Instruction No. 22/2021 of 27 October

INSTRUCTION NO. 22/2021 of 27 October
SUBJECT: FINANCIAL SYSTEM

• Interest Rate Risk in the Banking Book

Whereas it is necessary to assess the impact of a standardized interest rate shock on the economic value of future cash flows associated with the banking book and net interest income; Pursuant to the combined provisions of points (d) and (f) of paragraph 1 of Article 31, and point (c) of paragraph 1 of Article 54, both of Law No. 24/21 of 18 October, the Law of the National Bank of Angola, and Article 203 of Law No. 14/21 of 19 May, the Law on the Regime of Financial Institutions;

I DETERMINE:

1. Purpose
   This Instruction establishes the interest rate risk analysis requirements that Banking Financial Institutions must comply with.

2. Scope
   This Instruction applies to Banking Financial Institutions under the supervision of the National Bank of Angola, hereinafter referred to as Institutions, as provided for in Law No. 14/21 of 19 May, the General Law on the Regime of Financial Institutions.

3. Definitions
   Without prejudice to the definitions established in Law No. 14/21 of 19 May, for the purposes of this Instruction, the following shall be understood:

CONTINUATION OF INSTRUCTION NO. 22/2021 Page 2 of 10 a) Yield Curve: the temporal structure of interest rates that establishes a relationship between the yields of a set of instruments with the same credit risk and currency, but with different maturities. b) Expected Cash Flows: future revenue flows of an entity or investment calculated through the difference between expected receipts and payments at each future point in time. c) Net Interest Margin: the difference between total interest income and total interest expenses. d) Short Position: a contractual position assumed by an investor that benefits from a price decrease and suffers a loss from a price increase. e) Long Position: a contractual position assumed by an investor that benefits from a price increase and suffers a loss from a price decrease. f) Interest Rate Risk: arising from movements in interest rates resulting from mismatches in the amount, maturities, or repricing periods of interest-bearing financial instruments to be received and paid. g) Economic Value: the present value of expected cash flows from the assets, liabilities, and off-balance sheet items of the Institution.

4. General Provisions
   4.1. Institutions must report detailed information to the National Bank of Angola regarding their level of exposure to interest rate risk in the banking book, by submitting the forms set out in Annex I to this Instruction, duly completed. These forms must consider an instantaneous positive or negative shock of 2% (two percent) in interest rates, resulting in a parallel shift of the yield curve by the same magnitude, estimating the impact on the present value of cash flows and on the net interest margin of the Institutions.

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4.2. For the purposes of the preceding subpoint, in the case of a financial group, the parent company must report the information according to the consolidation perimeter, as provided for in Article 5 of Notice No. 08/21 of 05 July on Prudential Requirements.
4.3. Institutions must report information to the National Bank of Angola regarding positive or negative interest rate movements that imply the most adverse scenario for them.

5. Additional Information
   Institutions must report qualitative information to the National Bank of Angola regarding their exposure to interest rate risk in the banking book, which must include:
   a) A summary description of the types of positions included in the reporting; and, b) A description of the main assumptions made, including those relating to the early repayment of loans and the effective maturity of deposits with no fixed maturity date.

6. Reporting
   6.1. Institutions must report to the National Bank of Angola the information required in numbers 4 and 5 of this Instruction by the end of the month following the quarter to which it relates.
   6.2. Whenever, after conducting shocks, there is a potential reduction in economic value equal to or greater than 20% (twenty percent) of regulatory capital, Institutions must assess their level of exposure to interest rate risk in the banking book on a continuous basis and, within one business day, notify the National Bank of Angola, which may apply corrective measures.
   6.3. Taking into account the assumed interest rate risk levels, the specificity of the Institution, and the analysis of the reported information, the National Bank of Angola may determine corrective measures whenever it deems necessary.

CONTINUATION OF INSTRUCTION NO. 22/2021 Page 4 of 10
6.4. Without prejudice to other procedures, the National Bank of Angola may determine the following:
a) That the Institution report additional information or analyses regarding its banking book exposure subject to interest rate risk; b) Impose improvements to the policies and processes for managing interest rate risk in the banking book; c) Require the acquisition or disposal of financial instruments to reduce exposure to interest rate risk in the banking book; and, d) Require an increase in the level of regulatory capital.

7. Adjustments to the Shock
   7.1. The National Bank of Angola may determine updates it deems appropriate regarding the magnitude and frequency for reporting the standardized shock, established respectively in subpoint 4.2 of number 4 and subpoint 6.1 of number 6 of this Instruction, based on the macroeconomic environment or specific to each Institution.
   7.2. The National Bank of Angola may define differentiated standardized interest rate shocks for different currencies whenever:
   a) Exposure to currencies other than the Kwanza is verified in a given Institution or in the financial system; and, b) Exposure of a given institution to the macroeconomic context is verified.

