Resolution No. JPRF-F-2022-046 Reforming the Solvency, Technical Equity, and Risk-Weighted Assets and Contingencies Standard for Savings and Credit Cooperatives, Central Boxes, and Mutual Housing Savings and Credit Associations

Resolution No. JPRF-F-2022-046 THE FINANCIAL POLICY AND REGULATION BOARD CONSIDERING:

That, Article 226 of the Constitution of the Republic of Ecuador prescribes that state institutions, their agencies, dependencies, public servants, and persons acting under state authority shall exercise only the competencies and powers attributed to them in the Constitution and the law;

That, the Magna Carta, in its Article 308, determines that financial activities are a public order service and may be exercised with prior state authorization, in accordance with the law; and their fundamental purpose is to preserve deposits and meet financing requirements to achieve the country's development objectives;

That, Article 309 of the Fundamental Standard states that the national financial system is composed of the public, private, and popular and solidarity sectors, which intermediates public resources; each of these sectors shall have specific, autonomous, and differentiated control norms and entities, responsible for preserving their safety, stability, transparency, and solidity; additionally establishing that the directors of control entities are administratively, civilly, and criminally responsible for their decisions;

That, Article 13 of the Organic Monetary and Financial Code, Book I, reformed by the Organic Law Reforming the Organic Monetary and Financial Code for the Defense of Dollarization, published in the Official Register Supplement No. 443 of May 3, 2021, created the Financial Policy and Regulation Board, part of the Executive Function, as a public law legal entity, with administrative, financial, and operational autonomy, responsible for formulating credit, financial, securities, insurance, and prepaid comprehensive health care service policy and regulation;

That, Article 14 of the aforementioned Organic Code, referring to the scope of the Financial Policy and Regulation Board, determines that this collegiate body is responsible for formulating financial policy; issuing regulations that allow maintaining the integrity, solidity, sustainability, and stability of the national financial system; and also, issuing micro-prudential regulations for the national financial sector, based on proposals presented by the respective superintendencies, within their areas of competence and without prejudice to their independence;

That, Article 14.1 ibidem, in number 7, letters b) and d), states that it is the responsibility of the Financial Policy and Regulation Board to fulfill the duty and exercise the power to issue the prudential regulatory framework to which financial entities must adhere, a framework that must be coherent, not give rise to regulatory arbitrage, and must establish "minimum capital levels, technical equity, and risk weightings of assets, their composition, method of calculation, and modifications," as well as cover what corresponds to "risk management, internal control environment, corporate and cooperative governance, and market discipline";

That, as established in Articles 150 and 151 of the Organic Monetary and Financial Code, Book I, entities of the national financial system are subject to the regulation issued by the Financial Policy and Regulation Board, which must recognize the nature and particular characteristics of each of the sectors of the national financial system;

That, Article 444 of the aforementioned Organic Code mandates that popular and solidarity financial entities are subject to the regulation of the Financial Policy and Regulation Board and the control of the Superintendence of the Popular and Solidarity Economy, who, in the policies they issue, will keep in mind the nature and specific characteristics of the popular and solidarity financial sector;

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That, Article 89 of the Organic Law Reforming the Organic Monetary and Financial Code for the Defense of Dollarization, published in Official Register No. 443 of May 3, 2021, substituted Article 190 of the Organic Monetary and Financial Code, Book I, which refers to the solvency and technical equity of entities of the national financial system, financial groups, and popular and solidarity groups;

That, in the Codification of Monetary, Financial, Securities, and Insurance Resolutions, in Book I "Monetary and Financial System", Title II "National Financial System", Chapter XXXVI "Popular and Solidarity Financial Sector", Section VI, is contained the so-called "Solvency, Technical Equity, and Risk-Weighted Assets and Contingencies Standard for Savings and Credit Cooperatives, Central Boxes, and Mutual Housing Savings and Credit Associations";

That, the Twenty-Ninth General Provision of Book 1 of the Organic Monetary and Financial Code, added by the Organic Law Reforming the Organic Monetary and Financial Code for the Defense of Dollarization, provides:

"In the current legislation where reference is made to the 'Monetary and Financial Policy and Regulation Board', replace it with 'Financial Policy and Regulation Board'.";

That, the Fifty-Fourth Transitional Provision of the aforementioned Organic Code, added by the Organic Law Reforming the Organic Monetary and Financial Code for the Defense of Dollarization, provides:

"Transitional Regime of Resolutions of the Codification of the Monetary and Financial Policy and Regulation Board. The resolutions contained in the Codification of Monetary, Financial, Securities, and Insurance Resolutions of the Monetary and Financial Policy and Regulation Board and the norms issued by control bodies will remain in force until the Monetary and Financial Policy and Regulation Board and the Financial Policy and Regulation Board resolve what corresponds, within their areas of competence.";

