Technical Standards for the Application of Limits in the Assumption of Risks by Financial Entities

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THE COMMITTEE OF STANDARDS OF THE CENTRAL RESERVE BANK OF EL SALVADOR, CONSIDERING:

I. That Article 63, first paragraph, of the Banks Law, establishes that banks must elaborate and implement policies and control systems that allow them to adequately manage their financial and operational risks; considering, among others, provisions related to management, destination, and diversification of credit and investments, liquidity management, interest rates, and foreign currency operations, as well as those carried out abroad.

II. That Article 197 of the Banks Law, establishes the limits and prohibitions in the assumption of risks that banks must comply with regarding the same natural or legal person, whether domiciled domestically or abroad, with respect to their Equity Fund.

III. That Article 161, first paragraph, of the Law of Cooperative Banks and Savings and Credit Societies, establishes that savings and credit societies shall be subject to the provisions of the Banks Law contained in Title Seven, regarding General Provisions, except for the modification relative to the fact that said societies may not grant credits or assume risks for more than ten percent (10%) of their equity fund with the same natural or legal person.

IV. That Article 2, first paragraph, of the Law of Supervision and Regulation of the Financial System, establishes that the Financial Supervision and Regulation System has the objective of preserving the stability of the financial system and ensuring its efficiency and transparency, as well as ensuring the safety and solidity of the members of the financial system in accordance with what this Law, other applicable laws, regulations, and technical standards dictate for this effect, all in concordance with international best practices on the matter.

V. That Article 3, letter c), of the Law of Supervision and Regulation of the Financial System, establishes that it is the responsibility of the Superintendence of the Financial System to monitor the risks of the members of the financial system preventively and the manner in which they manage them, ensuring the prudent maintenance of their solvency and liquidity.

VI. That Article 99, third paragraph, letter a), of the Law of Supervision and Regulation of the Financial System, establishes that it corresponds to the Committee of Standards of the Central Reserve Bank of El Salvador the approval of technical norms, instructions, and provisions that the laws regulating the supervised entities establish must be dictated to facilitate their application, especially those relative to solvency requirements, liquidity, provisions, reserves, classification of risky assets, criteria

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to establish the need for consolidation, good corporate governance practices, information transparency, and on any other aspect inherent to risk management by the supervised entities.

VII. That in accordance with Article 101, fourth paragraph, of the Law of Supervision and Regulation of the Financial System, the powers to approve, modify, and repeal technical norms that must be complied with by the members of the financial system and other supervised entities are transferred to the Central Reserve Bank of El Salvador.

THEREFORE, by virtue of the regulatory powers conferred by Article 99 of the Law of Supervision and Regulation of the Financial System,

AGREES to issue the following:

TECHNICAL STANDARDS FOR THE APPLICATION OF LIMITS IN THE ASSUMPTION OF RISKS BY FINANCIAL ENTITIES

CHAPTER I OBJECT, SUBJECTS, AND TERMS

Object Art. 1.- These Standards aim to regulate the application of limits in the granting of credits by the obligated subjects to persons or groups of persons, whether domiciled in the country or not, in accordance with what is established in the current legal framework.

Subjects Art. 2.- The subjects obligated to comply with the provisions established in these Standards are: a) Banks constituted in El Salvador; b) Branches of foreign banks established in El Salvador; c) Subsidiaries that local banks constitute abroad; d) Subsidiaries and joint venture societies of banks constituted in El Salvador or of branches of foreign banks established in the country; e) The Agricultural Development Bank; insofar as it does not contradict its Creation Law; f) The Mortgage Bank of El Salvador, S.A; g) Savings and credit societies; and h) Societies that make up financial conglomerates.

Banks that administer trusts are obligated to comply with these Standards in the operations they carry out with such autonomous estates.

Terms Art. 3.- For the purposes of these Standards, the terms indicated below have the following meaning: a) Entity: Subjects obligated to comply with these Standards; b) Central Bank: Central Reserve Bank of El Salvador; c) Law: Banks Law; and d) Superintendence: Superintendence of the Financial System.

CHAPTER II GENERAL PROVISIONS

Persons and groups of persons subject to credit limits Art. 4.- The persons or groups of persons subject to credit or risk limits granted by entities are: a) Natural persons; b) Legal persons, including autonomous state-owned enterprises, except when it concerns the Central Bank, the State, and the Deposit Guarantee Institute; c) Groups formed by societies among which there is unity or control of decision. It will be understood that there is unity of control or decision when a person or a set of persons acting jointly, directly or through third parties, participates in the ownership of the society or has the power to carry out any of the following actions: i) Ensure the majority of votes in the general shareholders' meetings or elect the majority of directors. ii) Control at least ten percent (10.0%) of the capital with voting rights of the society, unless there is another person or group of persons with an agreement of joint action, who controls, directly or through third parties, a percentage equal to or greater than the aforementioned. d) Groups of societies with common shareholders owning more than fifty percent (50.0%) of the capital; e) Groups formed by general partnerships or limited partnerships in which one is a solidary partner; and f) Groups formed by the shareholder or partner of societies in which they hold more than fifty percent (50.0%) of the paid-up social capital or of the profits. In the case that the participation is greater than ten percent (10.0%) and does not exceed fifty percent (50.0%), the inclusion of the obligations will be made pro rata.

