Resolution JPRF-F-2023-071: Reforming Chapter VIII on the Relationship Between Total Technical Equity and Risk-Weighted Assets and Contingencies for Public and Private Financial System Entities

Address: Av. Amazonas between Pereira and Unión Nacional de Periodistas, Financial Management Governmental Platform. Yellow Block, 5th Floor | Postal Code: 170507 | Quito - Ecuador Resolution No. JPRF-F-2023-071 THE MONETARY AND 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 service of public order, 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 Norm 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 will have specific, autonomous, and differentiated control norms and entities, which will be 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 the Article numbered after Article 6 of the Organic Code of Monetary and Financial Law, Book I, "Organisms with regulatory, normative, or control capacity," shall seek to adopt international technical standards related to their area of competence as a reference framework for the issuance of regulations and the exercise of their functions, strictly adhering to the normative hierarchy established in the Constitution of the Republic of Ecuador;

That Article 13 of the aforementioned Organic Code was reformed by the Organic Law Reforming the Organic Code of Monetary and Financial Law for the Defense of Dollarization, published in the Official Register Supplement No. 443 of May 3, 2021, creating 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 health care service policy and regulation;

That Article 14 of the cited 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 faculty to issue the prudential regulatory framework to which financial entities must adhere, a framework that must be coherent, not provide minimum capital levels, technical equity, and risk weightings of assets and contingencies, as well as cover what corresponds to risk management, internal control environment, corporate and cooperative governance, and market discipline;

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That, as established in Articles 150 and 151 of the Organic Code of Monetary and Financial Law, Book I, financial entities will be subject to the regulation issued by the Monetary and 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;

That Article 190 of the Organic Code of Monetary and Financial Law, Book I, refers to the solvency and technical equity of entities of the national financial system, financial groups, and popular and solidarity groups;

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

[Text referring to the "Monetary and Financial Policy Board" is mentioned];

That the Fifty-Fourth Transitional Provision of the aforementioned Organic Code, added by the Organic Law Reforming the Organic Code of Monetary and Financial Law 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 organisms will maintain their validity until the Monetary and Financial Policy and Regulation Board and the Financial Policy and Regulation Board resolve what corresponds, in the scope of;

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

That the antepenultimate 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 Office No. SB-DS-2023-0173-O, of April 11, 2023, the Superintendent of Banks (S) submits to the Financial Policy and Regulation Board the proposal for reform to Chapter VIII [Relationship between total technical equity and risk-weighted assets and contingencies for entities of the Public and Private Financial System of the Monetary and Financial Policy and Regulation Board], attaching: draft resolution, presentation, and technical and legal reports;

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That, with Office No. SEPS-SGD-2023-18565-OF of June 26, 2023, the Superintendent of the Popular and Solidarity Economy attends to Office No. JPRF-JPRF-2023-0213-O sent by the Financial Policy and Regulation Board on June 21, 2023, in which it attaches observations to the project [risk-weighted assets and contingencies for savings and credit cooperatives, central boxes and Monetary, Financial, Securities, and Insurance Resolutions];

That the Technical Secretary of the Financial Policy and Regulation Board, through Memorandum No. JPRF-ST-2023-0049-M of June 29, 2023, sends to the President of the Board the following reports:

i. The technical report No. JPRF-CTSF-2023-006 of June 29, 2023, issued by the Technical Coordination of the Financial Sector, seeks progress towards the optimization of system regulation, by approximating the regulation to international best practices regarding the treatment of accounts that make up regulatory capital, in order to strengthen the resilience capacity of the National Financial System. In this sense, the report also proposes modifications in the risk weighting of assets and contingencies corresponding to the public and private financial sectors, in order to motivate a more coherent allocation of resources related to associated risks;

ii. Legal Report No. JPRF-CJF-2023-024 of June 29, 2023, issued by the Legal Coordination of Financial Policy and Norms of the Board, which concludes that: a) The Financial Policy and Regulation Board, as responsible for formulating the policy and regulation of the financial system, 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, in accordance with letters b) and d) of number 7 of Article 14.1 of the Organic Code of Monetary and Financial Law, Book I. According to the aforementioned norm, this prudential regulatory framework must be coherent and not give rise to regulatory arbitrage; b) The Superintendent of Banks (S) and the Superintendent of the Popular and Solidarity Economy have the power to propose regulation projects to the Financial Policy and Regulation Board, within the framework of their competencies, as established in the antepenultimate paragraph of Article 14.1 of the Organic Code of Monetary and Financial Law, Book I, without prejudice to the technical autonomy with which this regulator counts; c) The reform of the norm of the Codification of Monetary, Financial, Securities, and Insurance Resolutions is legally viable in light of the legal considerations exposed;

That the Financial Policy and Regulation Board, in an extraordinary session held by technological means, convened on June 29, 2023, and carried out via video conference on June 30, 2023, reviewed Memorandum No. JPRF-ST-2023-0049-M of June 29, 2023, issued by the Technical Secretary of the Board; as well as the aforementioned reports from the Technical Coordination of Financial System Policy and Regulation and the Legal Coordination of Financial Policy and Norms, in addition to the corresponding draft resolution;

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That the Financial Policy and Regulation Board, in an extraordinary session held by technological means, convened on June 29, 2023, and carried out via video conference on June 30, 2023, reviewed and approved the following Resolution; and,

In exercise of its functions,

RESOLVES:

ARTICLE FIRST.- Eliminate from number 1 of Article 3 [the section regarding the Relationship between Technical Equity and Risk-Weighted Assets and Contingencies for Entities of the Public and Private Financial System of the Monetary and Financial Policy and Regulation Board].

