Directive No. 02/DSB/DRO/2022

GOVERNOR DIRECTIVE No. 02/DSB/DRO/2022

Whereas it is necessary to regulate the procedures for conducting standardized stress tests, with the aim of strengthening the Angolan Financial System, under the provisions of Articles 15 and 40 of Notice No. 08/2021 of July 5 on Prudential Requirements, Instruction No. 10/21 of July 7 on the Internal Capital Adequacy Assessment Process (ICAAP), Instruction No. 11/21 of July 7 on the Internal Liquidity Adequacy Assessment Process (ILAAP), and Instruction No. 03/22 of March 29, 2022 on Stress Tests.

In accordance with the provisions of Article 166 of Law No. 14/21 of May 19, the General Regime of Financial Institutions Law, combined with letters d) and f) of Article 31 and paragraph 1 of Article 98, both of Law No. 24/21 of October 18, the Banco Nacional de Angola Law.

This Directive serves to establish the following:

1. A standardized methodology is established that Banking Financial Institutions must observe in conducting stress tests.
2. Banking Financial Institutions must conduct sensitivity analysis, as per Annex I, which is an integral part of this Directive.
3. Without prejudice to the preceding paragraph, Institutions must report to the Banco Nacional de Angola information on stress tests as per Annex II of this Directive.

ORIGIN: Banking Supervision Department (DSB) Financial System Regulation and Organization Department (DRO) DATE: 29/03/2022 SUBJECT: FINANCIAL SYSTEM

• Standardized Stress Tests for Supervisory Purposes

4. For the purposes of the preceding paragraph, Institutions must submit the information within 120 (one hundred and twenty) days after the reference date of December 31.
5. Without prejudice to the information reporting established in this Directive, within the scope of ICAAP and ILAAP, Institutions must present the assumptions, methodological aspects, and results arising from their stress test program, as provided in Instruction No. 03/22 of the 29th on Stress Testing.
6. Non-compliance with this Directive constitutes an offense provided for and punishable under Law No. 14/21 of May 19, the General Regime of Financial Institutions Law.
7. Doubts and omissions resulting from the interpretation and application of this Directive are resolved by the Banco Nacional de Angola.
8. This Directive enters into force on the date of its publication.

Luanda, March 29, 2022 BANKING SUPERVISION DEPARTMENT

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Elavoko do Rosário Chaves João -Director- FINANCIAL SYSTEM REGULATION AND ORGANIZATION DEPARTMENT

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Carla Marisa Rodrigues Madeira Gomes -Director-

ANNEX I Sensitivity Analyses

1. Stress Test Assumptions The table below presents the assumptions and parameters to be applied in the Sensitivity Analyses to be reported to the Banco Nacional de Angola, whose shocks are based on a 12-month horizon.

Risk	Assumptions	Description	Impact
Credit Risk	Increase in credit default by the private sector (Companies and Retail)	Deterioration of impairment stage: 10% of Stage 1 amounts transition to Stage 2 and 15% of Stage 2 amounts transition to Stage 3	Original Position, Accumulated Impairment, Net Income, Ratio of Non-Performing Exposures to Total Credit, Ratio of Regulatory Capital
	Decrease in recovery rate associated with public sector exposures, due to the State's inability to fully repay its debt	Increase in LGD by 10 p.p.
Market Risk	Devaluation of the government securities portfolio	Devaluation of government securities by 15%	Net Income, RWAs, Ratio of Regulatory Capital
	Devaluation of other assets in the trading portfolio (e.g., shares)	Devaluation of trading portfolio assets by 40%
	Exchange rate fluctuation	Depreciation/appreciation of the exchange rate by 25%
Operational Risk	Realization of extraordinary losses associated with operational risk, namely internal and external frauds, penalties for compliance infringements related to anti-money laundering procedures and financial conduct.	Extraordinary loss corresponding to 1% of total Regulatory Capital.	Net Income, Regulatory Capital, Ratio of Regulatory Capital
Liquidity Risk	Reduction in deposits and credit defaults	Reduction in deposits and credit defaults in accordance with Section 2.3 of this Annex	Survival Period, Liquidity Flow Mismatch

