Agreement No. 004-2008 on the Legal Liquidity Index

Republic of Panama
Banking Superintendence
AGREEMENT No. 004-2008
(issued on July 24, 2008)

"By which Agreement No. 9-2006 of November 2006 is repealed and new provisions are issued for the compliance with the legal liquidity index"

THE BOARD OF DIRECTORS

In exercise of its legal powers, and

CONSIDERING:

That Law Decree 9 of February 28, 1998 was modified by Law Decree 2 of February 22, 2008, and was ordered to be consolidated into a Single Text, hereinafter referred to as the Banking Law;

That in accordance with Article 73 of the Banking Law, every Bank with a General License and every Bank with an International License whose origin supervisor is the Banking Superintendence, must at all times maintain a minimum balance of liquid assets equivalent to the percentage of the total gross of its deposits in Panama or abroad, which the Banking Superintendence will periodically fix;

That in accordance with Item 10 of Article 75 of the Banking Law, the Superintendence is empowered to designate additional authorized liquid assets to constitute the liquidity index;

That due to the characteristics of the Panamanian banking system, with the absence of a Central Bank and any deposit protection scheme or lender of last resort, adequate management of liquidity risk is the main technical defense of the system;

That in working sessions of this Board of Directors with the Superintendent, it has become evident the need and convenience of establishing new conditions regarding the legal liquidity index and the sound and coherent management of liquidity risk.

That it is the function of this Board of Directors to fix, within the administrative scope, the interpretation and scope of legal provisions in banking matters for the purposes indicated above.

AGREES:

ARTICLE 1. LIQUIDITY RISK MANAGEMENT. Every General License Bank and every International License Bank whose origin supervisor is the Banking Superintendence must have policies, procedures, and control systems to effectively carry out liquidity risk management.

ARTICLE 2. RESPONSIBILITIES OF THE BOARD OF DIRECTORS. The Board of Directors of each Bank subject to this agreement must:

1. Establish policies and strategies for the daily administration of liquidity, which must be communicated and effectively implemented from the Board of Directors down to executive levels with decision-making and management responsibilities regarding the different banking risks.

2. Ensure that General Management takes the necessary actions for the monitoring and control of liquidity risk, as well as regularly inform the Board of Directors about the Bank's liquidity situation, and immediately if there were a material change in the liquidity position that would result in a substantive risk for the Bank. The reports presented to the Board of Directors must be available to the Banking Superintendence.

3. Establish a process for the continuous measurement and monitoring of net funding requirements.

4. Ensure that General Management periodically reexamines its efforts to establish and maintain relationships with creditors, in order to maintain the diversification of liabilities, avoiding and limiting concentration risk in the source of funds, as well as ensuring its capacity to sell resources.

5. Have contingency plans that include the strategy to handle potential liquidity requirements, including procedures to address cash flow deficits in emergency situations.

ARTICLE 3. MANUAL FOR LIQUIDITY RISK ASSESSMENT. Every Bank subject to this agreement must have a Manual that specifies the policies and procedures appropriate to the structure and complexity of its operations, approved by its Board of Directors, which must contain at minimum the following:

1. It will define the administrative structure that effectively executes the liquidity strategy. This structure must include the continuous participation of management members, which must ensure that liquidity is managed effectively and that appropriate policies and procedures are established to control and limit liquidity risk. Banks must establish limits for their liquidity positions in particular time horizons and review them regularly.

2. Adequate information system models to measure, monitor, control, and report liquidity risk. In the preparation of the models, the following must be considered among others:
   a. the maturity structure of assets and liabilities b. the volatility of customer deposits
   c. variety of scenarios and assumptions for stress testing, frequently reviewing the assumptions used in liquidity management to determine if they remain valid.

The system must allow performing:
a. periodic analyses on the diversification of funding sources b. periodic reviews of concentration limits and the underlying bases of such limits
c. analysis on the impact that other risks (credit, market, and operational) may have on the Bank's liquidity strategy.

