Circular No. 2012-03 - Periodic Information Obligations of Banks Regarding Prudential Supervision

Page 1 of 35 Circular No. 2012-03 PERIODIC INFORMATION OBLIGATIONS OF BANKS IN MATTER OF PRUDENTIAL SUPERVISION (Consolidated text as of 13/02/2024 - Update VIII)

1 DEFINITIONS AND REFERENCES a. For the purposes of this Circular, the following terms are understood as:

• "operational facility": credit facility resulting from a perfect and effective contract, under which the client can use the credit line;
• "Central Bank": the Central Bank of the Republic of San Marino, also defined as BCSM;
• "Circular": this Circular;
• "solvency ratio": the coefficient regulated by the provisions provided in Title III of Part VII of the REGULATION, relevant for the completion of SHEETS 4 and 5 of the NOTIFICATION;
• "reference date": the last day of the quarter to which the NOTIFICATION refers;
• "indirect exposure": see art. I.I.2 of the REGULATION(1);
• "large risks": risk positions defined by the provisions provided in Title IV of Part VII of the REGULATION, relevant for the completion of SHEET 6 of the NOTIFICATION;
• "group of connected clients or connected counterparties": see art. I.I.2 of the REGULATION;
• "financial companies": see art. I.I.2 of the REGULATION;
• "LISF": Law 17 November 2005 n.165 and subsequent amendments and integrations;
• "manual": operational manual as defined by art. VIII.II.4 of the REGULATION;
• "model": reporting schema as defined by art. VIII.II.4 of the REGULATION;
• "related party": see art. I.I.2 of the REGULATION;
• "shareholder": see art. I.I.2 of the REGULATION;
• "related parties and subjects connected to them": subjects whose relationships with the REPORTING ENTITY are the subject of the provisions provided in Title V of Part VII of the REGULATION, relevant for the completion of SHEET 7 of the NOTIFICATION;

1 The definition in question must be kept distinct from the notion of indirect risk, referable to guarantors of exposures assumed by the REPORTING ENTITY, considered within the framework of the P.U.M.A. procedure also for the purposes of reporting to the Italian Risk Registry.

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• "supervisory capital": basic capital, supplementary capital and related deductions as defined by the provisions provided in Title II of Part VII of the REGULATION, relevant for the completion of SHEET 3 of the NOTIFICATION;
• "draft financial statements": the economic and financial situation of the REPORTING ENTITY, drawn up with reference to December 31 and approved by the administrative body in anticipation of the subsequent shareholders' meeting for the approval of the annual financial statements; the draft financial statements contain estimates regarding the valuation of company assets, the quantification of depreciation, and the determination of funds, carried out applying the criteria and principles provided by financial reporting regulations;
• "sheet": part of the NOTIFICATION;
• "Regulation": BCSM Regulation n. 2007-07 and subsequent amendments and integrations;
• "notification": periodic collection of information, drawn up in accordance with company accounting data and/or management information systems, functional for the fulfillment of information obligations under this CIRCULAR and sent to BCSM according to the methods and terms defined by it;
• "reporting entities": Sammarinese banks;
• "prudential supervision": norms contained in Part VII of the REGULATION, from Title I to Title VIII, and their relative transitional provisions;
• "item": elementary data of the NOTIFICATION, to be inserted in the SHEETS by completing the relative MODEL.

b. In the remainder of the text, the use of terms described above is highlighted in UPPERCASE. For everything not expressly defined in this CIRCULAR, the definitions contained in the REGULATION and in the LISF apply.

c. With reference to the notion of "risk position" and its possible declinations in the different SHEETS of the NOTIFICATION, reference is made to what is provided in paragraph 5.4 of the CIRCULAR.

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2 PURPOSES AND STRUCTURE OF THE CIRCULAR a. This CIRCULAR regulates the information obligations in matter of PRUDENTIAL SUPERVISION and therefore has an applicative nature of Part VII of the REGULATION. b. The CIRCULAR provides applicative provisions or interpretations of the aforementioned norms present in the REGULATION, necessary for the fulfillment of information obligations through the completion and sending to BCSM of the NOTIFICATION. c. The CIRCULAR has a structure in chapters according to the articulation of the SHEETS that compose the NOTIFICATION; each chapter is composed of paragraphs that aggregate homogeneous provisions by subject. d. The compilation rules illustrated in the CIRCULAR are aimed at defining the data flow directed to BCSM in a manner conforming to the latter's analysis needs. No reflection on the maintenance of internal accounting and the formation of the annual financial statements of the REPORTING ENTITIES can be derived from the instructions present in the CIRCULAR, unless this is expressly provided.

