Resolution JPRM-2023-013-M: Regulation of Reserve Requirements and Liquidity Reserves

MONETARY POLICY AND REGULATION BOARD

RESOLUTION NO. JPRM-2023-013-M

THE MONETARY POLICY AND REGULATION BOARD

CONSIDERING:

That, Article 226 of the Constitution of the Republic of Ecuador prescribes that public servants and persons acting by virtue of a state power shall exercise only the competencies and faculties attributed to them in the Constitution and the Law;

That, Article 227 ibidem states that Public Administration constitutes a service to the community governed by the principles of efficiency, quality, hierarchy, coordination, planning, among others;

That, numerals 2 and 3 of Article 302 of the Constitution of the Republic provide that monetary, credit, exchange, and financial policies, among others, have as objectives establishing levels of global liquidity that guarantee adequate margins of financial security and orient liquidity surpluses toward the investment required for the country's development;

That, the first clause of Article 303 of the Magna Carta determines that the formulation of monetary, credit, exchange, and financial policies is the exclusive faculty of the Executive Function and shall be implemented through the Central Bank of Ecuador;

That, Article 309 ut supra establishes: "The national financial system is composed of the public, private, and popular and solidary sectors, which intermediates public resources. Each of these sectors will have specific and differentiated control norms and entities, which will be responsible for preserving their security, stability, transparency, and solidity (...).";

That, Article 47.1 of the Organic Monetary and Financial Code created the Monetary Policy and Regulation Board as part of the Executive Function, responsible for monetary formulation, the highest governing body of the Central Bank of Ecuador, and determined its composition;

That, Article 47.6 of the same Code, regarding the functions of the Monetary Policy and Regulation Board, among others, establishes: "1. Formulate policy in the monetary field and observe its application by the Central Bank of Ecuador, to preserve the integrity and sustainability of the dollarization monetary system and the financial system, in accordance with the provisions of this Code; (...) 26. The others conferred by law."

That, Article 53.1 of the Code ibidem, in its pertinent part, states: "(...) 1. Collect, compile, analyze, extract, prepare, and publish on the website and/or by any other means, with the periodicity determined by the Monetary Policy and Regulation Board, the following information: figures corresponding to monetary, financial, credit, and exchange indicators; macroeconomic synthesis statistics of the country; interest rates; authorized payment systems and authorized institutions to operate; statistics of payment systems and means; and, additional information required by the Monetary Policy and Regulation Board. (...) For the fulfillment of this function, the Central Bank of Ecuador may require any public or private institution to provide the information it deems necessary. Failure to provide information, in accordance with the regulations of the Monetary Policy and Regulation Board, shall be sanctioned as provided in this Code. (...)";

That, Article 118.1 ut supra determines the instruments to manage liquidity, among which reserve requirements are included, establishing that the Monetary Policy and Regulation Board will issue a resolution specifying the terms and conditions for liquidity operations;

That, Article 121 of the aforementioned Code establishes: "Entities of the national financial system are obligated to maintain liquidity reserves at the Central Bank of Ecuador regarding their assets and/or liabilities, in accordance with the regulations issued for this effect by the Monetary Policy and Regulation Board";

That, Article 151 of the Code ibidem determines: "Regulation shall recognize the nature and particular characteristics of each of the sectors of the national financial system. Regulation may be differentiated by sector, segment, activity, among others."

That, Article 189 of the aforementioned Code provides that entities of the national financial system must maintain sufficient levels of high-quality liquid assets, free of liens or restrictions, that can be transformed into cash within a certain period of time without significant loss of value, in relation to their obligations and contingencies, weighted as determined by the Board;

That, Article 240 of the aforementioned norm determines: "Entities of the public and private financial sectors, as well as those of the popular and solidary financial sector, without prejudice to other reserves established by this Code, are obligated to maintain reserve requirements on the deposits and captations they hold. The reserve requirement shall be maintained at the Central Bank of Ecuador. Under the protection of what is determined in the Constitution, for entities of the popular and solidary financial sector, the Monetary Policy and Regulation Board will establish differentiated reserve requirement conditions by segments. Failure by the financial entity to timely cover the requested reserve requirement constitutes a very serious offense, sanctioned by the Central Bank of Ecuador in accordance with this Code.";

That, Article 241 of the same normative body establishes: "The Monetary Policy and Regulation Board will regulate differentiated reserve requirement percentages, which may be by structure of captation, type of entity, among others";

