Resolution No. JPRF-F-2022-042 Amending Book I "Monetary and Financial System" of the Codification of Monetary, Financial, Securities and Insurance Resolutions Regarding the Standard for the Establishment of Provisions for Risk Assets in Savings and Credit Cooperatives and Mutual Savings and Credit Associations for Housing

Resolution No. JPRF-F-2022-042 THE FINANCIAL POLICY AND REGULATION BOARD CONSIDERING: That, Article 226 of the Constitution of the Republic of Ecuador provides: "State institutions, their agencies, dependencies, 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. They shall have the duty to coordinate actions for the fulfillment of their purposes and to make effective the enjoyment and exercise of the rights recognized in the Constitution."; That, Article 13 of the aforementioned Code created the Financial Policy and Regulation Board as part of the Executive Function, responsible for the formulation of credit, financial, securities, insurance, and prepaid comprehensive health care services policy and regulation, and subsequently establishes that: "Only when decisions imply the use of fiscal resources, affect pre-existing financing granted to the body in charge of public finances, or imply the need for a sovereign guarantee, the resolutions adopted by the Financial Policy and Regulation Board must previously have the favorable report of the head of the body in charge of public finances"; That, Article 14 ibid establishes the scope of the Financial Policy and Regulation Board and in its pertinent part states: "2. Issue regulations that allow maintaining the integrity, solidity, sustainability, and stability of the national financial, securities, insurance, and prepaid comprehensive health care services systems, in accordance with what is provided in Article 309 of the Constitution of the Republic of Ecuador. 3. Issue micro-prudential regulations for the national financial, securities, insurance, and prepaid comprehensive health care services sectors, based on proposals presented by the respective superintendencies, within their respective scopes of competence and without prejudice to their independence. (...) For the fulfillment of these functions, the Financial Policy and Regulation Board shall issue norms in matters within its competence, without being able to alter legal provisions. The Financial Policy and Regulation Board may issue regulations by segments, economic activities, and other criteria. The Superintendent of Banks, the Superintendent of Companies, Securities and Insurance; the Superintendent of Popular and Solidarity Economy; the President of the Monetary Policy Board; and the Deposit Insurance Corporation through its legal representative, Liquidity Fund and Private Insurance Fund may propose regulation projects for consideration by the Financial Policy and Regulation Board with the backing of the respective technical reports. (...)";

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That, literal d) of numeral 7; and, numeral 26 of article 14.1 of the aforementioned legal body, determine as duties and faculties of the Financial Policy and Regulation Board: "7. Issue the prudential regulatory framework to which financial entities, securities, insurance, and prepaid comprehensive health care services must adhere, a framework that must be coherent, not give rise to regulatory arbitrage, and cover, at least the following: (...) c) Levels of concentration of credit and financial operations; and, applicable provisions, for the mentioned operations. These levels may be defined by segments, economic activities, and other criteria; (...) 26. Establish, with the purpose of stimulating development, economic reactivation, and financial stability, with adequate technical backing, the system of interest rates and provisions applicable to credit, financial, commercial, and other operations, which may be defined by segments, economic activities, and other criteria. In the execution of these parameters, the principles of financial stability and solidity shall be considered and guaranteed at all times;"; That, articles 150 and 151 of the aforementioned Organic Code establish that entities of the national financial system shall be subject to the regulation issued by the Financial Policy and Regulation Board; and, that the regulation must recognize the nature and particular characteristics of each of the sectors of the national financial system and that the regulation may be differentiated by sector, by segment, by activity, among others; That, Article 204 of the aforementioned Code provides: "Quality of assets, contingencies, and establishment of provisions. Entities of the national financial system, in order to reflect the true quality of assets and contingencies, shall permanently qualify them and establish the provisions established by this Code and the regulations issued by the Financial Policy and Regulation Board to cover the risks of uncollectability, the loss of value of assets, and to support adequate macroeconomic performance."; That, the Fiftieth Transitory Provision added to the aforementioned legal body, by the Organic Reformatory Law to the Organic Monetary and Financial Code for the Defense of Dollarization, determines: "Transitory Regime of Resolutions of the Codification of the Monetary and Financial Policy Board. The resolutions contained in the Codification of Monetary, Financial, Securities and Insurance Resolutions of the Monetary and Financial Policy Board and the norms issued by the control bodies shall maintain their validity until the Monetary Policy Board and the Financial Policy and Regulation Board resolve what corresponds, within the scope of their competencies."; That, through Office No. SEPS-SGD-2022-15938-O of June 01, 2022, the Superintendent of Popular and Solidarity Economy (SEPS) proposed the reform to Section V "Standard for the Establishment of Provisions for Risk Assets in Savings and Credit Cooperatives and Mutual Savings and Credit Associations for Housing", Chapter XXXVI "Popular and Solidarity Financial Sector", Title II "National Financial System", of Book I "Monetary and