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3 TARGET SUBJECTS a. Sammarinese banks are required to comply with the provisions of the CIRCULAR and are therefore qualified as REPORTING ENTITIES. b. The exemption from the completion of NOTIFICATIONS, for financial companies cancelled from the register pursuant to Article 8, paragraph 1 of BCSM Regulation 2006-01, starts from the date of cancellation and concerns all NOTIFICATIONS with a REFERENCE DATE subsequent to the BCSM measure. c. Considering the need for the Supervisory Authority to maintain adequate informational oversight on the progress of the procedure, in conformity with what is provided by paragraph 4 of art. 99 of the LISF, REPORTING ENTITIES in voluntary liquidation must nevertheless transmit to BCSM:

• within the month following that of the deposit at the Registry of the Unified Court, copies of the reports referred to in Article 111, paragraphs 1, 3 and 4 of Law 23 February 2006 n. 47 and subsequent amendments;
• by January 31 of each year, a statement of accounts referred to December 31 of each year, compiled based on the schema provided by current supervisory provisions in matter of quarterly notifications.

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4 PERIODICITY AND STRUCTURE OF THE NOTIFICATION a. The NOTIFICATION has a quarterly periodicity and must be compiled using the relative MODEL, published in the reserved area of the website of the CENTRAL BANK (www.bcsm.sm) together with the MANUAL which contains operational indications for inserting data into the MODEL and the technical methods for transmitting the NOTIFICATION to BCSM. b. The MODEL is articulated in 11 SHEETS:

1. general data and notes;
2. automatic attention indicators;
3. supervisory capital and minimum capital coverages;
4. solvency ratio: cash assets weighted for counterparty default risk;
5. solvency ratio: weighting guarantees - commitments and calculation of coefficient;
6. large risks;
7. contractual relationships with related parties and subjects connected to them;
8. maturity transformation;
9. eligible participations;
10. census of the top 30 debtor counterparties;
11. top 30 debtor counterparties. c. Updates to the MODEL and the MANUAL are made available according to the methods provided by the second paragraph of art. VIII.II.4 of the REGULATION.

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5 GENERAL INDICATIONS FOR THE COMPLETION AND SENDING OF THE NOTIFICATION 5.1 Periodicity of transmission of the notification to BCSM a. REPORTING ENTITIES are required to respect the provisions contained in the CIRCULAR starting from the NOTIFICATION referred to September 30, 2012. b. NOTIFICATIONS must be transmitted to BCSM by the following deadlines:

• within the third month from the REFERENCE DATE for NOTIFICATIONS referred to June 30 and by April 15 of the following year for NOTIFICATIONS referred to December 31 (semi-annual notifications);
• within the second month from the REFERENCE DATE for NOTIFICATIONS referred to March 31 and September 30 (intra-semi-annual notifications).

5.2 Methods of completion of the notification a. The completion of SHEETS must be performed using the values of individual ITEMS at the accounting date to which the NOTIFICATION refers, updated with quarterly periodicity, unless otherwise provided by the CIRCULAR or the REGULATION. b. Values must be inserted in the sheets in units of euros, neglecting – with reference to individual items – fractions lower than 50 cents and rounding up to the next unit fractions equal to or higher than 50 cents. c. Accounting items expressed in currencies other than the euro must be valued in euros at current spot exchange rates at the REFERENCE DATE. However, if intangible fixed assets, fixed securities, and participations have been valued in the financial statements (if permitted) at the current exchange rate at the date of their purchase, the conversion into euros of the relative items must be carried out based on the cited exchange rate. d. The completion of notifications referred to December 31 and June 30 must be carried out considering, respectively, the accounting data used for the DRAFT FINANCIAL STATEMENTS or for the semi-annual financial statements, as specified in the remainder of this CIRCULAR. e. Any changes made during the approval of the annual financial statements by the shareholders' meeting, which determine changes in the amount of items of the NOTIFICATION, must be communicated to the Central Bank with the utmost speed (no later than 10 days from the date of the meeting), simultaneously providing for the appropriate corrections of the notifications sent, according to the methods provided for this purpose (2).

2 The obligation to correct also applies to any modifications made to the DRAFT FINANCIAL STATEMENTS by the administrative body after the sending of the NOTIFICATION (e.g., following a comparison with the statutory auditors).

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5.3 Preparation of the financial statements for the first semester and reflections for notification in matter of prudential supervision a. The administrative body of the REPORTING ENTITY draws up and approves a financial statement for the first semester (hereinafter also defined as semi-annual) with an attached synthetic report by the Management on company management. b. The semi-annual financial statement, which has no civil law value but only supervisory value, is drawn up based on the same criteria provided for the annual financial statement (BCSM Regulation n. 2016-02, subsequent amendments and integrations), proceeding to the valuations of company assets and liabilities resulting from the situation existing at June 30. c. Upon approval of the semi-annual financial statement, the administrative body also determines the amount of capitalizable semi-annual profit, understood as the difference between the annual profit and the portion thereof destined for distribution to shareholders if the profit were confirmed upon approval of the annual financial statement; such determination is left to the prudent appreciation of the administrators. d. The semi-annual financial statement must be compiled using the schema provided for the annual financial statement and sent to BCSM according to the methods established by it with the specific operational manual.

