Agreement No. 5 (2020) Modifying Articles 39, 41, and 42 of Agreement No. 4-2013 on Credit Risk Management

Republic of Panama
Superintendence of Banks
AGREEMENT No. 005-2020
(of June 9, 2020)
"By which Articles 39, 41, and 42 of Agreement No. 4-2013 on the management and administration of credit risk inherent to the credit portfolio and off-balance sheet operations are 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 February 26, 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 2 of Article 5 of the Banking Law, it is the objective of the Superintendence of Banks to strengthen and foster the conditions conducive to the development of Panama as an international financial center;

That in accordance with numeral 2 of Article 11 of the Banking Law, it is a technical attribute of the Board of Directors to approve general application norms for the definition and identification of credits to related clients or related to the banks or banking groups;

That in accordance with numeral 5 of Article 11 of the Banking Law, it corresponds to the Board of Directors of this Superintendence to establish, within the administrative scope, the interpretation and scope of legal or regulatory provisions in banking matters;

That it is the responsibility of the Board of Directors to define and establish criteria for credit risk management, including the processes and procedures to be observed in each of its phases;

That by Agreement No. 4-2013 of May 28, 2013, and its modifications, provisions on the management and administration of credit risk inherent to the credit portfolio and off-balance sheet operations are established;

That Article 39 of Agreement No. 4-2013 determines valid guarantees for the calculation of specific provisions, while Article 41 establishes matters regarding the valuation of guarantees and Article 42 regarding the present value of these guarantees;

That as a consequence of the effects of the global COVID-19 health pandemic, support measures for the different sectors of the Panamanian economy, including micro and small enterprises, are necessary; for this reason, the National Government through its entities is promoting existing programs aimed at maintaining the economic stability of our country;

That by Executive Decree No. 145 of April 9, 2020, which modifies Executive Decree No. 126 of June 23, 2010, by which Law No. 72 of November 9, 2009, is regulated, Law No. 8 of March 29, 2000, and Law No. 33 of July 25, 2000 on Micro, Small, and Medium Enterprises are reformed, new provisions regarding the Financing Program for Micro and Small Enterprises (PROFIMYPE) were established;

That the Financing Program for Micro and Small Enterprises (PROFIMYPE) is a complementary guarantee program backed by the State and guaranteed by the Guarantee Fund administered by the Authority of Micro, Small, and Medium Enterprises (AMPYME), for financing directed at entrepreneurship and micro and small enterprises;

That for this Superintendence of Banks, the Financing Program for Micro and Small Enterprises (PROFIMYPE) is of great importance, understanding that our role as an entity of the Panamanian State is to ensure that the international banking center remains solid and contributes to the country's economy, especially in the current situation;

That in working sessions of this Board of Directors, the need and convenience of modifying Articles 39, 41, and 42 of Agreement No. 4-2013 have been highlighted, in order to add guarantee letters issued by the Authority of Micro, Small, and Medium Enterprises (AMPYME) under the Financing Program for Micro and Small Enterprises (PROFIMYPE), as admissible guarantees for the calculation of specific provisions to back the credits granted by banking entities to entrepreneurs and micro and small enterprises that apply to said program.

AGREES:

ARTICLE 1. Article 39 of Agreement No. 4-2013 of May 28, 2013, is hereby amended as follows:

ARTICLE 39. GUARANTEES. For the calculation of the amount of specific provisions, the following guarantees on assets shall be considered valid:

1. Pledged deposits in the bank itself or in other banks.
2. Fixed or variable income securities traded in an active market.
3. Panamanian sovereign debt.
4. Fixed or variable income securities that lack an active market but for which the estimation of fair value is feasible.
5. Sovereign debt traded in an active market.
6. Irrevocable standby letters of credit, guarantees, sureties, endorsements, and export/import letters of credit issued by banking entities.
7. Promissory notes with discount codes from the Social Security Fund (Caja de Seguro Social).
8. Residential real estate.
9. Commercial real estate.
10. Real estate land.
11. Real estate (land exclusively for agricultural purposes).
12. Automobiles.
13. Cattle.
14. Agricultural products fully identifiable by the bank.
15. Guarantee letters issued by the Authority of Micro, Small, and Medium Enterprises (AMPYME) under the Financing Program for Micro and Small Enterprises (PROFIMYPE), which are within the items backed by the Ministry of Economy and Finance (MEF).