8. Sanctions
   Non-compliance with the mandatory rules established in this Instruction constitutes an offense punishable under Law No. 14/21 of 19 May, the General Law on the Regime of Financial Institutions.

CONTINUATION OF INSTRUCTION NO. 22/2021 Page 5 of 10
9. Transitional Provisions
9.1. Institutions must comply with the provisions of this Instruction from 31 December 2021.
9.2. For the purposes of subpoint 4.1 of this Instruction, Institutions must provide the information required in Article 37 of Notice No. 08/21 of 05 July on Prudential Requirements on an individual basis, monthly, and on a consolidated basis, quarterly, until August 2022.
9.3. Institutions must provide the information required in Article 37 of Notice No. 08/21 of 05 July on Prudential Requirements, on both individual and consolidated bases, quarterly, from September 2022 onwards.

10. Interpretation and Omissions
    Doubts and omissions arising from the interpretation and application of this Instruction shall be resolved by the National Bank of Angola.

11. Entry into Force
    This Instruction enters into force on the date of its publication.

PUBLISH.
Luanda, 27 October 2021.
THE GOVERNOR
JOSÉ DE LIMA MASSANO

CONTINUATION OF INSTRUCTION NO. 22/2021 Page 6 of 10
ANNEX I
Table "Interest Rate Risk in the Banking Book"

CONTINUATION OF INSTRUCTION NO. 22/2021 Page 7 of 10

CONTINUATION OF INSTRUCTION NO. 22/2021 Page 8 of 10
ANNEX II
Filling Notes for the Table "Interest Rate Risk in the Banking Book"

1. Balance sheet positions and off-balance sheet elements included in the banking book and exposed to interest rate risk must be allocated to the respective time band, considering, for fixed-rate instruments, their respective residual maturity periods, and for variable-rate instruments, the period until the next interest rate repricing.
2. Asset and liability amounts must, where applicable, be valued at their fair value net of specific provisions.
3. Positions in financial derivatives subject to interest rate risk must be treated as described in Annex I of Instruction No. 16/21 of 27 October on the calculation and requirement of regulatory capital for market risk.
4. The exchange rate to be used for instruments contracted in foreign currency is the reference exchange rate of the National Bank of Angola on the date of reporting.
5. Whenever elements denominated in a foreign currency and exposed to interest rate risk represent more than 5% (five percent) of the banking book, a specific analysis and reporting must be carried out for that currency.
6. Attached to the tables, the following information must be explicitly stated, with the appropriate level of detail:
   a) How elements whose effective maturity or repricing periods diverge from contractual terms were considered; b) Calculations performed and any assumptions made regarding variations in line items that indicate an impact due to changes in interest rates, but are not directly dependent on the interest rate, notably the effects on income recorded as commissions; and c) Assumptions admitted regarding the sensitivity of non-remunerated deposits to interest rate variations.
7. The elements necessary for quantitative reporting to the National Bank of Angola regarding interest rate risk in the banking book are described below:
   (A) Weighting factor, calculated based on:
   i) An estimate of the modified duration of banking book elements with maturity equal to the average term of each time band, assuming that all assets, liabilities, and off-balance sheet items are remunerated at a rate of 5% (five percent) and that the discount rate for the entire maturity spectrum is also 5% (five percent); and ii) A hypothetical parallel shift of the yield curve by 2% (two percent). (B) Weighted position = position in each time band multiplied by (A). (C) Cumulative impact of a parallel shift of the yield curve by 2% (two percent), corresponding to the sum of positions in each time band multiplied by the weighting factor. (D) Regulatory capital. (E) Impact of the shock on regulatory capital, in percentage, obtained by dividing the cumulative impact of a parallel shift of the yield curve by 2% (two percent) (C) by regulatory capital (D). (F) Weighting factor, calculated based on:
   i) the average residual term of each maturity band; and ii) a hypothetical parallel shift of the yield curve by 2% (two percent).
   (G) Weighted position = position in each time band multiplied by the weighting factor (F).

CONTINUATION OF INSTRUCTION NO. 22/2021 Page 9 of 10 (H) Cumulative impact of a parallel shift of the yield curve by 2% (two percent), calculated by the sum of positions in each time band multiplied by the weighting factor. (I) Net interest margin (interest income – interest expenses). (J) Impact of the shock on the net interest margin, in percentage, obtained by dividing the cumulative impact of a shift of the yield curve by 2% (two percent) (H) by the net interest margin (I).