Resolution JPRM-2022-007-M — Policy for Comprehensive Risk Management of the Central Bank of Ecuador

MONETARY POLICY AND REGULATION BOARD

Republic of Ecuador

RESOLUTION NO. JPRM-2022-007-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 under state authority shall exercise only the competencies and powers 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 effectiveness, efficiency, quality, hierarchy, coordination, planning, among others;

That, the first paragraph of Article 303 of the Constitution of the Republic determines that the formulation of monetary, credit, exchange, and financial policies is the exclusive authority of the Executive Branch and will be implemented through the Central Bank of Ecuador;

That, Article 47.1 of the Organic Monetary and Financial Code created the Monetary Policy and Regulation Board as part of the Executive Branch, responsible for the formulation of monetary policy, the highest governing body of the Central Bank of Ecuador, and determines 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 sphere and monitor 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; (...) 5. Establish the policies of the Central Bank of Ecuador and supervise their implementation; 6. Monitor compliance with the functions of the Central Bank of Ecuador; (...)";

That, the Fiftieth Transitory Provision of the aforementioned code prescribes: "Resolutions contained in the Codification of Monetary, Financial, Securities and Insurance Resolutions of the Monetary and Financial Policy and Regulation Board and norms issued by control bodies will remain in force until the Monetary Policy and Regulation Board and the Financial Policy and Regulation Board resolve what corresponds, within the scope of their competencies.";

That, Chapter VII: "Policies for Comprehensive Risk Management of the Central Bank of Ecuador", of Title I: "Monetary System", of Book I: "Monetary and Financial System", of the Codification of Monetary, Financial, Securities and

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MONETARY POLICY AND REGULATION BOARD

Republic of Ecuador

RESOLUTION No. JPRM-2022-007-M Page | 2

Insurance, issued by the former Monetary and Financial Policy and Regulation Board, establishes policies for comprehensive risk management of the Central Bank of Ecuador;

That, the operations and activities carried out by the Central Bank of Ecuador are exposed to different types of risk, both internal and external; therefore, it is necessary to issue policies that allow the Central Bank of Ecuador to determine institutional strategies to manage the risks to which it may be exposed;

That, it is the authority of the Monetary Policy and Regulation Board to resolve on the regulations contained in the Codification of Monetary, Financial, Securities and Insurance Resolutions, issued by the former Monetary and Financial Policy and Regulation Board, that relate to the monetary sphere, with the aim of incorporating such provisions into the own regulations of the Monetary Policy and Regulation Board, prior to the analysis of the pertinence of each norm and provision, in a disaggregated manner;

That, the Monetary Policy and Regulation Board, in ordinary session by mixed modality, on February 23, 2022, reviewed the proposal sent via memorandum No. BCE-BCE-2022-0031-M, of February 16, 2022, by the General Manager of the Central Bank of Ecuador to the President of the Monetary Policy and Regulation Board; as well as, the technical report No. BCE-DNRO-2022-030, of February 11, 2022, and the legal report No. BCE-CGJ-023-2022, of February 15, 2022; and,

In exercise of its functions and in accordance with Article 47.7 of the Organic Monetary and Financial Code, the Monetary Policy and Regulation Board issues the:

POLICY FOR COMPREHENSIVE RISK MANAGEMENT OF THE CENTRAL BANK OF ECUADOR

Art. 1.- Object: Establish policies for comprehensive risk management within the framework of corporate governance, so that the Central Bank of Ecuador can efficiently manage the different risks to which the operations and activities established in the Organic Monetary and Financial Code are exposed, in order to guarantee monetary and financial sustainability.

Art. 2.- Definitions: For the purpose of applying the provisions of this resolution, the following shall be considered:

1. Risk Management.- Process to identify, measure, control, mitigate, and monitor the risks to which the Central Bank of Ecuador is exposed, with the objective of defining the risk profile, the degree of exposure the entity is willing to assume in

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MONETARY POLICY AND REGULATION BOARD

Republic of Ecuador

RESOLUTION No. JPRM-2022-007-M Page | 3

the development of its operations; as well as, coverage mechanisms to protect the resources under its control and administration.

2. Exposure.- Assumed risk minus the implemented coverage.

3. Risk.- Possibility that an event occurs and generates financial losses for the Central Bank of Ecuador.

4. Financial Risk.- Potential losses that the entity may suffer due to exposure to different types of risk, which include market risks, liquidity risks, and counterparty risks.