5.4 The risk position in the sheets composing the notification a. For the purposes of fulfilling the information obligations of this CIRCULAR, for risk position is meant the risk activity weighted by applying the multiplicative factors provided by the REGULATION for the calculation of the SOLVENCY RATIO. In conformity with what is provided by the REGULATION, in the different SHEETS of the NOTIFICATION, the activities included in the calculation of risk positions are determined as indicated below (3). b. In SHEETS 4 and 5, relating to the SOLVENCY RATIO, the risk position is determined considering:

• cash or commitment exposures;
• participations and interests assimilable to these;
• financial instruments of the fixed portfolio;
• financial instruments of the non-fixed portfolio (see art. VII.III.2, paragraph 3 of the REGULATION). c. In the calculation of risk positions:
• the weighting of "off-balance sheet" risk activities must be performed not considering facilities not yet operational (see definition of OPERATIONAL FACILITY);
• exposures to be included include active financial leasing operations (remaining credit and any installments accrued at the REFERENCE DATE and not yet collected) as well as creditor positions related to interbank correspondence accounts for services rendered;
• the portion already deducted from SUPERVISORY CAPITAL referred to SHAREHOLDERS must be excluded;

3 The illustration of risk activities considers first of all what is provided for SHEETS 4 and 5 for the calculation of the solvency ratio which presents the greatest articulation of regulatory provisions; for the remaining SHEETS, additional indications are provided regarding activities to be excluded or included.

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• equally excluded from the calculation of risk positions is the portion of activities already deducted from supervisory capital. d. In SHEET 3, relating to the calculation of SUPERVISORY CAPITAL, the risk position includes the activities considered for the purposes of SHEETS 4 and 5:
• within the limits of the utilized amount for cash and commitment exposures, without considering any positions of unutilized facility (available margin);
• including in the risk position also INDIRECT EXPOSURES. e. In SHEET 6, relating to LARGE RISKS, and in SHEET 7, concerning RELATED PARTIES AND SUBJECTS CONNECTED TO THEM, the risk position includes the activities considered for the purposes of SHEETS 4 and 5:
• excluding financial instruments of the non-fixed portfolio;
• including any INDIRECT EXPOSURES. Pending the issuance of provisions in matter of consolidated supervision, the compliance with provisions in matter of large risks and related parties is evaluated by the Supervisory Body considering the ratio between the total of risk positions (as determined above) and the sum of the supervisory capitals of the parent bank and the controlled financial companies (including foreign ones) authorized to exercise the activity of granting financing (4).

5.5 Classification and valuation of credits a. For the purpose of a complete control of credit risks, REPORTING ENTITIES proceed to constantly update the valuation of credits in place, based on the information temporarily available on the creditworthiness of debtors, with consequent reallocation of exposures in the relevant category (deteriorated credit exposures or performing credit exposures) in conformity with what is provided by the REGULATION. b. REPORTING ENTITIES organize themselves to ensure the effective implementation of what is disposed above, also through appropriate internal delegations capable of guaranteeing a timely reclassification and valuation of credits with respect to the moment when updates on the creditworthiness of clients are available. c. The timely update of the presumed realizable value of credits must also find correspondence in company accounting and in the periodic supervisory notifications sent to BCSM. d. The trend of credits and the valuations performed are brought to the attention of the administrative body according to the methods provided in paragraph 7 of art. VII.IX.11 of the REGULATION.

5.6 Other general indications a. In order to guarantee the unique identification of subjects (natural persons and legal entities) to whom the data refers (e.g., in the SHEET relating to LARGE RISKS), in the completion of the NOTIFICATION, the coding rules provided for the assignment of the "customer code" by the Instructions temporarily in force issued by the Financial Information Agency (5) must be used. The coding

4 Included banks. For the purpose of computing indirect exposure, the presence or absence of facilities of the reporting bank to the controlled financial company is irrelevant. 5 At the date of the IV Update of this Circular, reference is made to Instruction n. 2016-01. For example, in the case of a Sammarinese natural person, the ISS code must be used.

Page 9 of 35 of aggregations of subjects (e.g., GROUP OF CONNECTED CLIENTS OR COUNTERPARTIES) must be performed with the operational methods provided in the MANUAL. b. In the evaluation of "economic" connection links between two or more subjects, pursuant to what is provided by art. I.I.2, paragraph 1, point 38.2 of the REGULATION, one must consider the existence of links by virtue of which, with all probability, the financial difficulties of one subject could reflect on the repayment capacity of its debts by other subjects. It is therefore left to the prudent appreciation of the competent company bodies to evaluate the existence or not of the aforementioned requirement based on the complex of available information regarding the relevance of the relationships occurring between the assigned clients.