That, numeral 24 of Article 261 of the aforementioned Code states: "The following are very serious offenses: (...) 24. Failure to comply with the level of reserve requirement on deposits or captations (...)";

That, through Resolution No. JPRM-2022-002-M, of January 20, 2022, the Monetary Policy and Regulation Board issued the "Regulation of the Reserve Requirement Percentage and Liquidity Reserves of Entities of the Public, Private, and Popular and Solidary Financial Sectors", reformed through Resolution No. JPRM-2023-002-M, of January 20, 2023;

That, it is necessary to update and unify the regulatory norms on reserve requirements and liquidity reserves, considering the reality of the monetary and financial system, in order to guarantee the right to legal certainty, contributing to maintaining the stability of the monetary and financial system, and complying with the principles of legitimate trust and effective protection of rights;

That, the Monetary Policy and Regulation Board, through extraordinary session No. 005-2023, under virtual modality, on June 30, 2023, reviewed the proposal sent via memorandum No. BCE-BCE-2023-0162-M, of June 28, 2023, by the General Manager of the Central Bank of Ecuador to the President of the Monetary Policy and Regulation Board, as well as the reserved technical reports No. BCE-SGPR7 035-2023/BCE-DNRS-019-2023/BCE-DNPRMF-035-2023; and No. BCE-SGSERV-048-DNSP-330-2023, of June 28, 2023; and the reserved legal report No. BCE-CGJ-022-2023, of June 28, 2023; and,

In exercise of its functions and in attention to Article 47.7 of the Organic Monetary and Financial Code, the Monetary Policy and Regulation Board resolves to issue:

REGULATION OF THE RESERVE REQUIREMENT PERCENTAGE AND LIQUIDITY RESERVES OF ENTITIES OF THE PUBLIC, PRIVATE, AND POPULAR AND SOLIDARY FINANCIAL SECTORS

SECTION 1: RESERVE REQUIREMENT PERCENTAGE

Article 1.- Reserve Percentage and Requirement: The reserve level that entities of the public, private, and popular and solidary financial sectors must maintain will be calculated on the weekly average of daily balances of deposits and captations of each entity, according to the following table and percentage:

Reserve Requirement Percentage by Type of Financial Entity and Asset Level

FINANCIAL ENTITY RESERVE REQUIREMENT PERCENTAGE

Private Financial Sector Assets: a) Less than or equal to USD 1,000 million 5.0% b) Greater than USD 1,000 million 5.0%

Popular and Solidary Financial Sector Savings and Credit Cooperatives Segment 1 and Central Boxes 4.5% Savings and Credit Mutuals for Housing 4.5% Savings and Credit Cooperatives Segment 2 4.0% Savings and Credit Cooperatives Segment 3 3.0%

Public Financial Sector Assets: a) Less than or equal to USD 1,000 million 3.5% b) Greater than USD 1,000 million 5.0%

For the calculation of total assets of entities in the private and public financial sectors, the average information of the first or second semester of the previous year will be considered, as applicable.

Entities of the national financial system must comply with the reserve requirement percentage, according to the schedule established in this resolution.

Article 2.- Captations Subject to Reserve: The Central Bank of Ecuador will calculate the reserve requirement for financial entities, based on the weekly average of daily balances of captations subject to reserve. The detail of the accounts on which the reserve requirement will be calculated will be contained in the regulation that the Central Bank of Ecuador issues for this effect.

Article 3.- Period: The aforementioned reserve requirement must be maintained on average by each entity of the public, private, and popular and solidary financial sectors, during the immediate subsequent weekly period.

By weekly period is understood the period between Thursday and Wednesday, including non-working days.

Weekly reserve deficiencies of entities in the public, private, and popular and solidary financial sectors may be compensated by an excess position verified in the week following the deficiency.

For the purpose of verifying compliance with the reserve level that entities of the public, private, and popular and solidary financial sectors must maintain, the corresponding weekly period and the compensation period inclusive will be observed.

Article 4.- Composition of Reserve: The reserve of entities in the public, private, and popular and solidary financial sectors may be constituted as follows:

1. Entities of the Private Financial Sector and Popular and Solidary Financial Sector: a) Up to 100% with balances in United States dollars that financial entities have in current accounts they maintain at the Central Bank of Ecuador; and, b) Up to 20% with instruments issued by the entity in charge of public finances, whose original or remaining term is less than 360 days on the date of constitution of the reserve; said values must necessarily be kept in custody in the Centralized Value Deposit, under the charge of the Central Bank of Ecuador.

