Notice No. 5/GBM/2018, June 6 – Establishes Prudential Limits on Risk Concentration Assumed by Credit Institutions with Their Counterparties

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BOLETIM DA REPÚBLICA PUBLICAÇÃO OFICIAL DA REPÚBLICA DE MOÇAMBIQUE SUMÁRIO A V I S O The matter to be published in the «Boletim da República» must be submitted as a duly authenticated copy, one for each subject matter, containing the necessary indications for this purpose, including the following endorsement, signed and authenticated: For publication in the «Boletim da República». IMPRENSA NACIONAL DE MOÇAMBIQUE, E. P. Banco de Moçambique: Aviso n.º 5/GBM/2018: Establishes the prudential limits on risk concentration assumed by credit institutions with their counterparties. Quarta-feira, 6 de Junho de 2018 I SÉRIE — Número 111

BANCO DE MOÇAMBIQUE AVISO n.° 5 /GBM/2018 de 6 de Junho

Having the need to update the prudential limits of credit institutions, in order to align them with the increasing risks inherent to their activity and the dynamics of the national economy, the Bank of Mozambique, in exercise of the powers conferred upon it by Article 64 of Law No. 15/99, of November 1 – Credit Institutions and Financial Companies Law, updated by Law No. 9/2004, of July 21, determines:

CAPÍTULO I Disposições Gerais

ARTIGO 1 (Objecto) This Notice establishes the prudential limits on risk concentration assumed by credit institutions with their counterparties.

ARTIGO 2 (Âmbito) This Notice applies to all credit institutions.

ARTIGO 3 (Definições) For the purposes of this Notice, the following shall be understood: a) “Carteira bancária (banking book)”, positions in risk or operations not classified within the trading portfolio; b) "Carteira de negociação (trading book)", positions in financial instruments held by a credit institution, whether for trading purposes or to hedge positions held for trading purposes; c) “Contraparte”, an individual or legal entity, resident or non-resident, on which a credit institution assumes one or more positions in risk; d) “Entidades correlacionadas”, individual or legal entities related to the credit institution, within the meaning of paragraph 2 of Article 2 of Notice No. 9/GBM/2007, of May 2; e) “Entidades não financeiras”, legal entities, resident and non-resident, whose nature does not fall under the definition of credit institution or financial company; f) “Exposição, posição em risco ou risco”, an asset or off-balance sheet item, as per Annexes I to III of Notice No. 11/GBM/2013, of December 31; g) “Grande risco”, the situation where the sum of positions in risk towards a counterparty or correlated entity represents at least ten percent (10%) of the institution's basic own funds (Tier 1 Capital); h) “Grupo de contrapartes ligadas entre si ou em relação de grupo de risco”, the set of individual or legal entities that constitute a single entity from the perspective of the risk assumed by the credit institution, due to being so closely linked that, in the event one encounters financial difficulties, the other or all others will likely face difficulties in fulfilling their obligations. This risk group relationship is considered to exist, namely when: (i) There is a control relationship between one and the other or others; (ii) There are common shareholders or members who exercise significant influence over the entities in question; (iii) There are common administrators; and (iv) There is direct commercial interdependence that cannot be replaced in the short term. i) “Posições em risco e transacções intragrupo”, transactions and positions in risk between correlated entities that directly or indirectly involve a liquidity or credit facility with entities with which the credit institution forms or is part of a group, namely through the existence of: (i) Common shareholders; (ii) Mechanisms or arrangements for centralized short-term liquidity management; (iii) Guarantees, loans and other facilities granted or received from other group entities; (iv) Back office services or other management services; (v) Positions in risk on shareholders with qualified participation conferring dominance or control, in the form of loans and off-balance sheet exposures, such as guarantees and acceptances; (vi) Positions in risk in the form of customer fund applications in other group entities; (vii) Risk transfer operations, namely reinsurance; (viii) Risk transfer operations assumed on third parties, between group entities. j) “Risco de concentração”, the possibility that a position or set of positions in risk towards interconnected counterparties may generate losses jeopardizing the liquidity and/or solvency of the credit institution due to their materiality within the overall assumed risks.