ARTICLE 2. Article 41 of Agreement No. 4-2013 of May 28, 2013, is hereby amended as follows:

ARTICLE 41. VALUATION OF GUARANTEES. On the date that banking entities perform the valuation of assets given as collateral to mitigate risk, they must take as a basis the predominant market values. Entities granting financing must use a strictly conservative criterion (the lowest value reflected in the appraisal report), in the sense of calculating the liquidation value that would be obtained by alienating said assets. Such valuation must be carried out according to the type of asset in question, as described below:

1. Mortgage guarantee on real estate.
   a. In the case of loans granted for the purchase of new homes, the fair value of the real estate will be taken, which will be obtained from a technical appraisal or references from similar sales in the project. Every second-hand home must have an updated appraisal at the time of the loan's constitution. b. Banking entities must request an appraisal when:
   b.1. When the credit is to be increased. b.2. When a credit facility is classified for the first time in the subnormal category or subsequent categories and does not have an appraisal with an age of less than one year, one must be requested. b.3. During the process of enforcing guarantees on real estate, these must be appraised with a maximum age of two years. This period may be reduced in the event of evidence of real estate price reductions.
   c. The valuation of the mortgage guarantee on real estate must be supported by an appraisal of the asset given as collateral, performed by an expert independent of the debtor and acceptable to the bank. However, the valuation of real estate (1) whose fair value is estimated to be lower than the maximum value approved for the preferential interest rate regime or (2) dedicated to agricultural production, may be carried out by the bank, provided it has appropriate and duly documented methodologies.
   d. For commercial real estate, all provisions in numerals b, c, and d shall apply. However, the appraisal must be renewed at least every 3 years. e. Every restructuring must be accompanied by an appraisal acceptable to the bank with an age of less than one year. In cases where the bank has determined that there is impairment in the loan guarantee, the valuation must be carried out immediately. f. When dealing with interim construction loans, guaranteed by the land and the value of improvements built on it, the value of the land will be considered initially, and the value of the guarantee will be increased considering the progress of the construction work, certified in writing by the site inspector independent of the debtor or constructor and acceptable to the bank. g. Priority in the assignment of value of assets in mortgages: Only second-degree or subsequent mortgages will be accepted as risk mitigants, when the preceding ones are registered in favor of the banking entity granting the financing or any of the companies in its economic group. The residual value of the guarantee must cover the entire financing. The residual value will be considered that resulting from discounting from the market value established in the most recent appraisal, the amount of the balances of credits guaranteed with the previous mortgages. Only assets given as collateral as a second mortgage in other banks will be accepted, those assets listed in Article 42 of this Agreement, provided there is a residual value of the guarantee and to which twenty (20) percentage points must be deducted from the coefficient established in the table of Article 42 of this Agreement.

2. Mortgage guarantee on movable property:
   The valuation of the mortgage guarantee on movable property will be equivalent to the value established in the insurance policy covering the asset.

3. Pledged deposits:
   In pledged deposits, the lower value between the loan balance and the pledged deposit will be taken.

4. Pledge guarantees:
   a. Sovereign debt, as well as financial instruments of commercial and state entities, will be accepted at their fair value. b. The valuation of the guarantee on cattle must be supported by an appraisal or certification of the value of the asset given as collateral, performed by persons independent of the debtor and acceptable to the bank. However, the valuation of cattle may be carried out by the bank itself, provided it has appropriate and duly documented methodologies.
   c. In the case of agricultural and livestock pledges, second-ranking pledges are not permitted.