2. Entities of the Public Financial Sector: a) Up to 100% with balances in United States dollars that public financial entities have in current accounts they maintain at the Central Bank of Ecuador; and, b) Up to 75% in instruments issued by the entity in charge of public finances, whose original or remaining term is less than 360 days on the date of constitution of the reserve; said values must necessarily be kept in custody in the Centralized Value Deposit, under the charge of the Central Bank of Ecuador.

Article 5.- Monitoring of Reserve: At the end of the weekly period, the Central Bank of Ecuador must monitor that entities in the public, private, and popular and solidary financial sectors have composed the reserve level in the form and with the instruments indicated in Article 4 of this section. If as a result of the monitoring weekly deficiencies in the reserve level are determined, it will be reported to the respective control body, even if these deficiencies have been compensated.

Likewise, the reserve level that has been covered in the compensation period provided for in Article 3 of this resolution will be considered timely fulfilled, if applicable.

Article 6.- Obligation to Maintain Liquid Resources: At all times, entities in the public, private, and popular and solidary financial sectors that maintain deposits subject to reserve must maintain liquid resources in their current accounts at the Central Bank of Ecuador, in order to cover their obligations derived from their participation in the components of the Central Payment System operated by the Central Bank of Ecuador.

Article 7.- Exception: Entities in the public, private, and popular and solidary financial sectors that are in the process of liquidation or intensive supervision; or, due to fortuitous event or force majeure duly motivated, will be exempt from compliance with the obligation provided for in this section.

Article 8.- Calculation of Reserve Requirement: For the calculation of the reserve requirement, the Central Bank of Ecuador will use the information from the daily balances that financial entities deliver to the corresponding control body. In case that the financial entity subject to reserve has not sent the corresponding balances for the calculation period, it will be considered for all effects that the reserve requirement that this entity must comply with is equal to 1.1 times the last calculated reserve requirement.

Article 9.- Sanction for Non-Compliance: In case that entities in the public, private, and popular and solidary financial sectors do not timely cover, nor maintain the required reserve level, the Central Bank of Ecuador will sanction according to what is established in the Organic Monetary and Financial Code; and, will communicate to the respective control body about said non-compliance.

Article 10.- Reprocessing: Superintendencies may request the Central Bank of Ecuador, within a maximum period of two (2) months counted from the date of presentation of the daily balance, prior to analysis of the justifications presented by financial entities and their favorable technical pronouncement, the execution of a reprocessing in the calculation of the reserve requirement percentage level.

SECTION II: LIQUIDITY RESERVES

SUBSECTION 1: LIQUIDITY RESERVE REQUIREMENT

Article 11.- Liquidity Reserve Obligation: Private banks, savings and credit mutuals for housing, savings and credit cooperatives, and central boxes must constitute and maintain liquidity reserves regarding their captations, at the levels and assets defined in this section.

Article 12.- Period: The financial entities indicated in the previous article must maintain average liquidity reserves, during the subsequent biweekly period from the date the Central Bank of Ecuador establishes its requirement.

By biweekly period is understood the period of fourteen (14) consecutive days from Thursday to Wednesday, including non-working days.

Article 13.- Calculation of Liquidity Reserves: The Central Bank of Ecuador will calculate the liquidity reserve requirement for the financial entities referred to in this section, based on the type of captations subject to reserve.

The composition of the liquidity reserves of each financial entity, for each biweek, will be calculated based on the information corresponding to each day of said period, which financial entities send to the Central Bank of Ecuador.

Article 14.- Publicity: The Central Bank of Ecuador will inform financial entities of the liquidity reserve requirement corresponding to each biweek, through its website.

Article 15.- Sanction for Non-Compliance: In case that the financial entities referred to in this section fail to comply with the provisions, composition of reserves determined, and delivery of information, the Central Bank of Ecuador will sanction according to what is established in the Organic Monetary and Financial Code; and, will inform the respective control body about said non-compliance.

Article 16.- Exception: Entities that are in the process of liquidation or intensive supervision; or, due to fortuitous event or force majeure duly verified, will be exempt from compliance with the obligation provided for in this section.