2. Additional Information for Calculating Impacts Underlying Liquidity Risk

2.1. Survival Period The survival period is evaluated using the Institution's stock of liquid assets and corresponds to the number of days during which it ensures the liquidity flows (added to its high-quality liquid asset stock) necessary to meet its payment obligations. This measurement is performed over a maximum time horizon of 180 days. Thus, for each of the 180 days, the following must be calculated:

Liquidity Position (t) = Liquid Asset Stock (t=0) - Cumulative Net Liquidity Flows (t) + Liquidity Reserve (t)

where Liquid Asset Stock (t=0) corresponds to the stock of liquid assets held by the Institution as of the reference date, after applying the weights established in Instruction No. 14/21 of September 27 on Liquidity Risk. The reserve value as of the reference date is kept constant in determining the net position of each day t.

The survival period will then correspond to the number of days elapsed between the reference date and the day prior to the day when cumulative net liquidity flows plus the liquidity reserve become negative, i.e.:

Liquidity Position (t=0) = Liquid Asset Stock (t=0) + Liquidity Reserve (t=0) ... Liquidity Position (t=n-1) = Liquid Asset Stock (t=0) + Cumulative Net Liquidity Flows (t=n-1) + Liquidity Reserve (t=n-1) > 0 Liquidity Position (t=n) = Liquid Asset Stock (t=0) + Cumulative Net Liquidity Flows (t=n) + Liquidity Reserve (t=n) < 0 Number of days of survival = n-1

2.2. Liquidity Flow Mismatch The mismatch of liquidity flows across different maturity buckets aims primarily to anticipate any significant discrepancies between the maturity of obligations and the maturity of the Institution's assets. The objective is to compare, for each time interval, the difference between inflow and outflow.

Similar to the survival period, the liquidity flow mismatch across different maturity buckets is calculated over a maximum horizon of 180 days. For the calculation, projections of inflow and outflow across different horizons and time scenarios are used.

2.3. Description of Assumptions

Base Scenario For the purpose of calculating the survival period and liquidity flow mismatches, in the base scenario, Institutions must determine inflows and outflows according to the realization of their internal forecasts. Institutions must describe the assumptions applied in point 7 of Annex II.

Stress Scenario In addition to the assumptions applied in the base scenario, within the scope of the stress scenario, Institutions must consider the following assumptions:

Description of Stress Scenario
Cash Outflow
1 Demand Deposits
1.1 Non-bank financial institutions: Daily reduction rate of 0.25%*
1.2 Non-financial institutions: Daily reduction rate of 1%*
1.3 Individuals: Daily reduction rate of 0.5%*
2 Time Deposits
2.1 Non-bank financial institutions: No renewal (natural maturity)
2.2 Non-financial institutions: No renewal (natural maturity)
2.3 Individuals: No renewal (natural maturity)
3 Other Deposits
3.1 Non-bank financial institutions: If at sight, daily reduction rate of 1%*, otherwise no renewal (natural maturity)
3.2 Non-financial institutions: If at sight, daily reduction rate of 5%*, otherwise no renewal (natural maturity)
3.3 Individuals: If at sight, daily reduction rate of 2.5%*, otherwise no renewal (natural maturity)
4 Interbank money market operations - banking financial institutions
5 Secured Financing
6 Interbank money market operations - with central bank
7 Debt securities
8 Other subordinated liabilities
9 Securities sale with repurchase agreement (own and third-party)
9.1 including: with the central bank
10 Subordinated debt and hybrid subordinated debt instruments
11 Hedging derivatives with negative fair value
12 Irrevocable fixed commitments for mortgage loans
13 Irrevocable commitments assumed with third parties
14 Securities and securities subscribed for primary placement
Cash Inflow
15 Interbank money market operations - with the central bank
16 Interbank money market operations - with banking financial institutions
17 Credits
17.1 Non-bank financial institutions: Default of 0.25% in 1st month, 1% up to 3rd month, 2.5% up to 6th month (assuming no repayment)**
17.2 Non-financial institutions: Default of 1% in 1st month, 2.5% up to 3rd month, 7.5% up to 6th month (assuming no repayment)**
17.3 Individuals: Default of 0.5% in 1st month, 1.5% up to 3rd month, 5% up to 6th month (assuming no repayment)**
18 Government debt securities issued by the national treasury and central bank
19 Bonds
20 Securities purchase with resale agreement (third-party)
20.1 including: with the central bank
21 Hedging derivatives with positive fair value
22 Irrevocable commitments assumed by third parties