That, Article 9 of the Organic Monetary and Financial Code, Book I, states that regulatory and control bodies have the duty to coordinate actions to fulfill their purposes and make effective the enjoyment and exercise of rights recognized in the Constitution;

That, the penultimate paragraph of the same Article 14.1 ibidem determines that the Superintendent of the Popular and Solidarity Economy may propose regulation projects for consideration by the Financial Policy and Regulation Board, backed by the respective technical reports;

That, through Letter No. SEPS-SEP-2022-00004-O of March 9, 2022, the General Secretary of the Superintendence of the Popular and Solidarity Economy sent to the Financial Policy and Regulation Board Letter No. SEPS-SGD-2022-06963-OF of March 8, 2022, signed by the Superintendent of the Popular and Solidarity Economy, Dr. Sofía Margarita Hernández Naranjo, through which the referred control body presented, for consideration by the Financial Policy and Regulation Board, a proposal for reform to the "Solvency, Technical Equity, and Risk-Weighted Assets and Contingencies Standard for Savings and Credit Cooperatives, Central Boxes, and Mutual Housing Savings and Credit Associations", contained in Section VI "Solvency, Technical Equity, and Risk-Weighted Assets and Contingencies Standard for Savings and Credit Cooperatives, Central Boxes, and Mutual Housing Savings and Credit Associations", Chapter XXXVI "Popular and Solidarity Financial Sector", Title II "National Financial System", Book I "Monetary and Financial System" of the Codification of Monetary, Financial, Securities, and Insurance Resolutions;

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Monetary, Financial, Securities, and Insurance Resolutions; in application of what is provided in the penultimate paragraph of Article 14.1 of the Organic Monetary and Financial Code, Book I; attaching for this purpose, Report No. SEPS-INR-DNR-2022-0025 of February 24, 2022, signed by the National Risk Intendant; Report s/n of February 25, 2022, signed by the National Director of Standards; and the corresponding draft resolution;

That, in an ordinary session on April 25, 2022, the Financial Policy and Regulation Board resolved not to address Point 3 of the agenda relating to "Know and resolve on the Reforming Standard to Section VI Solvency, Technical Equity, and Risk-Weighted Assets and Contingencies Standard for Savings and Credit Cooperatives, Central Boxes, and Mutual Associations, of Chapter XXXVI Popular and Solidarity Financial Sector, of Title II National Financial System, of Book I Monetary and Financial System, of the Codification of Monetary, Financial, Securities, and Insurance Resolutions"; requesting the Board to the Superintendence of the Popular and Solidarity Economy to make an extension to the proposal sent, in consideration of certain technical aspects and the application of international best practices;

That, through Letters No. JPRF-SETEC-2022-0013-O of April 29, 2022 and No. JPRF-JPRF-2022-0171-O of July 22, 2022, the Technical Secretary and the President of the Financial Policy and Regulation Board, respectively, informed the Superintendence of the Popular and Solidarity Economy of what was resolved in the ordinary session of April 25, 2022, and requested the referred control body to send information regarding the impacts of the suggested modifications in the reform proposal presented;

That, with Letter No. SEPS-SGD-2022-22357-OF of August 4, 2022, the Superintendent of the Popular and Solidarity Economy responded to the referred Letter No. JPRF-JPRF-2022-0171-O and attached the required information; annexing, as support, the Report s/n titled "Summary of Solvency Information";

That, the Technical Secretary of the Financial Policy and Regulation Board, through Memorandum No. JPRF-SETEC-2022-0078-M of November 2, 2022, sends to the President of the Board the following reports:

i) Technical Report No. JPRF-CT-2022-0038 of November 2, 2022, issued by the Technical Coordination of the Board, which determines that the proposed reform adjusts to international best practices, harmonizes the public and private financial sectors; and the popular and solidarity financial sector, in the weighting and method of aggregation of the accounts that make up primary and secondary technical equity; and, in addition, aligns with the reforms to the COMYF.

ii) Legal Report No. JPRF-CJ-2022-0045 of November 2, 2022, issued by the Legal Coordination of the Board, which concludes that: a) the Financial Policy and Regulation Board has legal competence to issue the prudential regulatory framework to which financial entities must adhere and establish minimum capital levels, technical equity, and risk weightings of assets, their composition, method of calculation, and modifications, as well as cover in said regulatory framework what corresponds to risk management, internal control environment, corporate and cooperative governance, and market discipline; b) the Superintendence of the Popular and Solidarity Economy has the power to propose regulation projects to the Financial Policy and Regulation Board, within the framework of its competencies; c) the secondary norm contained in the Codification of Monetary, Financial, Securities, and Insurance Resolutions must be adapted with the purpose of adapting it to the current content of Article 190 of the Organic Monetary and Financial Code, Book I; and d) the reform of the norm of the

