 2020, declared the threat of high risk of spread of the New Coronavirus (2019-nCoV) outbreak in the national territory;

That subsequently, in order to expand Cabinet Resolution No. 6 of 2020 and double surveillance measures to contain the epidemic, the Cabinet Council through Cabinet Resolution No. 10 of March 3, 2020, elevated the threat of spread of the New Coronavirus (2019-nCoV) outbreak in the national territory to very high and issued other provisions;

That this health threat situation of the New Coronavirus (2019-nCoV) at the global level has affected collateral sectors of the economy, including the financial sector, making it necessary to protect the financial stability of the Panamanian banking system;

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That the provisions adopted by the Superintendency of Banks correspond to macroprudential measures that help support companies and individuals regarding their banking commitments;

That the Superintendency of Banks has conducted the corresponding analyses of the threat situation of the New Coronavirus (2019-nCoV) in the national territory and, given the potential adverse effects on the country's economy, the repayment capacity of clients for their obligations could be directly and indirectly affected; therefore, it is necessary to implement special and temporary measures for the treatment of the bank's credit portfolio;

That in working sessions of this Board of Directors, the need and convenience of establishing special and temporary considerations to the provisions contained in Agreement No. 4-2013 has been highlighted, in order to adapt regulatory requirements on credit risk to the current threat situation of the spread of the New Coronavirus (2019-nCoV) in the national territory.

RESOLVES:

ARTICLE 1. MODIFIED LOANS. In light of the current situation presented by COVID-19, a new modality of credits, called "modified credits," is created, for which the following additional, exceptional, and temporary measures are established. The provisions established in this Agreement will apply to both consumer credits and corporate credits.

ARTICLE 2. CHARACTERISTICS OF MODIFIED LOANS. In order to allow the debtor adequate attention to their obligation in the face of potential or real deterioration of the ability to pay, due to the crisis caused by COVID-19, banking entities may modify the originally agreed conditions of credits without these adjustments being considered as a credit restructuring as provided in Agreement No. 4-2013. These modifications may be made at the request of the debtor or by initiative of the banking entity. These credits will have the following characteristics:

1. The new terms and conditions must meet criteria of financial viability, taking into account the debtor's repayment capacity and the bank's credit policies.
2. They will be subject to special monitoring by the banking entity.
3. Credits that are in the modified category and fail to meet the new terms and conditions must be recognized as a restructured credit.

ARTICLE 3. RULES RELATING TO MODIFIED LOANS. The modifications of credits as provided in this Agreement must not become a generalized practice to regularize the behavior of the credit portfolio. Additionally, banking entities must ensure the application of the following rules:

1. Loans classified as normal and special mention, as well as restructured loans that are not overdue, may be modified in accordance with the guidelines established in this Agreement.
2. Modified credits during the period in which the exceptional and temporary measures are in force must be clearly identified by banking entities, for the purpose of being widely monitored by the Superintendency of Banks.
3. During the validity of the exceptional and temporary measures, banking entities will strive, when agreeing on the terms and conditions of the modified loan (mainly regarding terms and interest rates), to take into consideration the current situation the country is going through.
4. The modification of credits will be exempt from the application of charges and commissions by the banking entity, with the exception of legal, notarial, and registration expenses paid to third parties.
5. The modification of credits will be exempt from the requirement to update the appraisal.

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6. The banking entity will establish specific policies and procedures for the management and follow-up of modification requests for the conditions of these credits in accordance with the criteria previously described.
7. The modification date will be considered the date on which the Agreement was formalized in which the new credit conditions are set forth.

ARTICLE 4. EVALUATION PERIOD FOR THE GRANTING OF MODIFIED LOANS. Banking entities will have a period of 120 days to evaluate credits from those debtors whose cash flow or repayment capacity has been affected by the COVID-19 situation or who present a delay of up to 90 days. These credits may be subject to a review of their terms and conditions, for which the bank may agree upon and/or grant grace periods while maintaining the classification of the credit at the time of entry into force of this Agreement.

ARTICLE 5. USE OF DYNAMIC PROVISION. For the purposes of what is provided in paragraph c of Article 37 of Agreement No. 4-2013, which establishes restrictions on the amount of dynamic provision, it is established as an exceptional and temporary measure that banking entities may use up to 80% of the dynamic provision for the constitution of specific provisions.

In cases where the bank needs to use more than eighty percent (80%) of the amount of the dynamic provision, it must obtain prior authorization from the Superintendency of Banks.

Banking entities may only make dividend payments once they have restored the amount of the dynamic provision corresponding to them according to their credit portfolio.

ARTICLE 6. CONTAGION. During the validity of the additional, exceptional, and temporary measures, the provisions of paragraph 1 of Article 18 of Agreement No. 4-2013 will not apply.

ARTICLE 7. VALIDITY. This Agreement will begin to govern from its promulgation.

Given in the city of Panama, on the sixteenth (16) day of the month of March of two thousand twenty (2020).

LET IT BE COMMUNICATED, PUBLISHED, AND COMPLIED WITH.

THE PRESIDENT THE SECRETARY Joseph Fidanque III Nicolás Ardito Barletta