5. Operational Risk.- The possibility of financial losses occurring due to events derived from failures or deficiencies in internal processes, people, systems, information technology, and external events. Operational risk includes legal risk, understood as the probability that the Central Bank of Ecuador suffers direct or indirect losses; that its assets are exposed to situations of greater vulnerability; that its liabilities and contingencies may increase beyond expected levels; or, that the development of its operations faces the possibility of being negatively affected due to error, negligence, incompetence, imprudence, or intent resulting from non-observance, incorrect, or untimely application of legal or regulatory provisions. Operational risk does not address the possibility of losses originating from unexpected changes in the political, economic, and social environment.

6. Systemic Risk.- Any set of circumstances that threaten the stability or confidence in the monetary and financial system.

Art. 3.- The Central Bank of Ecuador will apply a comprehensive risk management process in its operations as a managerial tool that supports the execution of institutional strategy and the decision-making process, and fosters self-control through the identification, evaluation, administration, and monitoring of the entity's financial and operational risks, both internal and external, and their impacts.

Art. 4.- Risk management must be an integral part of strategic planning and the decision-making process regarding the entity's operations.

In the entity's annual planning process, risk analysis must be considered.

The integration of risk management into the scheme for decision-making regarding the entity's operations will be carried out in accordance with the policies provided in this resolution.

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MONETARY POLICY AND REGULATION BOARD

Republic of Ecuador

RESOLUTION No. JPRM-2022-007-M Page | 4

Art. 5.- The execution of the various operations of the Central Bank of Ecuador, as well as the incursion into new activities and operations with resources from the investment of reserves and local investment operations, must observe the levels of risk exposure, based on the impact of each operation on the entity's equity and on the managed liquidity.

Art. 6.- Risk management administration corresponds to each of the entity's processes. The responsible persons for each process must know the risks that originate in their area of responsibility; the possible impacts of these risks on their process and on other processes; and, the impacts of risks from other processes on their operations, as well as develop and implement strategies for their administration.

Art. 7.- The financial and operational risks faced by the entity, as well as systemic risk, will be permanently evaluated and monitored by the respective independent units of the operational processes; their results will be reported to the highest authority, who will establish the periodicity thereof.

The Central Bank of Ecuador will report to the Monetary Policy and Regulation Board quarterly on financial, operational, and systemic risks, or when the Board requires it through its President.

GENERAL PROVISIONS:

FIRST: The Monetary Policy and Regulation Board recognizes the provisions contained in Chapter VII: "Policies for Comprehensive Risk Management of the Central Bank of Ecuador", of Title I: "Monetary System", of Book I: "Monetary and Financial System" of the Codification of Monetary, Financial, Securities and Insurance Resolutions, issued by the former Monetary and Financial Policy and Regulation Board, as part of the monetary regulations over which it is incumbent to resolve.

SECOND: The Central Bank of Ecuador, through its highest authority, will carry out all actions necessary to implement the policies contained in this resolution, and will inform the Monetary Policy and Regulation Board.

SINGLE REPEALING PROVISION: Chapter VII: "Policies for Comprehensive Risk Management of the Central Bank of Ecuador", of Title I: "Monetary System", of Book I: "Monetary and Financial System" of the Codification of Monetary, Financial, Securities and Insurance Resolutions, issued by the former Monetary and Financial Policy and Regulation Board, is expressly repealed.

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MONETARY POLICY AND REGULATION BOARD

Republic of Ecuador

RESOLUTION No. JPRM-2022-007-M Page | 5

FINAL PROVISION.- This resolution will enter into force from its issuance, without prejudice to its publication in the Official Register.

The Directorate of Documentary Management and Archive of the Central Bank of Ecuador is entrusted with its publication on the institutional website.

COMMUNICATE.- Given in the Metropolitan District of Quito, on February 23, 2022.

THE PRESIDENT

(Signature) TATIANA MARIBEL RODRÍGUEZ CERÓN

The preceding resolution was signed by Dr. Tatiana Maribel Rodríguez Cerón - President of the Monetary Policy and Regulation Board, in the Metropolitan District of Quito, on February 23, 2022.- I CERTIFY.

ADMINISTRATIVE SECRETARY

(Signature) MARÍA ALEXANDRA GUERRERO DEL POZO