• The daily reduction corresponds to the initial spot value multiplied by the daily reduction rate, resulting in a constant value. It shall be applied over a period of 180 days or until the total initial value is consumed. ** The default rate must be applied to the total credit amount at the initial moment (reference date of the report).

ANNEX II Results of Standardized Stress Tests for Supervisory Purposes

1. Financial Institution Identification 1.1 Name 1.2 Responsible Area 1.3 Contacts

2. Information as of the Reference Date of December 31 | Item | Value | |---|---| | 2.1 Regulatory Capital* | | | 2.2 RWAs* | | | 2.3 Regulatory Capital Ratio* | | | 2.4 Original Position** | | | 2.5 Accumulated Impairment | | | 2.6 Net Income | | | 2.7 Ratio of Non-Performing Exposures to Total Credit | | | 2.8 Exposure Indicator or Alternative Exposure Indicator for Year N*** | | | 2.9 Liquid Assets**** | | | 2.10 Liquidity Flow Mismatches (Unweighted)**** | | | Maturity Band 1: | | | Maturity Band 2: | | | Maturity Band 3: | | | 2.11 Liquidity Flow Mismatches (Weighted)**** | | | Maturity Band 1: | | | Maturity Band 2: | | | Maturity Band 3: | |

• In accordance with Notice No. 08/21 of July 5 on Prudential Requirements. ** Original Position corresponds to the risk position value, as provided in letters a) to c) of paragraph 5 of Annex I of Instruction No. 15/21 of October 27 on calculation and regulatory capital requirement for credit risk and counterparty risk, before the value adjustments provided in letter d) of paragraph 5 of Annex I of the aforementioned Instruction and the application of conversion factors associated with off-balance sheet items. For the purposes of this line, the aggregated value of the Original Position of all risk classes must be reported. *** In accordance with Instruction No. 13/21 of September 27 on Operational Risk. **** In accordance with Instruction No. 14/21 of September 27 on Liquidity Risk.

3. Stress Tests for Credit Risk Assumption: Increase in credit default by the private sector (Companies and Retail). Description: Deterioration of impairment stage in which 10% of clients who were Stage 1 transition to Stage 2 and 15% of those who were Stage 2 transition to Stage 3.

Category	Original Position (Abs/Rel)	Accumulated Impairment (Abs/Rel)	Net Income (Abs/Rel)	NPE Ratio (New Ratio / p.p.)	RWAs (Abs/Rel)	Regulatory Capital Ratio (New Ratio / p.p.)
Companies
Retail
Real Estate Secured Positions
Overdue
Total*

• Absolute and relative variations must reflect the impact on the values reported respectively in lines 2.4, 2.5, 2.6, and 2.2 of the "2. Information as of the Reference Date of December 31" table. Variations in p.p. must reflect the difference between the new ratio and the ratio reported respectively in lines 2.7 and 2.3 of the "2. Information as of the Reference Date of December 31" table.

Assumption: Decrease in recovery rate in case of public sector default. Description: Increase in LGD by 10 percentage points.

