Norm on Reform of Articles 4, 5, 6 and 7 of the Capital Adequacy Norm

Page 1 of 9 Resolution No. CD-SIBOIF-1087-1-DIC4-2018 Dated December 4, 2018

NORM ON REFORM OF ARTICLES 4, 5, 6 AND 7 OF THE NORM ON CAPITAL ADEQUACY

The Board of Directors of the Superintendence of Banks and Other Financial Institutions,

CONSIDERING

I That on October 27, 2010, the Norm on Capital Adequacy, contained in Resolution No. CD-SIBOIF-651-1-OCTU27-2010, published in La Gaceta, Official Journal No. 18, of January 28, 2011, was approved.

II That it is necessary to adapt the provisions of the Norm on Capital Adequacy to the Accounting Framework applicable to banks and financial institutions, established by resolution CD-SIBOIF-1020-1-OCT10-2017, which is based on International Financial Reporting Standards (IFRS) considering the norms issued by this Superintendence of Banks.

III That since the application of the Accounting Framework requires adjustments to Equity for valuation in "Other Comprehensive Income" and for "Transition Adjustments"; for the purposes of the adequacy calculation, positive adjustments will not count as capital components, since the former do not correspond to sales or cash recovery of assets, and the latter are recognized in accumulated results until the asset that generated the adjustment is derecognized. In view of the foregoing, these adjustments do not have the capacity to absorb losses that would allow reducing the risk of insolvency, and therefore, do not meet the prudential requirements to classify them in the regulatory capital that backs the assumed risks.

IV That according to the considerations set forth above and based on the authority granted by article 3, items 3) and 13), and article 10, item 1), of Law 316, Law of the Superintendence of Banks and Other Financial Institutions, and its reforms; contained in Law No. 974, Law of the Nicaraguan Legal Digest of the Banking and Finance Matter, published in La Gaceta, Official Journal No. 164, of August 27, 2018, and its reforms.

In exercise of its powers,

HAS ISSUED

The following: Resolution No. CD-SIBOIF-1087-1-DIC4-2018

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NORM ON REFORM OF ARTICLES 4, 5, 6 AND 7 OF THE NORM ON CAPITAL ADEQUACY

FIRST: Articles 4, 5, 6 and 7 of the Norm on Capital Adequacy, contained in Resolution No. CD-SIBOIF-651-1-OCTU27-2010, of October 27, 2010, published in La Gaceta, Official Journal No. 18, of January 28, 2011, are hereby amended, which shall read as follows:

"Art. 4 Components of Secondary Capital.- Secondary capital shall be composed of the following:

A. Donations and other non-capitalizable contributions available to cover losses of the financial institution; which may not be refunded under any concept.

B. Other Equity Reserves;

C. Accumulated Results of Previous Periods that do not qualify as primary capital;

D. Results of the Current Period;

E. Cumulative Preferred Shares and other hybrid capital instruments that meet the following characteristics:

1. Unsecured (unbacked), subordinated and fully paid;
2. Of a permanent nature (no maturity), or with maturity with a mandatory conversion clause to ordinary capital;
3. Not redeemable at the holder's option or redeemable with prior authorization of the Superintendent;
4. Available to cover losses of the financial institution;
5. When the instrument contains a mandatory performance payment clause, it must allow for deferral in case the financial institution's profitability does not allow for payment.
6. There are no clauses for early payment in case of deterioration in the credit quality of the institution.
7. Not financed, directly or indirectly, by the institution for the purchase of the instrument.

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8. There are no accelerated amortization clauses (step up) or other incentives for early amortization.
9. The instrument may not be purchased by the institution or by any related party in which it controls or exercises dominant influence.
10. The instrument may be purchased by investors, in amounts not less than the equivalent in national currency to fifty thousand dollars (US$50,000.00).

When the financial institution incurs in any of the situations that warrant the application of preventive measures as established in the General Banking Law, the Superintendent may order the financial institution to immediately capitalize, or in its absence, suspend the payment of interest on the hybrid capital instruments referred to in this item, while the circumstances that gave rise to the order persist. For such purposes, the contracts of said instruments to be considered as secondary capital must incorporate a clause authorizing the Superintendent to execute the aforementioned.

