Agreement No. 003-2019 Modifying the Technical Annex of Agreement No. 011-2018 on Operational Risk

Republic of Panama Superintendence of Banks AGREEMENT No. 003-2019 (of April 30, 2019) "By which the Technical Annex of Agreement No. 011-2018, which establishes new provisions on Operational Risk, is modified"

THE BOARD OF DIRECTORS

In exercise of its legal powers, and

CONSIDERING:

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

That in accordance with the provisions of paragraphs 1 and 2 of Article 5 of the Banking Law, it is the objective of the Superintendence of Banks to ensure the maintenance of the solidity and efficiency of the banking system; as well as to strengthen and foster the favorable conditions for the development of the Republic of Panama as an international financial center;

That in accordance with paragraphs 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 risky assets and the guidelines for the establishment of reserves for risk coverage, and to fix, within the administrative scope, the interpretation and scope of legal or regulatory provisions in banking matters;

That in accordance with Article 6 of the Banking Law, it is the function of the Superintendence of Banks to ensure that banks maintain appropriate solvency and liquidity coefficients to meet their obligations;

That in accordance with the provisions of Article 72 of the Banking Law, regarding the valuation of other risks, it is established that for the determination of the capital adequacy index, the Superintendence may take into account the existence of other risks, such as market risk, operational risk, and country risk;

That the Basel Principles for Effective Banking Supervision of the Basel Committee establish that banks must have an integral risk management process, which includes supervision by the board of directors and senior management, to identify, quantify, evaluate, monitor, report, and control or mitigate all significant risks in a timely manner, as well as to evaluate their capital and liquidity sufficiency in relation to their risk profile;

That through Agreement No. 011-2018 of September 11, 2018, new provisions on Operational Risk were issued;

That in working sessions of this Board of Directors, the need and convenience have been highlighted to incorporate into the Technical Annex the accounts that do not form part of the calculation of the Business Index (BI) for the determination of the risk-weighted assets for operational risk of the entity, due to the updates carried out by the Basel Committee.

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RESOLVES:

ARTICLE 1. The Technical Annex of Agreement No. 011-2018 is hereby amended as follows:

"TECHNICAL ANNEX

The Business Index, BI, is defined as follows:

BI = CIAD + CS + CF

CIAD, interest, lease, and dividend component CS, service component CF, financial component

In turn, each of these components is defined as follows:

CIAD = Min (ABS(IINT-GINT); 0.0225 x SACD) + DIV

ABS(x-y) is the absolute value of the difference x – y that is within the parentheses Min (x ; y) is the smaller value of the two quantities x and y. Max(x ; y) is the larger value of the two quantities x and y.

IINT, amount of interest income GINT, amount of interest payments SACD, amount of the balance of credits and debt recorded in assets DIV, amount of dividends collected

CS = Max (OIO; OGO) + Max (IHC; GHC)

OIO, other operating income OGO, other operating expenses IHC, income from fees and commissions GHC, expenses for fees and commissions

CF = ABS(GCN – PCN) + ABS(GLB – PLB)

GCN, gains from the trading portfolio PCN, losses from the trading portfolio GLB, gains from the banking book portfolio PLB, losses from the banking book

The detail of the composition of the variables is as follows:

SACD, amount of the balance of credits and debt recorded in assets SACD = SD + SCR + SIV + SR

SD, balance of deposits in banks and other financial institutions SCR, balance of credits granted SIV, balance of investment in debt securities SR, balance of asset repos

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For the calculation of the Business Index for a given quarter, the following calculations will be performed:

• In the case of variables that are part of Results, the three values corresponding to each month of the quarter will be summed and multiplied by four to annualize the value.
• In the case of variables that are Balance Sheet accounts and that form the SACD variable, the arithmetic mean of the three months that make up the quarter will be calculated.

The following items in the income statement do not contribute to any of the items of the BI:

• Income and expenses from insurance or reinsurance business
• Premiums paid and refunds/payments received from acquired insurance or reinsurance policies
• Administrative expenses, including personnel expenses, outsourcing commissions paid for the provision of non-financial services (logistical, IT, or human resources, for example), and other administrative expenses (for example, IT expenses, public supplies, telephone, travel, office supplies, postcards)
• Recovery of administrative expenses, including the recovery of payments made on behalf of clients (for example, taxes charged to clients)
• Premises and fixed asset expenses (except those derived from loss events from operational risk)
• Amortization of tangible and intangible assets (except amortization related to assets in operating leases, which must be included in expenses for financial and operating leases)
• Provisions or reversal of provisions (for example, for pensions, commitments, and guarantees provided), except provisions related to loss events from operational risk
• Expenses for share capital redeemable on demand
• Impairment of value or reversal of impairment of value (for example, of financial assets, non-financial assets, investments in subsidiaries, joint ventures, or associates)
• Variation of recognized goodwill in results
• Corporate tax (tax on profits, including current and deferred taxes)."

ARTICLE 2. VALIDITY. This Agreement shall enter into force on December 31, 2019, with the submission of the relevant reports to be made no later than January 30, 2020.

Given in the city of Panama, on the thirtieth (30) day of the month of April of two thousand nineteen (2019).

NOTIFY, PUBLISH, AND COMPLY.

THE PRESIDENT THE SECRETARY Luis Alberto La Rocca Joseph Fidanque III