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Financial" of the Codification of Monetary, Financial, Securities and Insurance Resolutions, of the Financial Policy and Regulation Board, attaching to the aforementioned office the technical report, legal report, executive summary, presentation, and corresponding draft Resolution; That, the Technical Secretariat of the Financial Policy and Regulation Board, through Memorandum No. JPRF-SETEC-2022-0073-M of October 12, 2022, sends to the President of the Board the Technical-Legal Report No. JPRF-CTCJ-2022-0010 of October 12, 2022; That, the Financial Policy and Regulation Board, in an extraordinary session held by technological means, convened on October 12, 2022 and carried out via video conference on October 13, 2022, reviewed the Memorandum No. JPRF-SETEC-2022-0073-M of October 12, 2022, issued by the Technical Secretariat of the Board, as well as the Technical-Legal Report No. JPRF-CTCJ-2022-010 of October 12, 2022, authorized by the Technical Secretariat of the aforementioned Board, and the corresponding draft Resolution; That, the Financial Policy and Regulation Board, in an extraordinary session held by technological means, convened on October 12, 2022 and carried out via video conference on October 13, 2022, reviewed and approved the following Resolution; and, In exercise of its functions, RESOLVES: SINGLE ARTICLE.- Amend Section V "STANDARDS FOR THE ESTABLISHMENT OF PROVISIONS FOR RISK ASSETS IN SAVINGS AND CREDIT COOPERATIVES AND MUTUAL SAVINGS AND CREDIT ASSOCIATIONS FOR HOUSING", Chapter XXXVI "POPULAR AND SOLIDARITY FINANCIAL SECTOR", Title II "NATIONAL FINANCIAL SYSTEM", of Book I "MONETARY AND FINANCIAL SYSTEM", of the Codification of Monetary, Financial, Securities and Insurance Resolutions, in the following terms:

1. Substitute the text of Article 62 of Subsection II "ON THE ESTABLISHMENT OF PROVISIONS OF THE CREDIT PORTFOLIO AND CONTINGENCIES", with the following: "Art. 62.- Generic provisions: In the event that the Superintendency evidences deficiencies in the disposition and application of policies and procedures; or non-compliance in the handling of file information; or inconsistencies in the registration of information, it shall order the establishment of generic provisions of up to 3% on the total balance of the portfolio of one or more types of credit. Entities shall maintain this generic provision until the Superintendent of Popular and Solidarity Economy determines that the causes that originated them have been overcome. Generic provisions as indicated in the previous paragraph shall not be established in credit operations with risk category D and E.

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Entities may establish voluntary generic provisions different from those required in the first paragraph. These voluntary generic provisions may be established for one or more types of credit and shall form part of the secondary technical equity, upon proof to the Superintendent of Popular and Solidarity Economy. Generic provisions shall be considered for the effects of what is provided in numeral 11 of Article 10 of the Organic Law of the Internal Tax Regime." 2. Substitute the text of Article 64 of Paragraph I "ACCOUNTS RECEIVABLE AND OTHER ASSETS" of Subsection III "ON THE ESTABLISHMENT OF PROVISIONS OF ACCOUNTS RECEIVABLE AND OTHER ASSETS", with the following: "Art. 64.- General guidelines: The accounting registration of these accounts must be carried out based on the criteria established by the Superintendent of Popular and Solidarity Economy. If in any supervision process it is detected that there are no maturity dates in accounts receivable and other assets; or that they do not correspond to the established characteristics of these accounts, the control body may order them to be qualified in category E and proceed to their immediate write-off. If, in the opinion of the Superintendent of Popular and Solidarity Economy, the value of the provisions established for accounts receivable and other assets does not adequately cover the credit risk, said Control Body may at any time and in a motivated manner, order the establishment of additional specific provisions." 3. Substitute the text of Article 65 of Paragraph II "INVESTMENTS" of Subsection III "ON THE ESTABLISHMENT OF PROVISIONS OF ACCOUNTS RECEIVABLE AND OTHER ASSETS", with the following: "Art. 65.- Qualification and establishment of provisions: Investment instruments shall be qualified and provisioned based on the following categories:

1. CATEGORY A: Investment with normal risk: Corresponds to investment instruments whose issuers, according to their financial statements and other available information, at least present the following conditions: a. Comply with the obligations derived from these instruments by the maturity date; b. Payment capacity; c. Absence of losses during the last three (3) years; and, d. Have a clean opinion from the external auditor or whoever performs the surveillance labor. Instruments classified in this category must have a minimum provision of 5% with respect to the registered amount, without exceeding 19.99%.