5.7 Link with the prudential supervision discipline of financial companies a. In coherence with what is provided by art. VII.II.4 paragraph 4 of the REGULATION, facilities granted by financial companies to their controlled banks, as such subject to the discipline of deductions from the supervisory capital of the same financial companies, must be computed net of any facilities received by the controlled bank (6).

5.8 Questions a. Questions regarding the provisions present in the CIRCULAR can be presented to BCSM according to the methods provided by art. VIII.II.5 of the REGULATION.

6 Example: the financial company BETA concludes an active leasing operation with its controlled bank ALFA for an amount of 1,000; the same company BETA is also the recipient of financing from ALFA for an amount of 800. For the prudential supervision discipline of ALFA (controlled bank), the two operations are irrelevant, while for the financial company BETA, a deduction from supervisory capital must be determined equal to the amount of the leasing granted net of the facility received, therefore for an amount of 200 (risk activity to be weighted as leasing to determine the risk position to be compared with the contribution of ALFA in BETA in order to obtain the value of the deduction from supervisory capital).

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6 SHEET 1. - GENERAL DATA AND NOTES a. In the SHEET General Data and Notes, the reference data of the REPORTING ENTITY and the REFERENCE DATE of the NOTIFICATION must be inserted, to be selected among those pre-filled, as well as the data relating to the "Head of Statistical Reporting", as defined in BCSM Regulation n. 2015-01 (part II title I). b. In the part "Notes to the notification", REPORTING ENTITIES can insert comments or observations regarding the data inserted, in order to better clarify its content, as well as the data and information required by the CIRCULAR and the MANUAL.

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7 SHEET 2. – AUTOMATIC ATTENTION INDICATORS a. The automatic attention indicators intend to be a valid tool to support the compilers of the NOTIFICATION, highlighting any inconsistencies between the data inserted (e.g., balancing checks) or the non-compliance with prudential requirements, favoring the consequent in-depth analysis by REPORTING ENTITIES. b. SHEET 2 reports the summary of all indicators regarding anomalies found in the completion of the entire NOTIFICATION. Normally, each individual attention indicator is present in the individual SHEETS at the points where the anomaly is detected, so that the same emerges already during the completion of the MODEL. c. The purpose of the attention indicators is merely informative; their eventual presence does not prevent nor the completion, nor the saving, nor the sending to the Central Bank of the MODEL.

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8 SHEET 3. - SUPERVISORY CAPITAL AND MINIMUM CAPITAL COVERAGES 8.1 Structure of supervisory capital a. SUPERVISORY CAPITAL is composed of basic capital and supplementary capital net of deductions, in coherence with the provisions provided in Title II of Part VII of the REGULATION and this CIRCULAR. b. For the illustration of the relationships between the individual ITEMS composing SUPERVISORY CAPITAL, reference is made to the MODEL and the MANUAL; below are provided indications for the completion of specific ITEMS, integrative of the provisions present in the REGULATION, with an initial exposition regarding NOTIFICATIONS referred to December and June and the reception in SUPERVISORY CAPITAL of profits and losses of the period.

8.2 Supervisory capital for the months of December and June a. SUPERVISORY CAPITAL referred to the month of December of each year is calculated according to accounting criteria, even if this has not yet been approved. For this purpose, REPORTING ENTITIES use the information available at the date of sending the NOTIFICATION regarding company valuations present in the DRAFT FINANCIAL STATEMENTS, approved by the administrative body. b. The amount of capitalizable profit (annual and semi-annual) that contributes to the calculation of SUPERVISORY CAPITAL, referred to the months of December and June, is verified by external auditors. For the purposes of calculating SUPERVISORY CAPITAL referred to the month of December, no further controls by external auditors are requested beyond those performed for the legal audit of the end-of-year financial statement. c. The amount of capitalizable semi-annual profit is verified by external auditors based on tools and control procedures suitable to allow the main verifications performed for year-end checks. Such verifications concern the correct application of recognition and valuation criteria, the respect of the principle of consistency in the application of such criteria, and the respect of the principle of economic accrual, except for derogations in the compilation of the financial statement to be motivated according to what is provided by art. II.II.5 of BCSM Regulation n. 2016-02. d. The activities of external auditors described in the previous paragraphs and relating to the amount of capitalizable profit must be described in a specific communication to be sent to the Central Bank, by the REPORTING ENTITY, within the terms indicated in Article III.I.2 of BCSM Regulation n. 2015-01.

8.3 Methods and times of recognition of profits and losses in supervisory capital a. The recognition of profits and losses in SUPERVISORY CAPITAL of the REPORTING ENTITY occurs through the use of ITEMS of s