F. Subordinated term debt and redeemable preferred shares of limited life that meet the following characteristics:

1. Unsecured (unbacked), subordinated and fully paid;
2. With original maturity terms greater than five years; and
3. Not mandatorily convertible to ordinary capital.
4. There are no clauses for early payment in case of deterioration in the credit quality of the institution;
5. Not financed directly or indirectly by the institution for the purchase of the instrument;
6. The instrument may not be purchased by the institution or by any related party in which it controls or exercises dominant influence;
7. There are no accelerated amortization clauses (step up) or other incentives for early amortization;
8. The instrument may be purchased by investors, in amounts not less than the equivalent in national currency to fifty thousand dollars (US$50,000.00).

The instruments referred to in this item may not exceed fifty percent of primary capital. Likewise, during the last five years prior to the maturity of said instruments, only the following percentages may be recognized as part of secondary capital:

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When the financial institution incurs in any of the situations that warrant the application of preventive measures as established in the General Banking Law, the Superintendent may order the financial institution to immediately capitalize, or in its absence, suspend the payment of interest on the subordinated term debt referred to in this item, while the circumstances that gave rise to the order persist. For such purposes, the contracts of said instruments to be considered as secondary capital must incorporate a clause authorizing the Superintendent to execute the aforementioned.

The capitalization of the subordinated term debt referred to in this item, borne by debtor financial institutions that incur in any of the situations that warrant the application of preventive measures established in the General Banking Law, shall not apply to multilateral financial entities, except for the suspension of interest payments.

G. Generic Provisions: a. Voluntary generic provisions: Refers to credit provisions constituted by the financial institution voluntarily to cover unidentified losses. For the purposes of secondary capital calculation, these generic provisions may not exceed 1.25% of the total risk-weighted credit assets. b. Countercyclical Provision Fund: Refers to the countercyclical provision fund constituted by the financial institution, in accordance with the Norm on Constitution of Countercyclical Provisions.

In accordance with article 20 of the General Banking Law, secondary capital may not exceed one hundred percent of primary capital. Additionally, the positive balance generated from the Net Other Comprehensive Income account as part of the equity of the financial institution shall not count as part of secondary capital.

Art. 5 Deductions.- The following items shall be deducted from the Capital Adequacy calculation:

a) The following shall be deducted from the sum of primary capital components:

Maturity Percentages Fifth year before maturity 80% Fourth year before maturity 60% Third year before maturity 40% Second year before maturity 20% Last year before maturity 0%

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1. The book value of goodwill acquired from a business combination, derived from mergers or acquisitions of institutions.
2. Accumulated results of previous periods in case of losses.
3. Non-capitalizable donations that have refund conditions.
4. Other Net Assets of Amortization: Taxes paid in advance, other expenses paid in advance, balance of the deferred income tax account less transition adjustment, improvements to properties received in lease, software, other intangible assets, and stationery, supplies and other materials. These accounts will also not be counted within the risk-weighted assets. All these assets are net of amortization, depreciation and impairment.

b) The following shall be deducted from the sum of secondary capital components:

1. Results of the Current Period, in case of losses.
2. The negative balance of the Net Other Comprehensive Income account.
3. The amount of gain from sales with financing of non-financial assets, plus the amount for revaluations of those assets, registered before the sale as a transition adjustment to January 1, 2018 and adjustment for revaluation of Other Comprehensive Income. Once the cost value of the non-financial asset has been fully recovered, the aforementioned gain and revaluation will cease to be deducted from secondary capital.
4. The balance of the subaccounts Non-Distributable Exercise Result and Non-Distributable Accumulated Results of Previous Exercises.

c) The following shall be deducted from the Capital Calculation Base:

1. Any pending adjustment to be constituted;
2. The book value of participations in capital instruments issued by subsidiaries and associates. Likewise, participations in joint ventures will be deducted. These investments will also not be counted in the computation of risk assets contained in article 6 of this norm.