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Notwithstanding, the following titles are included within this category that will not require provision: a. Titles issued or guaranteed by the Ministry of Economy and Finance, Central Bank of Ecuador, and entities of the public financial sector, as well as guarantees granted by entities that make up the credit guarantee system up to the secured amount. b. Titles issued by entities of the private financial sector and popular and solidarity financial sector, and those negotiated through the country's stock exchanges, that meet the conditions for their qualification within this category. 2. CATEGORY B: Investment with acceptable risk: Corresponds to investment instruments whose issuers, according to their financial statements and other available information, present any of the following conditions: a. Factors of uncertainty that could affect the ability to continue adequately meeting debt services or to liquidate investments; b. Weaknesses that can affect their financial situation; c. Losses in any accounting period of the last three years; or, d. Increase in the indebtedness index. These instruments must have a provision of 20% up to 49.99%. 3. CATEGORY C: Investment with appreciable risk: Corresponds to investment instruments of issuers that present any of the following conditions: a. High probability of non-compliance in the timely payment of principal and interest or of realization on the agreed terms; b. Losses in the period or accumulated that, individually or summed, compromise more than 50% of their equity; or, c. Deficiencies in their financial situation that compromise the recovery of the investment. These instruments must have a provision of 50% up to 79.99%. 4. CATEGORY D: Investment with significant risk: Corresponds to investment instruments of issuers that present any of the following conditions: a. Non-compliance with the terms agreed in the title; b. Accentuated deficiencies in their financial situation, according to their financial statements and other available information; or, c. High probability of not honoring the obligations derived from the investment. These instruments must have a provision of 80% up to 99.99%.

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5. CATEGORY E: Uncollectable investment: Corresponds to investment instruments of issuers that present any of the following conditions: a. Are in the process of liquidation; or, b. Losses of the period or accumulated that, individually or summed, consume the entirety of the equity. These instruments must have a provision of 100%."
6. Include as General Disposition Ninth, the following: "NINTH.- Provisions made on credits that have been cancelled through dations in payment shall not be reversed and shall be destined to cover provision deficiencies of credit portfolios or other assets. If there are no such deficiencies, entities must request authorization from the Superintendent of Popular and Solidarity Economy to effect their reversal."
7. Include as General Disposition Tenth, the following: "TENTH.- Generic provisions that were established in the year 2020 in compliance with Transitory Dispositions Sixth and Eighth, shall be reclassified as specific provisions to cover requirements derived from the qualification of risk assets. If there are no provision deficiencies, entities must request authorization from the Superintendent of Popular and Solidarity Economy to effect their reversal."
8. Include as General Disposition Eleventh, the following: "ELEVENTH.- Provisions constituted in excess may be reversed except with authorization from the Superintendent of Popular and Solidarity Economy, based on the corresponding technical reports."
9. Include as General Disposition Twelfth, the following: "TWELFTH.- For the valuation of fiduciary rights, entities of the popular and solidarity financial sector shall include in the contracts of constitution of the commercial trust, a clause by which the fiduciary administrator is obliged to apply the criteria established in this standard, for the evaluation of assets that are transferred to the autonomous patrimony. The qualification assigned by the trust administrator to the different assets that make up the autonomous patrimony must be reported to the respective entity of the popular and solidarity financial sector. Regarding credit portfolios and contingencies, each financial entity must report to the control body in the respective credit structures."

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GENERAL DISPOSITION ONLY.- In case of doubt regarding the content or scope of the provisions of this Resolution, it shall correspond to the Superintendent of Popular and Solidarity Economy to resolve them. Said control body shall be in charge of the compliance of this Resolution. FINAL DISPOSITION.- This Resolution shall enter into force from the present date, without prejudice to its publication in the Official Register. Publish this Resolution on the website of the Financial Policy and Regulation Board, within a maximum term of two days from its issuance. NOTIFY.- Given in the Metropolitan District of Quito, on October 13, 2022. THE PRESIDENT, Mgs. María Paulina Vela Zambrano The preceding resolution was processed and signed by Master María Paulina Vela Zambrano, President of the Financial Policy and Regulation Board, in the Metropolitan District of Quito, on October 13, 2022.- I CERTIFY. TECHNICAL SECRETARY Dr. Nelly Arias Zavala