CAPÍTULO II Critérios valorimétricos e limites

ARTIGO 4 (Valor da posição em risco)

1. The value of the position in risk of an asset element corresponds to its net book value, less specific provisions, for the cases provided in paragraph 2 of Article 2 of Notice No. 16/GBM/2013, of December 31, regarding the regime of minimum regulatory provisions or impairment, for credit institutions that prepare their financial statements in accordance with International Financial Reporting Standards (IFRS), adjusted as provided in Articles 8 and 9 of Notice No. 11/GBM/2013, of December 31.
2. The value of the position in risk of an off-balance sheet element corresponds to the result of applying credit conversion factors (CCF), as established in paragraphs 2 and 3 of Part 1 of Annex II of Notice No. 11/GBM/2013, of December 31.

ARTIGO 5 (Riscos abrangidos)

1. Credit institutions with headquarters in Mozambique must consider the risks assumed by their domestic establishments and foreign branches.
2. Branches in Mozambique of credit institutions with foreign headquarters must consider only the risks of their own activity, referencing their own funds as defined in Notice No. 8/GBM/2017, of June 2.
3. Institutions and branches covered by this Notice must consider positions in risk related to both the banking book and trading book.

ARTIGO 6 (Limites à concentração de risco)

1. Credit institutions, regarding the positions in risk they assume, are subject to the following limits: a) Regarding a single counterparty, they must not incur risks whose value, individually or collectively, exceeds twenty-five percent (25%) of their basic own funds (Tier 1 Capital); b) Regarding correlated entities and intragroup transactions, they must not incur risks or intragroup transactions whose value exceeds: (i) Twenty-five percent (25%) of their basic own funds (Tier 1 Capital), if the counterparty is a financial entity; and (ii) Ten percent (10%) of their basic own funds (Tier 1 Capital), if it is a non-financial entity; c) The aggregate value of exposures towards correlated entities or intragroup transactions must not exceed thirty percent (30%) of their basic own funds (Tier 1 Capital); d) The aggregate value of significant risks assumed must not exceed six times their basic own funds (Tier 1 Capital); e) Positions in risk related to interbank operations are subject to a limit of twenty-five percent (25%) of their basic own funds (Tier 1 Capital).
2. Intraday positions in risk are exempt from the limit established in paragraph (e) of the preceding subsection.
3. When a position in risk towards a counterparty is guaranteed by a third party, irrevocably and legally binding, it is considered that such risk is assumed towards that third party and not the counterparty.

ARTIGO 7 (Tratamento do risco nas relações de grupo) Risks related to all individual or legal entities constituting a group of interconnected counterparties or in a risk group relationship must be considered as assumed towards a single counterparty.

ARTIGO 8 (Excepções aos limites de concentração de risco)

1. In exceptional circumstances and upon duly substantiated request by credit institutions, the Bank of Mozambique may authorize them to exceed the risk concentration limits set forth in Article 6.
2. In granting authorizations under the preceding paragraph, the Bank of Mozambique determines the timeframe and conditions for the applicant's adaptation to the limits.
3. Without prejudice to applicable sanctions under the law, values exceeding the limits set in this Notice in non-compliance with paragraph 1 are deductible from basic own funds (Tier 1 Capital).

ARTIGO 9 (Riscos isentos) The limits referred to in Article 6 do not apply to positions in risk assumed towards: a) The Government of Mozambique, in national currency; b) The Bank of Mozambique, in national currency; c) Eligible foreign governments and central banks with a 0% risk weight, as provided in subsection I of Part 2 of Annex II of Notice No. 11/GBM/2013, of December 31; and d) International organizations, as provided in subsection II of Part 2 of Annex II of Notice No. 11/GBM/2013, of December 31.

ARTIGO 10 (Riscos não considerados) For the purposes of calculating the limits referred to in Article 6, the following positions in risk are not considered: a) Covered by explicit and irrevocable guarantees from the entities and under the conditions referred to in the preceding article; b) Covered by cash deposits, in the same currency, within the institution itself; c) Covered by deposits within the institution of debt securities issued by the entities referred to in the preceding article or by the institution itself, provided they do not represent their own funds; and d) Covered by own funds, as per paragraph (b) of paragraph 4 of Article 8 of Notice No. 8/GBM/2017, of June 2.

ARTIGO 11 (Alteração da base de cálculo dos limites prudenciais) The Bank of Mozambique may order adjustments to the values of positions in risk serving as the basis for calculating the limits established in this Notice whenever conditions justifying the observance of prudential principles so warrant.