Presumption of linkage Art. 5.- The Superintendence may accumulate obligations to a group or to a natural or legal person individually considered, when in its judgment there are facts that make it presumed that the credits granted to various debtors constitute a single operation or credit risk.

To guarantee the right to be heard by the entities, the presumption will be resolved as follows: a) The Superintendent will communicate a motivated resolution to the bank in question, with the objective that within a term not exceeding eight business days counted from the day following the date of notification, it presents its arguments for defense; and b) In the case that the bank does not present the necessary arguments within the indicated period or if they are not satisfactory to the Superintendent of the Financial System, the latter will resolve that the credit constitutes a single operation or credit risk and will accumulate it to the individual debtor or to a group of economically linked persons, as appropriate.

Against the resolutions issued by the Superintendent, a recourse for reconsideration and appeal will be admitted as stipulated in Articles 63 and 66 of the Law of Supervision and Regulation of the Financial System.

CHAPTER III ESTABLISHMENT OF POLICIES, LIMITS IN THE GRANTING OF CREDITS, AND FORM OF ACCUMULATION

Establishment of policies Art. 6.- It corresponds to the Board of Directors of each entity: a) Establish policies for credit concentrations, whether in the country or abroad. These must address, at a minimum, risk diversification, credit and investment limits by country, and within these, sub-limits by economic sector, term of operations, among others; b) Implement internal control procedures that allow the measurement, monitoring, and control of credit concentration risk; c) Designate the administrative unit responsible for the control and follow-up of credit concentration risk; d) Schedule periodic evaluations on the compliance with policies and prudential regulations; e) Receive monthly information on the credit concentration situation and risk exposure with respect to the main debtors; f) The agreements of the Board of Directors on this matter must be duly expressed in the respective minutes book.

Global limit for the assumption of risks Art. 7.- Entities may not grant credits to the persons and groups of persons referred to in Article 4 of these Standards, for more than twenty-five percent (25%) of their equity fund.

Excesses of financing of fifteen percent (15%) must be backed by sufficient real guarantees or guarantees from first-line local banks or foreign banks.

The limit referred to in this article will apply to each bank, according to its own equity fund, with the exception of savings and credit societies which may not grant credits or assume risks for more than ten percent (10%) of their Equity Fund with the same natural or legal person.

Limit of credits to non-domiciled persons Art. 8.- Entities may not grant credits to the persons and groups of persons referred to in Article 4 of these Standards, for more than ten percent (10%) of their equity fund, when it concerns credits granted to non-domiciled persons or to be invested abroad.

The sum of all credits referred to in the previous paragraph may not be greater than seventy-five percent (75%) of the bank's equity fund or above this limit up to one hundred fifty percent (150%) when authorized by the Superintendence. This provision does not apply to subsidiaries of country banks abroad, for the credits they grant in the country where they are established.

Authorization to place more than 75% of the equity fund Art. 9.- The entity interested in granting credits to debtors not domiciled in El Salvador or to be invested abroad, in an amount greater than seventy-five percent (75%) of its equity fund, must submit an authorization request to the Superintendence, to which the following information must be attached: a) Financial program that includes future placements, in which it demonstrates how it will comply with the technical relations that bind the law, such as: equity fund, liquidity coefficients, foreign currency matching, term matching, and credit concentration limits; b) Description of how it has complied with the legal equity requirements and how it will comply in the future; c) Report of the Audit Committee and external auditors on the compliance with policies for the administration and control of credit concentration risk, indicating if they have been consistently complied with, as well as the mention of the quality of information and risk follow-up mechanisms; d) Having approved by their respective Boards of Directors and communicated to the Superintendence the pertinent policies for operations abroad referred to in Article 63 of the Law, which must include specific limits to credit exposure by country and other risk diversifications considered pertinent; e) Having complied with the information requirements of the prudential and accounting norms established by the Superintendence, especially those dealing with operations abroad; f) Report of the results of periodic evaluations of Internal Audit, on the compliance with policies and prudential regulations referred to in Article 6 of these Standards; g) The organizational description of the administrative unit responsible for the control and follow-up of credit concentration risk, as well as the procedures manual for the management and follow-up of credit operations to debtors not domiciled in El Salvador or to be invested abroad.

The Superintendence reserves the right to request necessary expansions on the presented information, as well as to carry out checks on the declarations and assertions contained in the documentation.

With the results of the evaluation of the request and documentation, the Superintendence will issue an authorization resolution so that the bank can make placements in excess of seventy-five percent (75%) of its equity fund, or it will reason the motives for not granting the authorization.