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Codification of Monetary, Financial, Securities, and Insurance Resolutions is legally viable in light of the legal considerations exposed by this Coordination in the present report, under the terms indicated in Technical Report No. JPRF-CT-2022-0038 of November 2, 2022, issued by the Technical Coordination of this Board;

That, the Financial Policy and Regulation Board, in an ordinary session convened by technological means on November 22, 2022 and carried out via video conference on November 25, 2022, reviewed Memorandum No. JPRF-SETEC-2022-0078-M of November 2, 2022, issued by the Technical Secretary of the Board; as well as the aforementioned reports from the Technical Coordination and the Legal Coordination, in addition to the corresponding draft resolution;

That, the Financial Policy and Regulation Board, in an ordinary session convened by technological means on November 22, 2022 and carried out via video conference on November 25, 2022, reviewed and approved the following Resolution; and,

In exercise of its functions,

RESOLVES:

ARTICLE 1.- Substitute the text of Article 76 of Subsection II "Technical Equity and Risk-Weighted Assets", Section VI "Solvency, Technical Equity, and Risk-Weighted Assets and Contingencies Standard for Savings and Credit Cooperatives, Central Boxes, and Mutual Housing Savings and Credit Associations", Chapter XXXVI "Popular and Solidarity Financial Sector", Title II "National Financial System", Book I "Monetary and Financial System" of the Codification of Monetary, Financial, Securities, and Insurance Resolutions, with the following:

"Art. 76.- Savings and credit cooperatives, central boxes, and mutual housing savings and credit associations are obligated to maintain a technical equity ratio of at least 9% with respect to the sum of their risk-weighted assets and contingencies."

ARTICLE 2.- Substitute Article 77 of Subsection II "Technical Equity and Risk-Weighted Assets", Section VI "Solvency, Technical Equity, and Risk-Weighted Assets and Contingencies Standard for Savings and Credit Cooperatives, Central Boxes, and Mutual Housing Savings and Credit Associations", Chapter XXXVI "Popular and Solidarity Financial Sector", Title II "National Financial System", Book I "Monetary and Financial System" of the Codification of Monetary, Financial, Securities, and Insurance Resolutions, with the following:

"Art. 77.- Savings and credit cooperatives, central boxes, and mutual housing savings and credit associations are obligated to maintain a technical equity ratio of at least 4% with respect to total assets and contingencies."

ARTICLE 3.- Substitute the text and table of Article 80 of Subsection II "Technical Equity and Risk-Weighted Assets", Section VI "Solvency, Technical Equity, and Risk-Weighted Assets and Contingencies Standard for Savings and Credit Cooperatives, Central Boxes, and Mutual Housing Savings and Credit Associations", Chapter XXXVI "Popular and Solidarity Financial Sector", Title II "National Financial System", Book I "Monetary and Financial System" of the Codification of Monetary, Financial, Securities, and Insurance Resolutions, with the following:

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"Art. 80.- The weighting and method of aggregation of each of the accounts that make up primary technical equity is as follows: "

ARTICLE 4.- Substitute the text and table of Article 81 of Subsection II "Technical Equity and Risk-Weighted Assets", Section VI "Solvency, Technical Equity, and Risk-Weighted Assets and Contingencies Standard for Savings and Credit Cooperatives, Central Boxes, and Mutual Housing Savings and Credit Associations", Chapter XXXVI "Popular and Solidarity Financial Sector", Title II "National Financial System", Book I "Monetary and Financial System" of the Codification of Monetary, Financial, Securities, and Insurance Resolutions, with the following:

"Art. 81.- The weighting and method of aggregation of each of the accounts that make up secondary technical equity is as follows: "

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GENERAL PROVISIONS

FIRST.- The Superintendence of the Popular and Solidarity Economy will communicate to the controlled entities the content of this Resolution.

SECOND.- In case of doubt regarding the content or scope of the provisions of this Resolution, it will be for the Superintendence of the Popular and Solidarity Economy to resolve them.

FINAL PROVISION.- This Resolution will 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.

COMMUNICATE.- Given in the Metropolitan District of Quito, on November 25, 2022.

THE PRESIDENT, Mgs. María Paulina Vela Zambrano

The aforementioned 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 November 25, 2022.- I CERTIFY.

TECHNICAL SECRETARY Dr. Nelly Arias Zavala