ARTIGO 12 (Critérios para identificação de grupo de contrapartes ligadas entre si)

1. Credit institutions have the duty to identify interdependencies and links of their counterparties, in order to comply with Article 6.
2. For the purposes of the preceding paragraph, credit institutions must also assess whether, in cases where economic or commercial dependence exists between counterparties, they may be considered interconnected within the meaning of paragraph (h) of Article 3, based on, among others, the following criteria or circumstances: a) Existence of direct or indirect control relationship between one and the other or others; b) Existence of common shareholders or members exercising significant influence over the entities in question; c) Existence of common administrators; d) Direct commercial interdependence that cannot be replaced in the short term, reflected, namely, in the following facts: (i) Fifty percent (50%) of gross annual revenues or expenses of one or more counterparties originate from or are incurred towards other group counterparties; (ii) One or more counterparties partially or fully guarantee the positions in risk of another or others, where the materiality of the guarantee value may cause default by the guarantor due to its invocation by the beneficiary; (iii) One or more counterparties have as a buyer of part or all of their production another counterparty that can easily be replaced by other clients; (iv) The expected source of funds for the repayment of each credit contracted by a counterparty in favor of another is the same, and the counterparty has no other income sources from which the credit can be fully repaid; (v) When insolvency or default of one counterparty is likely to be associated with the insolvency or default of another; (vi) When two or more counterparties depend on the same source for most of their financial resource needs, and in case of default by the common funding provider, no alternative provider can be found, resulting in the propagation or spreading of the funding problem from one counterparty to others due to unidirectional or bidirectional dependence on the same funding source.
3. The Bank of Mozambique may determine the inclusion of one or more counterparties in a group of interconnected counterpartaries if it detects, during inspection, that one or more criteria established in this article were not observed.

ARTIGO 13 (Mitigação do risco de concentração)

1. Without prejudice to the limits set in Article 6, credit institutions must identify, measure, monitor and control concentrations of positions in risk periodically and, especially when disturbances occur in financial markets, at the following levels: a) Of the activity sector of counterparties and their guarantors, when risk mitigation techniques have been applied transferring the risk to them; b) Of the countries of counterparties towards which positions in risk have been assumed; and c) Others that may result in material concentration of risks.
2. The Bank of Mozambique may, within the inspection process, determine adjustments to concentration levels that have not been adequately considered.

ARTIGO 14 (Dever de informação e reporte) The Bank of Mozambique establishes the periodicity and form for providing information regarding compliance with the limits established in this Notice.

CAPÍTULO III Disposições complementares, finais e transitórias

ARTIGO 15 (Prazo de adequação)

1. Situations representing an excess over the limits provided in Article 6 must be regularized within six months from the date of entry into force of this Notice.
2. The timeframe established in the preceding paragraph applies to the adaptation process of information management and control systems deemed necessary to ensure compliance with the limits defined in this Notice.
3. Institutions must prepare an action schedule to be implemented to ensure compliance with the timeframe set in paragraph 1.
4. Upon duly substantiated request by a credit institution, the Bank of Mozambique may grant an extension for a period not exceeding six months to conclude the adaptation process to limits that, for substantial reasons, could not be completed within the timeframe fixed in paragraph 1.
5. Extension requests referred to in the preceding paragraph must be submitted to the Bank of Mozambique within fifteen days from the date of verification of facts or circumstances constituting an impediment to compliance with the timeframe fixed in paragraph 1.

ARTIGO 16 (Instruções) The Bank of Mozambique, through the Regulation and Licensing Department, issues the necessary instructions for compliance with this Notice.

ARTIGO 17 (Regime sancionatório) Violation of the provisions of this Notice constitutes an infraction provided for and punishable under the Credit Institutions and Financial Companies Law.

ARTIGO 18 (Norma revogatória) Paragraphs 9, 10 and 21 of Article 3, and Articles 8, 9, 10, 11, 12 and 13 of Notice No. 9/GBM/2017, of June 5, approving the Regulation on Prudential Ratios and Limits for Credit Institutions; paragraphs 1 and 2 of Article 4 of Notice No. 9/GBM/2007, of May 2, on Correlated Credit; and other provisions contrary to this Notice are hereby repealed.

ARTIGO 19 (Esclarecimentos) Doubts arising in the interpretation and application of this Regulation must be submitted to the Prudential Supervision Department of the Bank of Mozambique.

ARTIGO 20 (Entrada em vigor) This Notice enters into force on the date of its publication.

Maputo, 30 de Abril de 2018. — O Governador, Rogério Lucas Zandamela. Preço — 20,00 MT IMPRENSA NACIONAL DE MOÇAMBIQUE, E.P.