Capital instruments, for the purposes of the application of this item, are understood to be any of the following: common or ordinary shares, preferred shares, other titles of participation in the capital of the issuing entity, and subordinated debt instruments.

Art. 6 Risk-Weighted Credit Assets.- Risk assets shall be weighted as follows:

A) With a weighting of zero percent (0%) of their value, the following items:

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1. Cash, legal reserve deposits and other deposits at the Central Bank of Nicaragua, as well as balances of effects in collection and local remittances in transit.
2. Investments in debt instruments issued in national or foreign currency by the Central Government or the Central Bank of Nicaragua, all in accordance with the Law.
3. Credits granted in national or foreign currency to the Central Government or the Central Bank of Nicaragua, all in accordance with the Law.
4. Investments in debt instruments issued by Multilateral Credit Organizations of which the country is a member, qualified as first-tier institutions as established in the norm regulating the matter on limits in deposits and investments.
5. Balances of third-party credits and contingent operations, guaranteed with debt instruments issued in national or foreign currency by the Central Government or the Central Bank of Nicaragua.
6. Debt instruments issued by third parties, guaranteed with debt instruments issued in national or foreign currency by the Central Government or the Central Bank of Nicaragua.
7. Balances of credits and contingent operations guaranteed with deposits in the same financial institution endorsed in favor of said institution.

B) With a weighting of twenty percent (20%) of their value, short-term self-liquidating contingent operations (documentary letters of credit).

C) With a weighting of fifty percent (50%) of their value, mortgage loans for housing granted in national currency without value maintenance.

D) With a weighting between zero and one hundred fifty percent of their value (0% to 150%), the following items:

1. Assets (credits, deposits and investments), guarantees, bonds and other contingent operations net of provisions, depreciation, amortizations and impairments, made with financial institutions of the country or abroad. Likewise, demand deposits and remittances of documents to be deposited in said entities. All of the above according to the long-term risk rating of the issuer.
2. Third-party credits and contingent operations guaranteed by guarantees, bonds and other contingent operations of foreign financial institutions according to the long-term risk rating of the issuer.
3. Investments in debt instruments issued by foreign states or central banks according to the long-term sovereign risk rating of the issuer.

The risk rating of long-term issuances will be in accordance with the ratings of the following Rating Agencies:

Weighting Risk Rating Agencies Fitch IBCA Moody's Investors Services Standard & Poor's Corporation Dominion Bond Rating Services Limited Kroll Bond Rating Agency, Inc. Centroamerican Rating Society, S.A. Pacific Credit Rating, S.A. de C.V. 0% AAA to AA- Aaa to Aa3 AAA to AA- AAA to AA- AAA to AA- AAA to AA- AAA to AA- 20% A+ to A- A1 to A3 A+ to A- A+ to A- A+ to A- A+ to A- A+ to A- 50% BBB+ to BBB- Baa1 to Baa3 BBB+ to BBB- BBB+ to BBB- BBB+ to BBB- BBB+ to BBB- BBB+ to BBB- 100% BB+ to B- and Unrated Ba1 to B3 and unrated BB+ to B- and unrated BB+ to B- and unrated BB+ to B- and unrated BB+ to B- and unrated BB+ to B- and unrated 150% Below B- Below B3 Below B- Below B- Below B- Below B- Below B-

The Superintendent may update the above table in case of new authorized and registered risk rating agencies in the registry kept by the Superintendence for these purposes, establishing the link between the rating agency's scale and the corresponding risk weighting. Likewise, it may be updated when new internationally recognized risk rating agencies are determined, or in case such entities modify their risk rating nomenclatures; which will be informed via circular to financial institutions.

In the case of more than one risk rating existing, to determine the corresponding weighting, the lower rating among those published by the risk rating agencies will be applied.