SUBSECTION II: CONSTITUTION OF LIQUIDITY RESERVES

Article 17.- Composition of Liquidity Reserves: Financial entities must constitute their liquidity reserves with the following assets and percentages:

Composition of Liquidity Reserves

ASSETS PERCENTAGE ON CAPTATIONS

Public Financial Titles Private Banks Minimum 1.5% Savings and Credit Mutuals for Housing Minimum 0.5% Savings and Credit Cooperatives and Central Boxes

Titles issued by the entity in charge of Public Finances Private Banks Minimum 2.0% Savings and Credit Mutuals for Housing

Savings and Credit Cooperatives and Central Boxes

Article 18.- Repurchase Guarantee: Values issued by public financial entities, to be considered part of liquidity reserves, must have their repurchase guaranteed at any time by the issuer, at the request of the holder.

Article 19.- Restriction: The values with which financial entities constitute liquidity reserves must not be subject to any restriction.

This restriction is excepted for values acquired through repo operations; for which, the regulation issued by the Central Bank of Ecuador will be observed, safeguarding that no duplication in the accounting of liquidity reserves occurs.

Article 20.- Sending of Information: The financial entities referred to in this section must send, in the periodicity and form determined by the Central Bank of Ecuador, their total liquidity positions.

Article 21.- Reports: The General Management of the Central Bank of Ecuador will inform the Monetary Policy and Regulation Board quarterly, on the evolution and compliance of liquidity reserves.

Article 22.- Sending of Information to Control Bodies: The General Management of the Central Bank of Ecuador, in case of financial entities that do not comply with the liquidity reserve requirement and its composition, will send the report of said entities to the Superintendency of Banks and the Superintendency of Popular and Solidary Economy.

Article 23.- Other Information Requirements: The Central Bank of Ecuador, if required, may request additional information on the positions that financial entities maintain in the country and abroad.

GENERAL PROVISIONS

FIRST.- The Superintendency of Banks and the Superintendency of Popular and Solidary Economy; and, directly, entities of the national financial system, must send the information required by the Central Bank of Ecuador, without any restriction, within a maximum term of fifteen (15) days counted from the date the communication is formally received, in compliance with what is established in Article 53.1 of the Organic Monetary and Financial Code.

SECOND.- Entities of the popular and solidary financial sector, that after the segment update carried out by the control body have been relocated in segments 1 or 2, will comply with the provisions regarding the reserve level provided for in this resolution, from the date the segment to which they belong is updated, without prejudice to other provisions.

TRANSITIONAL PROVISIONS

FIRST.- Entities of the financial system must comply with the reserve requirement percentage, according to the schedule detailed in the following table:

Reserve Requirement Percentage

Type of Financial Entity / Year 2023 2024 2025 Public and Private Financial Sector Assets > USD 1,000 million 5.0% 5.0% 5.0% Assets <= USD 1,000 million 4.0% 4.5% 5.0%

Popular and Solidary Financial Sector Savings and Credit Cooperatives Segment 1 and Central Box 3.5% 4.5% 4.5% Savings and Credit Mutuals for Housing 3.5% 4.5% 4.5% Savings and Credit Cooperatives Segment 2 2.0% 3.0% 4.0% Savings and Credit Cooperatives Segment 3 - 1.5% 3.0%

In the case of Savings and Credit Cooperatives of Segment 3, the percentage indicated in the previous table will be calculated based on the captations registered in the last available periodic balances, in accordance with the current regulation on the matter.

SECOND.- For the fiscal year 2023, the requirement of the reserve level percentage provided for in Transitional Provision First, will be applied progressively, according to the following detail:

Type of Financial Entity / Month March June September Public and Private Financial Sector Assets <= USD 1,000 million 4.0% - -

Popular and Solidary Financial Sector Savings and Credit Cooperatives Segment 1 and Central Box 2.5% 3.0% 3.5% Savings and Credit Mutuals for Housing 2.5% 3.0% 3.5% Savings and Credit Cooperatives Segment 2 0.5% 1.2% 2.0%

THIRD.- For the fiscal year 2024, the requirement of the reserve level percentage for Savings and Credit Cooperatives of Segment 3, will be applied progressively, according to the following detail:

Type of Financial Entity / Month March June September Savings and Credit Cooperatives Segment 3 0.5% 1.0% 1.5%

FOURTH.- Entities of the popular and solidary financial sector, that after the segment update carried out by the control body have been relocated from segment 4 to segment 3, in the month of June of fiscal years 2024 and 2025, hereinafter, will comply with the requirement of the reserve level percentage, according to the following detail:

2024 October November December 0.5% 1.0% 1.5%

2025 October November December 2.0% 2.5% 3.0%

FIFTH.- The Central Bank of Ecuador, within a maximum term of one (1) month, will carry out the pertinent actions