Notice No. 03/2016 of June 16: Regulatory Capital Requirements for Credit Risk and Counterparty Credit Risk

Published in the Official Gazette, First Series, No. 98, of June 16

NOTICE No. 03/2016

SUBJECT: REGULATORY CAPITAL REQUIREMENTS FOR CREDIT RISK AND COUNTERPARTY CREDIT RISK

Considering the development of the Angolan Financial System, international best practices, and the issuance of Notice No. 02/2016 on Regulatory Capital (RC), which establishes new risk categories considered in the calculation of the regulatory solvency ratio, it is necessary to establish the capital requirement for covering credit risk and counterparty credit risk.

Under these terms, and pursuant to the combined provisions of letters d) and f) of paragraph 1 of Article 21st and letter d) of paragraph 1 of Article 51st, both of Law No. 16/10, of July 15 – Law of the Bank of Angola, and Article 88st of Law No. 12/15, of June 17 – Law of the Framework of Financial Institutions.

I DETERMINE:

Article 1. (Object) This Notice establishes the regulatory capital requirement that Financial Institutions must consider regarding credit risk and counterparty credit risk, in accordance with the provisions of letter a) of paragraph 4 of Article 4th of Notice No. 02/2016, on RC.

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Article 2. (Scope) This Notice applies to Financial Institutions under the supervision of the Bank of Angola, hereinafter referred to as Institutions under the terms and conditions provided in the Law of the Framework of Financial Institutions.

Article 3. (Definitions) Without prejudice to the definitions established in the Law of the Framework of Financial Institutions, for the purposes of this Notice, the following are understood:

1. External Rating Agency: entity that performs external assessments of credit risk, at the request of the rated entity or on its own initiative.

2. Credit Risk Assessment: prospective opinion on the credit quality in general or of a specific issuance by a borrower, focusing on the analysis of the borrower's capacity and willingness to honor its financial commitments at maturity dates.

3. Trading Book: all positions in financial instruments and commodities held by an Institution, for trading purposes or for hedging positions held for trading purposes. In these terms, positions held for trading purposes are considered the following:

a) proprietary positions and positions resulting from the provision of services to clients and market making;

b) positions intended for short-term resale;

c) positions intended to profit from short-term actual or expected differences between purchase and sale prices or other price or interest rate variations.

4. Counterparty: party participating in a transaction or contract.

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5. Parent Company: legal person that exercises a relationship of control or group over another legal person, designated as a subsidiary, when one of the following situations occurs:

a) Institutions authorized by the Bank of Angola;

b) management companies of shareholdings subject to the supervision of the Bank of Angola under the provisions of the Law of the Framework of Financial Institutions.

6. Regulatory Capital: "RC" as defined and calculated in accordance with Notice No. 02/2016, on RC.

7. Group of Connected Counterparties: set of persons, natural or legal, that constitute a single entity from the perspective of assumed risk, due to being so linked that, in the event that one of them encounters financial problems, the others may have difficulties in fulfilling their obligations. It is considered that this link exists in entities belonging to the same economic group, within the meaning of paragraph 3 of Article 1st of Notice No. 14/2007, of September 28, on consolidation for accounting purposes. The existence of common shareholders or administrators, cross-guarantees, or commercial interdependence that cannot be replaced in the short term constitutes indications of the existence of a group of connected counterparties, prevailing the substance of transactions and economic relations over their formal aspects. The concept of group of counterparties does not apply, however, to relationships between companies with majority public capital, headquartered in Angola, without participation relationships between themselves, and between these and the Angolan State.

8. Economic Group: set of financial, banking or non-banking Institutions, and non-financial companies, in which there is a relationship of control by a Financial Institution over the others.

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9. Financial Group: set of resident and non-resident companies that have the nature of Banking and Non-Banking Financial Institutions, with the exception of Financial Institutions linked to insurance and social security activities, in which there is a relationship of control by a parent company supervised by the Bank of Angola over the other companies comprising it.

10. Relationship of Control: "relationship of control" as defined in the Law of the Framework of Financial Institutions.

11. Risk: possibility of a future event occurring with a negative impact on the net worth of Institutions.

12. Credit Risk: arising from the default of contractual financial commitments by a borrower or a counterparty in operations.

13. Counterparty Credit Risk: arising from the default by the counterparty of an operation before the final settlement of the respective financial flows.

Article 4. (Regulatory capital requirement for covering credit risk and counterparty credit risk) Institutions must calculate the regulatory capital requirement for covering credit risk and counterparty credit risk, as established in the Instruction on the Calculation and Requirement of Regulatory Capital for Credit Risk and Counterparty Credit Risk, considering the total activity, with the exception of the trading book and assets directly deducted from regulatory capital, for the following risk classes:

a) public entities;

b) organizations;

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c) financial institutions;

d) companies;

e) retail book;

f) positions secured by real estate;

g) past due items;

h) mortgage bonds or public sector bonds, and;

i) other items.

Article 5. (Application Base)

1. Institutions under the supervision of the Bank of Angola, with the exception of management companies of shareholdings, must apply the provisions of this Notice on an individual basis.

2. Without prejudice to the provisions of the previous paragraph, parent companies of financial groups provided for in Notice No. 03/2013, of April 22, on prudential supervision on a consolidated basis, must apply on a consolidated basis the provisions contained in this Notice to the activity of the financial group of which they are part, ensuring for this purpose the coherence and alignment of approaches to credit risk.

Article 6. (External Rating Agencies)

1. External rating agencies must be registered with the Bank of Angola, according to specific regulations to be established.

2. The use of risk weights associated with credit quality assessments assigned by external rating agencies is dependent on compliance, by Institutions, with rules established in specific regulations.

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Article 7. (Information Provision) The Bank of Angola establishes, in the Instruction on Information Provision on Regulatory Capital Requirement for Credit Risk and Counterparty Credit Risk, the structure and minimum content of reports and other information elements that must be submitted to it within the scope of this Notice.

Article 8. (Sanctions) Non-compliance with the mandatory norms established in this Notice constitutes an offense punishable under the Law of the Framework of Financial Institutions.

Article 9. (Transitional Provision) Institutions must comply with the provisions of this Notice under the terms of the transitional provisions of Notice No. 02/2016, on regulatory capital.

Article 10. (Regulation) Securitization operations and other credit derivatives must be previously communicated to the Bank of Angola observing the minimum requirements defined in specific regulations.

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Article 11. (Doubts and Omissions) Doubts and omissions resulting from the interpretation and application of this Notice are resolved by the Bank of Angola.

Article 12. (Entry into Force) This Notice enters into force on the date of its publication.

PUBLISH Luanda, on April 28, 2016

THE GOVERNOR VALTER FILIPE DUARTE DA SILVA