Category	Accumulated Impairment (Abs/Rel)	Net Income (Abs/Rel)	RWAs (Abs/Rel)	Regulatory Capital Ratio (New Ratio / p.p.)
Central Administration (Local Currency)
Central Administration (Foreign Currency)
Public Sector Entities
Total*

• Absolute and relative variations must reflect the impact on the values reported respectively in lines 2.5, 2.6, and 2.2 of the "2. Information as of the Reference Date of December 31" table. Variation in p.p. must reflect the difference between the new ratio and the ratio reported in line 2.3 of the "2. Information as of the Reference Date of December 31" table.

4. Stress Tests for Market Risk Assumption: Devaluation of the trading portfolio. Description: Devaluation of the government securities portfolio by 15% and of the other assets in the trading portfolio by 40%.

Market Risk*	Net Income (Abs/Rel)	RWAs (Abs/Rel)	Regulatory Capital Ratio (New Ratio / p.p.)
Government Securities Portfolio
Other Assets in Trading Portfolio
Total**

• Excluding FX risk and commodity risk. ** Absolute and relative variations must reflect the impact on the values reported respectively in lines 2.6 and 2.2 of the "2. Information as of the Reference Date of December 31" table. Variation in p.p. must reflect the difference between the new ratio and the ratio reported in line 2.3 of the "2. Information as of the Reference Date of December 31" table.

Assumption: Exchange rate fluctuation. Description: Fluctuation of the exchange rate by +25% or -25%, depending on the scenario that penalizes the institution.

FX Risk	Net Income (Abs/Rel)	RWAs (Abs/Rel)	Regulatory Capital Ratio (New Ratio / p.p.)
Total*

• Absolute and relative variations must reflect the impact on the values reported respectively in lines 2.6 and 2.2 of the "2. Information as of the Reference Date of December 31" table. Variation in p.p. must reflect the difference between the new ratio and the ratio reported in line 2.3 of the "2. Information as of the Reference Date of December 31" table.

5. Stress Tests for Operational Risk Assumption: Realization of extraordinary losses associated with operational risk, namely internal and external frauds, penalties for compliance infringements related to anti-money laundering procedures and financial conduct. Extraordinary losses are understood as unusual financial losses in the normal process of an institution, as they are difficult to predict since they occur with reduced periodicity; they may occur due to, for example, cybersecurity failures / cyberattacks, human failures or errors, frauds, and others. Description: Extraordinary loss corresponding to 1% of total Regulatory Capital.

Operational Risk	Net Income (Abs/Rel)	Regulatory Capital Level (Abs/Rel)	Regulatory Capital Ratio (New Ratio / p.p.)
Total*

• Absolute and relative variations must reflect the impact on the values reported respectively in lines 2.8, 2.6, and 2.2 of the "2. Information as of the Reference Date of December 31" table. Variation in p.p. must reflect the difference between the new ratio and the ratio reported in line 2.3 of the "2. Information as of the Reference Date of December 31" table.

6. Stress Tests for Liquidity Risk Assumption: Reduction in deposits and credit defaults. Description: Reduction in deposits and credit defaults in accordance with Section 2.3 of Annex I of this Directive.

Category	Survival Period*	Liquidity Flow Mismatches (Band 1)	Liquidity Flow Mismatches (Band 2)	Liquidity Flow Mismatches (Band 3)
Base Scenario		Base / Stress	Base / Stress	Base / Stress
Stress Scenario
Total*

• If greater than 180 days, it must be stated as ">180 days".

7. Supplementary Information Provision for Stress Tests As a complement to the mandatory quantitative information provision underlying this Annex, if Institutions deem it necessary, they may use the table below to provide, among other things, clarifications that justify and assist in interpreting the results obtained.

Descriptive	Stress Tests for Credit Risk	Stress Tests for Market Risk	Stress Tests for Operational Risk	Stress Tests for Liquidity Risk