General Resolution No. 7-2000 Establishing Provisions on Country Risk Management

REPUBLIC OF PANAMA
BANK SUPERINTENDENCY
GENERAL RESOLUTION No. 7-2000
(September 8, 2000)

THE BANK SUPERINTENDENT

in exercise of her legal powers, and

CONSIDERING:

That, in accordance with Number 30 of Article 17 of Law Decree 9 of February 26, 1998, it corresponds to the Superintendent to evaluate the financial indicators of banks and of the Economic Groups of which the banks are part, such as asset risks and others that the Superintendent deems convenient;

That, in accordance with Number 32 of Article 17 of Law Decree 9 of February 26, 1998, it corresponds to the Superintendent to issue the rules that, within the scope of activities permitted by Law, banks must observe so that their operations develop within adequate levels of risk;

That, the economic, social, and political environment of the debtor's domicile country may prevent such debtors from fulfilling their obligations, constituting losses in the banks' international portfolio; and

That, the need and convenience of establishing minimum criteria regarding adequate policies and procedures for the identification, review, and control of country risk in activities related to all loans, bank deposits, and securities investments have been demonstrated, for the establishment of adequate provisions caused by said risk.

RESOLVES:

ARTICLE 1. CONCEPT OF COUNTRY RISK. For the purposes of this General Resolution, country risk shall be understood as the possibility of default of the debtor's obligation derived from adverse effects in the economic, social, political environment, or due to natural disasters in a country other than Panama. This risk shall be attributed to the country where the source that generates the fund flows to obtain the recovery of the obligation and/or from which the return of the invested resources must be obtained is located.

Country risk comprises transfer risk, political risk, and sovereign risk. Transfer risk corresponds to the general inability of debtors in a specific country to fulfill their financial obligations, due to the lack of availability of the currency in which the obligation is denominated, regardless of the particular financial condition of the respective debtor. Political risk refers, among other things, to the possibility of war, civil unrest, and other situations of a purely political nature. Sovereign risk corresponds to the possibility that sovereign debtors in a specific country cannot or are not willing to fulfill their financial obligations, for reasons other than credit risk and other risks inherent in financing operations.

ARTICLE 2. POLICIES FOR THE EVALUATION OF COUNTRY RISK. Every Bank must exercise efficient management of its resources abroad, which includes effective policies and procedures to identify, manage, quantify, and control the risk assumed, applying the utmost care and rigor in the analysis and monitoring of country risk.

The use of resources in other countries requires the establishment of effective policies to reduce and manage risk. In view of the foregoing, it shall correspond to the Board of Directors and/or the General Management of each Bank:

a. Establish policies regarding the use of loans, bank deposits, and securities investments abroad;

b. Establish adequate geographic diversification of resources, maximum levels of credit exposure, bank deposits, and securities investment by country;

c. Establish country risk evaluation criteria, taking into consideration economic and social indicators, economic policy, the balance of payments, and the stability of the political regime in accordance with what is developed in Article 3 of this General Resolution; and

d. Establish the percentages and/or guidelines for the calculation of the provision for country risk, considering the criteria established in this General Resolution, which must form part of the corresponding manuals.

ARTICLE 3. ELEMENTS FOR THE EVALUATION OF COUNTRY RISK. The objective of this management is to ensure that operations carried out by the Bank mainly in the capital, debt, money, and exchange markets do not expose it to losses that could threaten its equity and/or liquidity.

The Bank will consider the following elements to evaluate and classify country risk:

a. The rating assigned to the country by internationally recognized rating agencies, as established in the attached Annex 1; or

b. The evaluations assigned to the country by international financial organizations or specialized banks; or

c. The rating assigned to the country by specialized advisory firms hired by the Bank; or

d. Other sources of information, analysis, or studies to which the Bank has access.

ARTICLE 4. INFORMATION ON COUNTRY RISK. Every Bank must keep at the disposal of the Superintendency, at least the following information related to country risk:

a. File of each country where the Bank maintains loans, bank deposits, and securities investment.

b. Analysis method of each country evaluated, the report containing all relevant information and the conclusions that determine the risk category assigned to the respective country.

c. Period, method of adjustment, and monitoring of country risk.

d. Any other that the Superintendency deems appropriate to request.

ARTICLE 5. CATEGORIES OF COUNTRY RISK CLASSIFICATION. For the purposes of classifying a country, the Bank will take the elements detailed in this General Resolution. In accordance with the foregoing and as a consequence of economic, political, and social changes, the categories in which countries must be classified are: normal risk, moderate risk, risk with difficulties, high risk.

ARTICLE 6. COUNTRIES WITH NORMAL RISK. Countries classified in this category are those that have investment grade, rated from level one (1) to level four (4) by rating companies (See Annex 1), in addition to being countries that punctually fulfill their international financial obligations, with the financing of their foreign trade activities, their economic, political, and social performance demonstrates economic capacity and credibility.

ARTICLE 7. COUNTRIES WITH MODERATE RISK. Countries that do not present significant macroeconomic imbalances will be included in this category, that is, their internal and external imbalances are controllable, but there are doubts about the fulfillment of their international financial obligations (See Annex 1).

