Agreement No. 003-2023 Modifying Article 37 of Agreement No. 4-2013 on Credit Risk

Republic of Panama
Superintendence of Banks
AGREEMENT No. 003-2023
(of June 6, 2023)
“By which Article 37 of Agreement No. 4-2013 on credit risk is modified”

THE BOARD OF DIRECTORS
In exercise of its legal powers, and
CONSIDERING:

That following the issuance of Decree-Law No. 2 of February 22, 2008, the Executive Branch prepared a systematic arrangement in the form of a Single Text of Decree-Law No. 9 of 1998 and all its modifications, which was approved by Executive Decree No. 52 of April 30, 2008, hereinafter the Banking Law;

That in accordance with numeral 1 of Article 5 of the Banking Law, it is the objective of the Superintendence of Banks to ensure the solidity and efficiency of the banking system;

That in accordance with numerals 3 and 5 of Article 11 of the Banking Law, it is the technical attribute of the Board of Directors to approve the general criteria for the classification of risk assets and the guidelines for the establishment of reserves to cover risks; as well as to establish, within the administrative scope, the interpretation and scope of legal or regulatory provisions in banking matters;

That Agreement No. 4-2013 of May 28, 2013, establishes the provisions regarding the management and administration of credit risk inherent to the credit portfolio and off-balance sheet operations;

That Article 33 of Agreement No. 4-2013 establishes that to cover credit risk, banks will establish specific and dynamic provisions; the latter being defined as that which is established on all credit facilities that lack an assigned specific provision, that is, on credit facilities classified in the normal category;

That Articles 36 and 37 of Agreement No. 4-2013 establish that banks must establish a dynamic provision with quarterly periodicity, taking into account data from the last day of the quarter, whose amounts cannot be less than 1.25% nor greater than 2.5% of the risk-weighted assets corresponding to credit facilities classified in the normal category;

That in the case of banks that are branches of foreign banks, their capital funding (capital and debt necessary to finance their operations) is constituted, to a greater extent, by deposits received from their parent house; that is, their funding is supported by the structure of their parent house; therefore, by virtue of this nature, this Superintendence has considered establishing, as a prudential criterion, a special treatment for the dynamic provision that these banks must establish;

That in working sessions of this Board of Directors, the need and convenience of modifying Article 37 of Agreement No. 4-2013 has been manifested, in order to establish a special prudential criterion for the establishment of dynamic provision required for banks that are branches of foreign banks.

Agreement No. 003-2023

AGREES:

ARTICLE 1. Article 37 of Agreement No. 4-2013 of May 28, 2013, is hereby amended as follows:

“ARTICLE 37. AMOUNT OF DYNAMIC PROVISION. The amount of the dynamic provision is obtained through the calculation of the following components:

1. Component 1: It is the amount obtained by multiplying the balance of risk-weighted assets, corresponding only to credit facilities classified in the normal category, by the alpha coefficient from the table.

2. Component 2: It is the amount obtained by multiplying the quarterly variation in risk-weighted assets, corresponding only to credit facilities classified in the normal category, if positive, by the beta coefficient from the table. If the variation is negative, the amount is zero.

3. Component 3: It is the amount of the variation in the balance of specific provisions during the quarter.

The amount of the dynamic provision that must be maintained at the end of the quarter is the sum of the two components, obtained in numerals 1 and 2, minus the third component, with its sign, of the amount obtained in numeral 3, that is, if this last component is negative, it must be added.

Table for the calculation of dynamic provisions

The amount of the dynamic provision must comply with the following restrictions:
a. It cannot be greater than 2.5% of the risk-weighted assets corresponding to credit facilities classified in the normal category. b. It cannot be less than 1.25% of the risk-weighted assets corresponding to credit facilities classified in the normal category.
c. It cannot decrease with respect to the amount established in the previous quarter, unless the decrease is motivated by the conversion into specific provisions.

The Superintendence of Banks will establish the criteria for said conversion.

From the date on which dynamic provisions are computed, the provision known as the global minimum will be computed as a dynamic provision, for the purpose of the required amount.

PARAGRAPH: Banking entities that are branches of foreign banks whose funding comes at least 85% from their parent house must maintain at all times a dynamic provision not less than 1.25% of the risk-weighted assets corresponding to credit facilities classified in the normal category. For these banks, the establishment of dynamic provision by a percentage higher than 1.25% of their risk-weighted assets will not be applicable.

The provisions established in this paragraph will be applicable starting March 31, 2024.”

Alfa Beta
1.50% 5.00%

Agreement No. 003-2023

ARTICLE 2. VALIDITY. The provisions of this Agreement will begin to govern from its promulgation.

Given in the city of Panama, on the sixth (6) day of the month of June of two thousand twenty-three (2023).

NOTIFY, PUBLISH, AND COMPLY.

THE PRESIDENT THE SECRETARY
Felipe Echandi Lacayo David Alberto Davarro