3. Have adequate internal control systems for its liquidity risk management process. A fundamental component of the internal control system involves independent periodic reviews and evaluations of the system's effectiveness, and where necessary, ensure that appropriate reviews or internal control improvements are made.

4. Have policies and contingency plans.

The reports issued must be delivered periodically to the Board of Directors, General Management, and executive levels with decision-making and management responsibilities regarding the different banking risks.

ARTICLE 4. LEGAL LIQUIDITY INDEX. For the purposes of Article 73 of the Banking Law, the minimum legal liquidity index that General License Banks and International License Banks whose origin supervisor is the Banking Superintendence must maintain at all times is fixed at THIRTY PERCENT (30%).

Notwithstanding, said index will be TWENTY PERCENT (20%) for banking entities that maintain a quarterly average of interbank deposits higher than EIGHTY PERCENT (80%) of their total deposits.

ARTICLE 5. ACCEPTABLE FOREIGN BANKS. For the purposes of item 5 of Article 75 of the Banking Law, foreign banks with a long-term international rating not lower than BBB–/Baa3, or with a short-term international rating not lower than A-3/P-3, issued by a recognized rating agency, will be accepted.

ARTICLE 6. OBLIGATIONS ISSUED BY FOREIGN GOVERNMENTS. For the purposes of item 6 of Article 75 of the Banking Law, obligations issued by foreign governments actively traded in international markets in currencies acceptable to the Superintendence, will be accepted in accordance with the following risk rating weighting table for the issuer:

Rating | Weighting
AAA+ to BBB- | 100%
BB+ | 50%
BB | 40%
BB- | 20%
B+ | 10%
B | 5%
Below these ratings and unrated | 0%

All foreign government obligations must quote periodically in a public reference market. For the purposes of this article, periodicity is defined when the instrument has quotes based on effective transactions and is traded at least 80% of the working days corresponding to the previous year.

ARTICLE 7. OBLIGATIONS ISSUED BY INTERNATIONAL FINANCIAL ORGANISMS. For the purposes of item 6 of Article 75 of the Banking Law, obligations issued by multilateral financial organisms of which the Republic of Panama is a member are accepted as liquid assets.

ARTICLE 8. OBLIGATIONS ISSUED BY FOREIGN PRIVATE AND GOVERNMENTAL AGENCIES. For the purposes of item 7 of Article 75 of the Banking Law, securities guaranteed by residential mortgage loans, issued by foreign private and governmental agencies whose long-term international rating is not lower than AAA/Aaa, allowing the investor to receive a pro-rata participation of all cash flows generated by a package of mortgages, are accepted as liquid assets.

The securities must meet the following conditions:
a. Have a long-term international risk rating not lower than AAA/Aaa or short-term not lower than A-1/P-1, or their equivalents; b. Be payable in United States dollars or in another currency of free convertibility and transferability, at the judgment of the Superintendence; and
c. Be subject to periodic quotes in an organized securities market.

ARTICLE 9. LIMIT FOR CREDITS OF OBLIGATIONS PAYABLE WITHIN ONE HUNDRED EIGHTY-SIX (186) DAYS. For the purposes of item 9 of Article 75 of the Banking Law, no more than fifty percent (50%) of the liquid assets used for the calculation of the liquidity index may consist of credits of obligations (understood as loan obligations) that are payable within one hundred eighty-six (186) calendar days counted from the liquidity report, which must be classified in the Normal category, in accordance with the Agreement on loan classification.

The percentage referred to in the previous paragraph will be reviewed semi-annually by the Board of Directors of the Banking Superintendence in the months of July and January of each year. Variations to the established percentage will be announced through a General Resolution of the Board of Directors.