This category is the lowest risk in which a country presenting one or more of the following situations can be included:

a. There are reasonable doubts as to whether the country will be able to maintain its macroeconomic equilibriums in the medium term; or

b. Its level of indebtedness makes it difficult to contract new credits under normal conditions; or

c. In the payment of its debt service, any of the following circumstances are observed:

i. It interrupted, totally or partially, the amortization of its debts in the last five years, but it normally carried out the interest service;

ii. It has renegotiated its debt in the last five years, totally or partially, extending its maturity date.

ARTICLE 8. COUNTRIES WITH RISK WITH DIFFICULTIES. Countries whose internal and external imbalances are common or recurrent will be included in this category. Their economies generally present delays in their international financial obligations.

The country presenting one or more of the following situations will be included in this category:

a. Countries that have a high-risk rating, from levels one (1) to three (3) (See Annex 1); or

b. There is no clarity as to whether the agreed renegotiations correspond to a definitive adjustment to their payment capacity; or

c. In its payment behavior, any of the following circumstances are observed:

i. It interrupted, totally or partially, the amortization of its debts in the last two years, although it normally carried out the interest service;

ii. In the last two years it has renegotiated its debt, extending its maturity date, or demonstrates interest in carrying out such renegotiations;

or,

iii. It has refinanced a substantial part of its interests with new credits in the last two years.

d. It presents a shortage of international reserves.

ARTICLE 9. COUNTRIES WITH HIGH RISK. This category includes countries with internal and external imbalances, which translate into high inflation rates, low or even negative GDP growth, and serious difficulties in financing the balance of payments. This scenario leads to increasing levels of rescheduling of their external commitments, with little possibility of payment.

The country presenting one or more of the following situations must be classified in this category:

a. Its rating by a rating company is high risk and is at levels four (4) to nine (9) (See Annex 1).

b. In its payment behavior, any of the following circumstances are observed:

i. It has interrupted, totally or partially, the payment of interest in the last two years;

ii. It has imposed a unilateral moratorium on its debts in the last two years.

ARTICLE 10. CRITERIA FOR THE APPLICATION OF THE PROVISION FOR COUNTRY RISK. The Bank will determine country risk in accordance with the provisions established in this General Resolution when evaluating loans based on Agreement 6-2000 and securities investments based on Agreement 7-2000. The Bank will fix the appropriate percentages to establish the provision caused by country risk in the categories of moderate risk, risk with difficulties, and high risk. This provision will subsequently be evaluated by the Bank's external auditors and by the Bank Superintendency.

It is expressly understood that when a loan, bank deposit, or securities investment has a real guarantee that is located and realizable in Panama, the portion covered by the guarantee will be exempt from the provision.

The Superintendency may request an adjustment to the provision established by the Bank when, in its judgment, it is appropriate.

ARTICLE 11. APPLICATION OF THE PROVISION FOR COUNTRY RISK FOR FOREIGN BANKS. In the case of branches of Foreign Banks with General License or International License, the Bank may credit the provision of the loans, bank deposits, and securities investments of the branch in Panama by its Head Office abroad, through a certificate issued by the external auditors of said Head Office and/or by its respective Supervisory Body; in the event that the foregoing does not apply, such banks will carry out the provisions for country risk based on Article 10 of this General Resolution.

The Superintendency reserves, nevertheless, the faculty to evaluate the sufficiency of said provision and to order the Bank to constitute provisions in Panama at any time.

ARTICLE 12. SUBSEQUENT CHANGES IN CLASSIFICATION. When a country is reclassified into a category of higher or lower risk, the Bank may make the necessary adjustments in the provision, without prejudice to subsequent reviews that the Superintendency may deem appropriate to carry out.

ARTICLE 13. ACCOUNTING PROVISIONS AND DISCLOSURE OF INFORMATION. Banks must account for and disclose in their Audited Financial Statements the information that allows the user to evaluate the country risk profile in the loans, bank deposits, and securities investments that they maintain abroad based on the criteria established in this General Resolution, in the International Accounting Standards (IAS) and the Generally Accepted Accounting Principles in the United States of America (US-GAAP).

ARTICLE 14. VALIDITY. This General Resolution will enter into force from January 1 (1) of two thousand one (2001).

NOTIFY AND COMPLY

THE BANK SUPERINTENDENT
Delia Cárdenas
AAHB

ANNEX No. 1
International long-term foreign currency ratings.

Level
Standard & Poors
Moody's
Duff & Phelps
Fitch IBCA
Thomson Financial Bankwatch
Explanation
AAA
Aaa
AAA
The highest quality
AA+
AA
AA-
Aa1
Aa2
Aa3
AA+
AA
AA-
AA+
AA
AA-
AA
High quality
A+
A
A-
A1
A2
A3
A+
A
A-
A+
A
A-
A
A
Great payment capacity
Investment Grade
BBB+
BBB
BBB-
Baa1
Baa2
Baa3
BBB+
BBB
BBB-
BBB+
BBB
BBB-
BBB
Adequate payment capacity
BB+
Ba1
BB+
BB+
BB+
Risk
BB
Ba2
BB
Moderate
BB-
Ba3
BB-
BB-
BB-
Probable fulfillment of obligations; Daily uncertainty.
B+
B1
B+
B+
B+
B
B2
B
B-
B3
B-
B-
B-
Vulnerability to adverse economic conditions.
CCC+
Caa1
CCC+
CCC+
CCC+
CCC
Caa2
CCC
CC-
Caa3
CC-
CC-
CC-
CC
High risk
C
Ca
C
Propensity to default on commitments.
D