5. Other guarantees:
   a. Standby letters of credit, guarantees, sureties, or endorsements, as well as irrevocable letters of credit issued by banking entities, insurance and reinsurance companies, and assignments on promissory notes with discount codes will be taken at the fair value of the guarantee. These guarantees will not be accepted, for the purposes of this Agreement, if they are issued in favor of the bank by an entity of its same group, to guarantee obligations of a third entity of the same group. b. Guarantee trusts will be considered as risk mitigants provided they include the assets established in Article 42.
   c. Promissory notes with discount codes for retirees and pensioners of the Social Security Fund will be accepted at the value of the balance of the obligation they are guaranteeing.
   d. Guarantee letters issued by the Authority of Micro, Small, and Medium Enterprises (AMPYME) under the Financing Program for Micro and Small Enterprises (PROFIMYPE), provided these guarantees are within the items backed by the Ministry of Economy and Finance (MEF). This guarantee may be accepted by banking entities accredited as Financing Entities (EFIN) before the Authority of Micro, Small, and Medium Enterprises (AMPYME), provided that both the accredited Bank and EFIN, as well as the applicant client, have met all the conditions established by AMPYME. The percentage that covers the guarantee is the result of applying the limits established by the Authority of Micro, Small, and Medium Enterprises (AMPYME). The guarantee is composed of the company classification, as well as the economic activity defined by AMPYME. The guarantee granted by AMPYME decreases proportionally to the principal payments received, covering up to a maximum of 90% of the outstanding balance of the loan value. For the purposes of valuing guarantees as risk mitigants, it will be recognized in accordance with what is provided in Article 42 of Agreement No. 4-2013.

ARTICLE 3. Article 42 of Agreement No. 4-2013 of May 28, 2013, is hereby amended as follows:

ARTICLE 42. PRESENT VALUE OF GUARANTEES. For the calculation of specific provisions within the framework of international financial reporting standards and valuation prudential principles, it is necessary to take into account the time value of money and the uncertainty regarding the cash realization value of the guarantees, as well as the costs of the recovery activity. Therefore, and for the purposes of calculating the provisions established in Article 34, the present values established in the following table must be applied:

Guarantee	Present Value
1. Deposits in the bank itself or in other banks, whether pledged or given in trust.	100% of the guaranteed amount
2. Fixed or variable income securities traded in active markets.	70% of fair value
3. Panamanian sovereign debt.	90% of fair value
4. Fixed or variable income securities that lack an active market.	50% of fair value
5. Sovereign debt traded in an active market.	70% of fair value
6. Standby letters of credit, guarantees, sureties, endorsements, and irrevocable export/import letters of credit issued by banking entities.	90% of nominal value
7. Assignments on promissory notes with discount codes from the Social Security Fund.	85% of the promissory note balance value
8. Residential real estate.	70% of fair value
9. Commercial real estate.	60% of fair value
10. Real estate Land.	50% of fair value
11. Real estate (Land exclusively for agricultural purposes).	50% of fair value
12. Movable property (mortgages constituted on automobiles for personal use).	50% of fair value
13. Cattle.	75% of fair value
14. Agricultural products fully identifiable by the bank.	40% of fair value
15. Guarantee letters issued by the Authority of Micro, Small, and Medium Enterprises (AMPYME) under the Financing Program for Micro and Small Enterprises (PROFIMYPE), which are within the items backed by the Ministry of Economy and Finance (MEF)	50% of the amount guaranteed by AMPYME.

These coefficients are based on empirical evidence and financial analyses corresponding to non-stressed market situations. The coefficients may be reviewed and modified by the Superintendence of Banks, both due to the existence of new empirical evidence and because an increase in liquidity risk for the cash realization of the guarantees is detected.

ARTICLE 4. VALIDITY. This Agreement will come into effect from its promulgation.

Given in the city of Panama, on the ninth (9) day of the month of June of two thousand twenty (2020).

LET IT BE COMMUNICATED, PUBLISHED, AND COMPLIED WITH.

THE PRESIDENT, THE SECRETARY,

Joseph Fidanque III Nicolás Ardito Barletta