ARTICLE 10. OTHER AUTHORIZED LIQUID ASSETS. In accordance with item 10 of Article 75 of the Banking Law, the following will be considered liquid assets, provided they are free of any encumbrance or lien and are freely transferable:

1. Obligations of Panamanian Private Law companies, at their market value, that meet the following conditions:
   a. Have a maturity not greater than one hundred eighty-six (186) days counted from the liquidity report; b. Be payable in United States dollars or in another currency of free convertibility and transferability, at the judgment of the Superintendence; and
   c. Be subject to periodic quotes in an organized securities market.

2. Obligations of foreign Private Law companies, at their market value, that meet the following conditions:
   a. Have an international long-term risk rating in foreign currency not lower than BB+/Ba1 or short-term not lower than B/NP, or their equivalents; b. Be payable in United States dollars or in another currency of free convertibility and transferability, at the judgment of the Superintendence; and
   c. Be subject to periodic quotes in an organized securities market.

3. Obligations of Panamanian Private Law companies, payable in Panama on demand or at term, guaranteed by Banks established abroad with investment grade, provided that the issuing companies and the guaranteeing bank do not form part of the same Economic Group.

4. Obligations issued by the Government of the Republic of Panama, at their market value, that meet the following conditions:
   a. Be payable in United States dollars or in another currency of free convertibility and transferability, at the judgment of the Superintendence; and b. Be subject to periodic public quotes in an active buying and selling market.

5. Obligations of Panamanian Public Law entities whose long-term risk rating is not lower than the risk rating of the Republic of Panama, or their equivalents, and expressed in United States dollars or in another currency of free convertibility and transferability, at the judgment of the Superintendence. These obligations must be considered at their market value, be subject to periodic public quotes in an active buying and selling market.

PARAGRAPH: PERCENTAGE OF OTHER AUTHORIZED LIQUID ASSETS IN THE LEGAL LIQUIDITY INDEX. Up to fifty percent (50%) of the minimum legal liquidity index may consist of the assets described in this Article.

ARTICLE 11. LIEN-FREE ALLOWED ASSETS. For the purposes of the legal liquidity calculation, the allowed assets detailed in the previous articles must be free of liens.

ARTICLE 12. BANKING OBLIGATIONS PAYABLE IN PANAMA. For the purposes of item 3 of Article 75 of the Banking Law and item 3 of Article 10 of this Agreement, a banking obligation will be considered payable in Panama if it is subject to Panamanian law, regardless of where the payment is effectively made.

ARTICLE 13. MARKET VALUE. The recording of the obligations referred to in Article 75 of the Single Text of the Banking Law and this Agreement must be carried out in the weekly liquidity report established by this Superintendence at market value, using the market value of the last working day of the reported week.

ARTICLE 14. PERCENTAGE OF LIQUID ASSETS IN CASH. When deemed appropriate, the Superintendent may designate to a particular bank a percentage of the minimum legal liquidity index that must consist of cash money, held by the Bank in its possession, in United States dollars or in another currency of free convertibility and transferability, at the judgment of the Superintendence.

ARTICLE 15. PLACEMENTS IN BANKS OF THE SAME ECONOMIC GROUP OR SAME MARKET. When deemed appropriate, the Superintendent may designate to a particular Bank a maximum percentage of placements that it may maintain in banks of its same Economic Group and/or in banks of the same banking market.

ARTICLE 16. COMPUTABLE DEPOSITS. For the purposes of the minimum legal liquidity index requirement, the following deposits will be counted:

1. Demand deposits;
2. Savings deposits;
3. Time deposits whose maturity does not exceed one hundred eighty-six (186) days counted from the liquidity report, except for the portion that guarantees loans in the Bank itself and for the outstanding guaranteed balance on the date of the report.