ARTICLE SECOND.- Repeal number 7 of [the section regarding the Relationship between Technical Equity and Risk-Weighted Assets and Contingencies for Entities of the Public and Private Financial System of the Monetary, Financial, Securities, and Insurance Resolutions], which states the following: 7. Two (2.0) for credit portfolio operations accounted for in group 14, placed abroad (16).

ARTICLE THIRD.- Substitute the text of Note 1 [regarding the weighting of Assets and Contingencies Risk-Weighted for Entities of the Public and Private Financial System of the Monetary, Financial, Securities, and Insurance Resolutions], with the following:

multilateral development organizations, which meet the following conditions: a) The Issuer's rating is AAA to AA-, or its equivalent, issued by an international risk rating agency. b) That the investment is made in multilateral organizations. Among others, the following are included:

The World Bank Group, composed of the International Bank for Reconstruction and Development (IBRD), the International Finance Corporation (IFC), the Multilateral Investment Guarantee Agency (MIGA), and the International Development Association (IDA), the Asian Development Bank (ADB), the African Development Bank (AfDB), the European Bank for Reconstruction and Development (EBRD), the Inter-American Development Bank (IDB), the European Investment Bank (EIB), the European Investment Fund (EIF), the Nordic Investment Bank (NIB), the Caribbean Development Bank (CDB), the Islamic Development Bank (IsDB), the Council of Europe Development Bank (CEB), the International Facility for Immunization Financing (IFFIm), the Asian Infrastructure Investment Bank (AIIB).

Investments made in the "Liquidity Fund of the Ecuadorian Financial System" will be considered with a weighting of 0.00.

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Paper issued by the Ministry of Finance or whoever exercises those competencies will be considered with a weighting of 0.10.

Titles issued by other public sector financial entities will be weighted with the [appropriate rate as per context, implied continuation].

ARTICLE FOURTH.- Substitute the text of Article 7 of Section III [of the Monetary, Financial, Securities, and Insurance Resolutions], with the following:

Art. 7.- The weighting and aggregation method of each of the accounts that make up primary and secondary technical equity is as follows:

Primary Technical Equity Weighting Aggregation Method Code Description Private Banking Public Banking 100% Sum 31 Share Capital X X 100% Sum 3201 Share Issuance Premium X X 100% Sum 3301 Legal Reserve X X 100% Sum 3302 General Reserves X 100% Sum 330310 Special Reserves - For Future Capitalizations X X 100% Sum 34 Other Equity Contributions X X 100% Subtract 340210 Donations - In Goods X X 100% Subtract 3490 Others [1] X X 100% Sum 2608 Subordinated Loans X X 100% Subtract 3602 Accumulated Losses [1] X X 100% Subtract 5 4 Income minus Expenses [6] [1] X X 100% Subtract 3604 Current Year Loss [1] [5] X X 100% Sum 2802 Contributions for Future Capitalizations [2] X X 100% Subtract 190530 Goodwill [1] X X 100% Subtract 3202 Discount on Share Issuance [1] X X

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Secondary Technical Equity Weighting Aggregation Method Code Description Private Banking Public Banking 100% Sum 2801 Convertible Bonds [3] X X 100% Sum 2803 Subordinated Term Debt [4] X X 100% Sum 3303 Special Reserves X X 100% Subtract 330310 Special Reserves - For Future Capitalizations X X 50% Sum 3305 Revaluation Reserves of Equity X X 45% Sum 3310 Non-Operating Results Reserves X X 45% Sum 35 Valuation Surplus X X 100% Sum 3601 Accumulated Profits or Surpluses X X 100% Sum 3603 Current Year Profit [5] X X 50% Sum 5 4 Income minus Expenses [6] X X 100% Sum 149989 Voluntary General Provision [7] X X 100% Sum 2912 Other Liabilities - Negative Goodwill (Badwill) [8] X X 100% Subtract 1613 Dividends Paid in Advance. X 100% Subtract Deficiencies of provisions, amortizations, and depreciation and the balance of Group 37 "Devaluation of Equity", in which activated losses categorized as such by the Superintendent of Banks or by internal or external audits of the entity are recorded. Additionally, the value of capital increases carried out contrary to the provisions of numbers 2 and 3 of Article 255 of the Organic Code of Monetary and Financial Law; or, those that for any cause the Superintendent of Banks determines as not imputable to technical equity. [1] [9] X X

The total of the secondary technical equity elements will be limited in amount to a maximum of one hundred percent (100%) of the total of the primary technical equity elements.