Revocation of authorization Art. 10.- The Superintendence may revoke the authorization to grant credits abroad in excess of seventy-five percent (75%) of the bank's equity fund, when it considers that the assumed risks are affecting its solvency or liquidity, based on the non-compliance with the financial plan and the declarations or assertions contained in the initial and subsequent documentation required in Article 9 of these Standards.

Excluded credits Art. 11.- Deposits and highly liquid and low-risk securities that constitute the liquidity reserve, as well as investments in securities and bank deposits that demonstrate minimum risk ratings of AA, or its equivalent in the country, will not be counted for the calculation of the individual and global limit of credits to non-residents or to be invested abroad.

Investments in securities and bank deposits that demonstrate

The ratings considered to determine the risk category must be

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the last ones issued by internationally recognized risk rating agencies.

For the equivalence of risk ratings issued by different Rating Agencies, the following Table will be used:

RATING AGENCY LONG-TERM OBLIGATIONS Fitch AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- Moody's Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Standard & Poor's AAA AA+ AA AA- A+ A A- BBB+ BBB BBB-

SHORT-TERM OBLIGATIONS Fitch F-1+ F-1 F-2 F-3 Moody's P-1 P-2 P-3 Standard & Poor's A-1+ A-1 A-2 A-3

• Rating Agencies are an integral part of the issued rating; consequently, within the same category there are different ratings.

Excluded credits with special limits Art. 12.- Credits and resources granted directly or indirectly are excluded from the limits of Article 197 of the Law and will be governed by their own limits: a) The sum of credits granted by the bank to national subsidiaries plus the equity participation in them, at no time may exceed fifty percent (50%) of the value of the bank's equity fund or ten percent (10%) of its net loan portfolio, whichever is lower; b) The sum of credits granted by the bank to joint venture societies plus the equity participation in them, at no time may exceed twenty-five percent (25%) of the bank's equity fund; c) The sum of credits granted by the bank to foreign subsidiaries plus the equity participation in them, at no time may exceed fifty percent (50%) of the bank's equity fund or ten percent (10%) of its net loan portfolio, whichever is lower; d) The sum of credits granted by the bank to subsidiary societies established in the country and the holding company of exclusive purpose of the conglomerate may not exceed fifty percent (50%) of the bank's equity fund or ten percent (10%) of its loan portfolio, whichever is lower; and e) The sum of direct or indirect credits granted by the bank to societies in which it has a minority participation may not exceed twenty-five percent (25%) of its equity fund, including in said percentage the credits, guarantees, bonds, and guarantees that the bank grants to societies in which the holding company of exclusive purpose has a minority participation.

In the case of savings and credit societies, they are excluded from the limit established in letter b) of Art. 161 of the Law of Cooperative Banks and Savings and Credit Societies and will be governed by their own limits, the credits and resources granted directly or indirectly as follows: a) The sum of credits granted by the savings and credit society to the holding society and with other member societies of the conglomerate established in the country, at no time may exceed five percent (5%) of the value of the equity fund of the savings and credit society; b) The sum of credits, guarantees, bonds, and guarantees granted to member societies of the conglomerate established abroad may not exceed five percent (5%) of its equity fund; and c) The sum of direct or indirect credits granted by the savings and credit society to societies in which it has a minority participation may not exceed five percent (5%) of its equity fund, including in said percentage the credits, guarantees, bonds, and guarantees that the savings and credit society grants to societies in which the holding company of exclusive purpose has a minority participation.

Accumulation of obligations Art. 13.- Obligations of the same debtor will be considered those that accumulate as debts of a group, integrated by the credits granted to each of the natural or legal persons that form the groups determined based on what is established in Articles 4 and 5 of these Standards.

When one of the natural or legal persons has a participation greater than ten percent (10%) and does not exceed fifty percent (50%) in another society, the inclusion of the obligations in the group will be made pro rata; in the case that the participation is greater than fifty percent (50%), the inclusion of the obligations will be made in its entirety.

When it concerns groups of societies with common shareholders owning more than fifty percent (50%) of the capital of the societies, the inclusion of the obligations will be made at one hundred percent (100%).

In the case that unity of control or decision is determined, the group's responsibilities will be taken in their entirety.

CHAPTER IV CONDITIONS AND COVERAGE OF GUARANTEES

Conditions of Guarantees Art. 14.- Real guarantees, in addition to being legally constituted, must meet the following conditions:

a) Mortgages and pledges must be duly registered in the corresponding Public Registries, according to the following detail: i) Mortgages on real estate are granted a term of one year; and ii) Mortgages on ships, aircraft, and commercial enterprises, and pledge guarantees, are granted a term of six months. These terms for definitive registration in the corresponding registries will be counted from the date of granting the credit or the constitution of the guarantee, whichever is earlier. After that term, they will not count for the effect of coverage, until they are definitively registered. The term will be granted if the respective preventive annotation and the necessary legal documentation have been presented or, in its case, only the latter, as appropriate. b) Physical goods given as collateral must be executable according to the laws of the country where they are located; c) Guarantees from local banks or foreign banks will not count for coverage purposes, em

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mitted by local banks or foreign banks, em