Deposits received from its parent house, branch, subsidiary, or affiliate abroad will be excluded from the database. For the purposes of this article, an affiliate is understood as any of the following legal persons related to the Bank:

1. A company of which the Bank, individually, is the holder of at least FIFTY-ONE PERCENT (51%) of the outstanding shares; or
2. A company that, individually, is the holder of at least FIFTY-ONE PERCENT (51%) of the Bank's shares; or
3. A company of which the Bank, individually, holds the participation or votes necessary in that company to elect, by itself, the majority of the directors of that company, or to appoint the Legal Representative or General Attorney or the highest-level Executive of that company, or to veto decisions to the contrary in these matters; or
4. A company that, individually, holds the participation or votes necessary in the Bank to elect, by itself, the majority of the Bank's directors, or to appoint its Legal Representative or General Attorney or its highest-level Executive, or to veto decisions to the contrary in these matters.

ARTICLE 17. PERIODICITY OF CALCULATION OF THE LEGAL LIQUIDITY INDEX. The legal liquidity index will be calculated at the end of each week, and the presentation of the legal liquidity report will comply with the procedure established by the Superintendence.

Notwithstanding, when the Bank's risk profile so advises, the Superintendent may require a particular Bank to calculate and present a report of the legal liquidity index with a different periodicity.

ARTICLE 18. FINES. Violations of the liquidity provisions established in the Banking Law and this Agreement, as well as non-compliance due to delay in the presentation of liquidity reports and the incorrect presentation thereof, are subject to the provisions contained in Article 185 of the Banking Law.

ARTICLE 19. INTERNATIONAL RISK RATING. For the purposes of the international risk ratings of instruments in foreign currency referred to in this Agreement, those described in Annex 1 will be used, following as reference the nomenclature of the agencies Standard & Poors, Moody’s, and Fitch.

ARTICLE 20. RELATIONSHIP BETWEEN ASSETS AND LOCAL DEPOSITS. For the purposes of Article 78 of the Banking Law, only General License Banks will be obligated to maintain assets in Panama equivalent to eighty-five percent (85%) of their local deposits.

ARTICLE 21. RISK AND LIQUIDITY MANAGEMENT IN INTERNATIONAL LICENSE BANKS. Every International License Bank for which the Banking Superintendence of Panama exercises destination supervision must have policies, procedures, and control systems that ensure effective liquidity risk management. Additionally, they must comply with the regulations established by their origin supervisor for the monitoring of liquidity risk.

Banks must comply with the presentation of the liquidity report in accordance with the procedures established by the Banking Superintendence of Panama.

ARTICLE 22. The Superintendent may temporarily suspend the acceptance of the obligations referred to in Articles 6, 7, and 8 of this Agreement when, in his criterion, unfavorable market conditions so advise.

ARTICLE 23. This Agreement repeals in all its parts Agreement No. 9-2006 of December 2006.

ARTICLE 24. VALIDITY. This Agreement will enter into force starting from the first (1st) of January 2009.

Given in the City of Panama, on the twenty-four (24) days of the month of July of two thousand eight (2008).

PUBLISH AND COMPLY.

THE PRESIDENT, THE SECRETARY,
Félix B. Maduro Jorge Altamirano M.

ANNEX 1

LONG-TERM INVESTMENT GRADE RATINGS

MOODY’S: Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 STANDARD & POORS: AA+ AA AA- A+ A A- BBB+ BBB BBB- FITCH: AA+ AA AA- A+ A A- BBB+ BBB BBB-

LONG-TERM NON-INVESTMENT GRADE RATINGS

MOODY’S: Ba1 Ba2 Ba3 B1 B2 B3 Caa1 Caa2 Caa3 Ca C STANDARD & POORS: BB+ BB BB- B+ B B- CCC+ CCC CCC- CC C D FITCH: BB+ BB BB- B+ B B- CCC+ CCC CCC- CC C D

ANNEX 2

SHORT-TERM INVESTMENT GRADE RATINGS

MOODY’S: P-1 P-2 P-3
STANDARD & POORS: A-1+ A-1 A-2 A-3
FITCH: F-1+ F-1 F-2 F-3

SHORT-TERM NON-INVESTMENT GRADE RATINGS

MOODY’S: NP
STANDARD & POORS: B B-1, B-2, B-3 C D
FITCH: B C D