DEDUCTIONS OF TOTAL TECHNICAL EQUITY

The capital assigned to a branch or agency abroad; and, additionally, the invested capital, that is, the value of its participation in the paid-in capital plus

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reserves, except those arising from asset valuations, in a subsidiary or affiliated entity will be deducted from the total technical equity of the parent company.

When a subsidiary records investments in other entities of the financial system, making it a subsidiary or affiliate of said entity, these values will be deducted according to the provision in the previous paragraph, from the total technical equity of the parent company.

Additionally, the balances recorded in account 1611 "Advance for Acquisition of Shares" will be deducted from the total technical equity, when they correspond to investments in shares, advances in the capitalization or constitution of subsidiary or affiliated companies.

NOTES TO CONSTITUTED TECHNICAL EQUITY

Note 1. These accounts will be considered in absolute value. Note 2. For contributions for future capitalizations to be part of primary technical equity, there must be written and irrevocable evidence from shareholders that such resources will not be withdrawn and will be capitalized within a maximum period of one year. Note 3. The total balance of issued documents will be considered up to 30% of the entity's capital and reserves, on the date technical equity is calculated. Note 4. For subordinated term debt instruments or corresponding loan contracts to be part of secondary technical equity, they must have an original minimum maturity of more than five (5) years; not be guaranteed and be fully paid, in the case of issued instruments; principal payment cannot be made before maturity; and, additionally, they must expressly state that they have the authorization of the Superintendent of Banks and the acceptance of the creditor organism. During the last five (5) years of the maturity period to which they were issued, or the respective loan contract, an accumulative discount (or amortization) factor of 20% annually will be applied. These instruments or contracts are not available to participate in the entity's losses, except when a financial system entity is subjected to forced liquidation, where they will serve to cover the losses of said liquidation. The total of subordinated term debt instruments or relevant loan contracts cannot exceed 50% of the primary technical equity of the debtor financial system entity; Note 5. The total of current year profits will be considered once the conditions of numbers 1 and 2 of Article 405 of Book I of the Organic Code of Monetary and Financial Law are met; Note 6. These accounts will be considered for the months of January to November; and, when the difference of accounts 5-4 is greater than zero, it will weight at 50% in secondary technical equity. In the case that the difference of accounts 5-4 is less than zero, it will weight at 100% in primary technical equity.

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Note 7. For all credit segments, the voluntary provision will be considered with a maximum limit of 1.25% of risk-weighted assets and contingencies. Note 8. Negative commercial credit or negative goodwill (badwill) will be computed in the calculation of secondary technical equity, with 100% of its remaining balance not transferred to the statement of results. Note 9. For the calculation of secondary technical equity, provision deficiencies will be considered in their entirety, without taking into account the schedules established for their constitution, requested by financial entities and approved by control organisms.

ARTICLE FIFTH.- Substitute the text and table of Article 80 [of the Monetary, Financial, Securities, and Insurance Resolutions regarding Risk-Weighted Assets and Contingencies for Savings and Credit Cooperatives, Central Boxes and Mutual Savings Associations], with the following:

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

Primary Technical Equity Weighting Aggregation Method Code Description COAC Mutualists Central Boxes CONAFIPS 100% Sum 31 Share Capital X 100% Sum 3201 Premium on Issuance of Contribution Certificates X 100% Sum 3301 Irrepartible Legal Reserve Fund [1] X X 100% Sum 3304 Irrepartible Legal Reserve X 100% Sum 3303 Special and Discretionary X 100% Sum 34 Other Equity Contributions [2] X 100% Subtract 3602 Accumulated Losses [3] X 100% Subtract 3604 Current Year Loss [3] X 100% Sum 5 4 Income minus Expenses [4] X

Application Notes Note 1. Donations made in real estate or movable property other than cash will not be considered. The values of the Irrepartible Legal Reserve Fund considered in primary technical equity cannot be included in secondary technical equity. Note 2. Other contributions made in real estate or movable property other than cash will not be considered.

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Note 3. These accounts will be considered in absolute value. Note 4. These accounts will be considered for the months of January to November; and, when the difference of accounts 5-4 is greater than zero, it will weight at 50% in secondary technical equity. In the case that the difference of accounts 5-4 is less than zero, it will weight at 100% in primary technical equity.

ARTICLE SIXTH.- Substitute [the text of Article 81 of the Monetary, Financial, Securities, and Insurance Resolutions regarding Risk-Weighted Assets and Contingencies for Savings and Credit Cooperatives, Central Boxes and Mutual Savings Associations], with the following:

Art. 81.- The weighting and aggregation method of each of the accounts [continues...]