Agreement No. 011-2019 Modifying Article 27 of Agreement No. 004-2013 on Credit Risk Management

Republic of Panama
Banking Superintendence
AGREEMENT No. 011-2019
(October 1, 2019)
"By which Article 27 of Agreement No. 004-2013 is modified, which establishes provisions on the management and administration of credit risk inherent in the credit portfolio and off-balance sheet operations"

THE BOARD OF DIRECTORS

In exercise of its legal powers, and

CONSIDERING:

That as a result of the issuance of Decree-Law 2 of February 22, 2008, the Executive Branch prepared a systematic ordering in the form of a Single Text of Decree-Law 9 of 1998 and all its modifications, which was approved by Executive Decree 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 Banking Superintendence to strengthen and foster the favorable conditions for the development of Panama as an international financial center;

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

That in accordance with numeral 3 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 for risk coverage;

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 in accordance with numeral 8 of Article 11 of the Banking Law, it is the technical attribute of the Board of Directors to establish the general rules that banks must follow in their accounting;

That by Agreement No. 004-2013 of May 28, 2013, modified by Agreement No. 008-2014 of September 16, 2014, provisions are established on the management and administration of credit risk inherent in the credit portfolio and off-balance sheet operations;

That in working sessions of this Board of Directors, the need and convenience of modifying Article 27 of Agreement No. 004-2013 has been manifested, in order to update the regulatory framework for the management and administration of credit risk in banking entities.

Agreement No. 011-2019

AGREES:

ARTICLE 1. Article 27 of Agreement No. 004-2013 is hereby amended as follows:

"ARTICLE 27. WRITE-OFF OF OPERATIONS. Each bank shall write off all loans classified as uncollectible within a period not exceeding one year from the date on which they were classified in this category. The following loans shall be exempt from the application of this period:

1. Residential mortgage loans and consumer loans with real estate guarantees, classified as risk mitigants as provided in Article 42 of this Agreement and whose guarantee is duly constituted in the Republic of Panama in favor of the banking entity. In these cases, each bank shall write off all loans classified as uncollectible within a period not exceeding two years from the date on which they were classified in this category. The aforementioned provision may be extended once for an additional year with prior approval of the Superintendent.

After the extension year has passed, if the bank has not yet carried out the specified write-off, it must create a reserve in the equity account, by appropriating its Retained Earnings to which charges will be made for the value of the loan net of provisions already established, according to the percentages established in the following table:

PERIOD APPLICABLE PERCENTAGE
At the beginning of the first year after the extension (fourth year) 50% At the beginning of the second year after the extension (fifth year) 50%

PARAGRAPH: In the event that the bank does not request the extension referred to in this numeral, or if it is requested and denied by the Superintendent, the bank must immediately create a reserve of 100% in the equity account net of provisions already established. The Superintendent shall establish through Resolution the parameters and guidelines that will be considered for not approving an extension request.

2. Corporate loans with real estate guarantees classified as risk mitigants as provided in Article 42 of this Agreement and whose guarantee is duly constituted in the Republic of Panama in favor of the banking entity. In these cases, each bank shall write off all loans classified as uncollectible within a period not exceeding two years from the date on which they were classified in this category.

After the two years have passed, if the bank has not yet carried out the specified write-off, it must create a reserve in the equity account, by appropriating its Retained Earnings to which charges will be made for the value of the loan net of provisions already established, according to the percentages established in the following table:

PERIOD APPLICABLE PERCENTAGE
At the beginning of the third year 50%
At the beginning of the fourth year 50%

Agreement No. 011-2019

The aforementioned reserves referred to in numerals 1 and 2 of this article shall remain in place until the effective adjudication of the property is carried out; such reserve shall be considered a regulatory reserve and shall not be counted for the purposes of calculating the capital adequacy ratio.

Those residential mortgage loans, consumer loans with mortgage guarantees, and corporate loans with real estate guarantees classified as uncollectible in the year 2018, and for which the bank had not applied the required write-off within the one-year period prior to the exception established in this article upon the entry into force of this Agreement, the banking entity must ensure compliance with the periods indicated in numerals 1 and 2 of this article, using as reference the date on which the loan was classified as uncollectible.

In the event of situations corresponding to years prior to 2018, the Superintendent shall evaluate each case individually and establish the corresponding level of provisions."

ARTICLE 2. EFFECTIVENESS. This Agreement shall enter into force from its promulgation.

Given in the city of Panama, on the first (1) day of the month of October of two thousand nineteen (2019).

NOTIFY, PUBLISH, AND COMPLY.

THE PRESIDENT THE SECRETARY
Joseph Fidanque III Nicolás Ardito Barletta