E) With a weighting of sixty to one hundred twenty-five percent (60% to 125%) of their value, the following credit operations, exposed to credit foreign exchange risk:

1. Consumer credits granted in foreign currency and in national currency with value maintenance will be weighted at one hundred twenty-five percent (125%) of their value.
2. Mortgage loans for housing granted in foreign currency and in national currency with value maintenance will be weighted at sixty percent (60%) of their value. Credits for social interest, single-family and multi-family housing, referred to in Law No. 677, Special Law for the Promotion of Construction of Social Interest Housing and Access to Social Interest Housing, published in La Gaceta, Official Journal No. 80, of May 4, 2009, and its reforms, granted in foreign currency and in national currency with value maintenance in amounts that do not exceed the values established in the aforementioned Law No. 677 for the types of housing mentioned above, will be weighted at fifty percent (50%) of their value.
3. Commercial credits and microcredits granted in foreign currency and in national currency with value maintenance to non-foreign exchange generating debtors will be weighted at one hundred twenty-five percent (125%) of their value; otherwise, they will be weighted at one hundred percent (100%). For the purposes of this norm, foreign exchange generating debtors are those whose source of income comes from:

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i. Financing operations of export goods or merchandise involving a sales contract between the trading entity and the producer, in which the corresponding payment in foreign currency or national currency with value maintenance is established; ii. Export operations of services or provision of services to exporters, involving an export or service provision contract, in which the corresponding payment in foreign currency is established.

The above cases must be duly evidenced by the institution. The purchase of foreign exchange in the exchange market or the mere fact that the prices of the goods or services it trades are expressed in foreign currency shall not be considered as the debtor being a foreign exchange generator.

F) With a weighting of one hundred percent (100%) of their value:

1. Credits (commercial, consumer or personal, microcredit) including contingent operations (bonds, guarantees, granted guarantees, standby letters of credit) granted in national currency without value maintenance; accounts receivable and any other obligation.
2. Investments in public offering debt instruments issued by legal entities of the country made in accordance with the regulations governing limits on deposits and investments.
3. Items corresponding to assets not mentioned in this article.

Art. 7 Notional Amount of Foreign Exchange Risk Assets.- The notional amount of foreign exchange risk assets shall be understood as the sum of the net nominal positions, long or short, previously weighted.

For the purposes of calculating the net long or short nominal position, it must:

A. Calculate separately for national currency with value maintenance and for foreign currency, the net nominal position, which will be measured through the difference between the balances of asset and liability accounts, including in these accumulated interest, provisions, impairments, depreciation and amortizations. In the case that the resulting difference is positive (assets greater than liabilities), it will be considered as a net long nominal position, to which a weighting of 50% will be applied, and in case it is negative (liabilities greater than assets), it will be considered as a net short nominal position, to which a weighting of 100% will be applied. The net nominal position in national currency without value maintenance will not be included in this calculation.

B. Sum the absolute value of the weighted net nominal positions, long and short, to obtain the notional amount of foreign exchange risk assets.

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SECOND: Since the application of the Accounting Framework applicable to banking and financial institutions, established by resolution CD-SIBOIF-1020-1-OCT10-2017, requires adjustments to Equity for valuation in "Other Comprehensive Income" and for "Transition Adjustments"; for the purposes of the adequacy calculation, the following guidelines will be followed:

a) Adjustments registered in the "Transition Adjustments" account will not form part of the capital adequacy base, until the asset that generated it has been realized (disposed of or received total cash flows) and reclassified to the accumulated results account. These adjustments will also not be taken as part of the risk-weighted assets, being deducted from the assets that generated them. When the adjustment registered in the Transition Adjustment account of an asset becomes greater than its book value, the deduction of said adjustment to the asset will not apply.

b) The positive balance generated by the application of the Accounting Framework, in the "Net Other Comprehensive Income" account, will not count towards meeting capital adequacy and minimum social capital requirements.

c) In case the application of the aforementioned Accounting Framework generates a negative balance in the "Net Other Comprehensive Income" account, it must be deducted from the capital adequacy calculation base.

THIRD: The amount of the net adjustment registered in the accumulated results account of the opening financial position statement of January 1, 2018 as required in IFRS 1, will be deferred in equal amounts over a period of 60 months, to be counted as part of secondary capital. This provision is excepted for the adjustment resulting from the application of NIC 19 Employee Benefits registered on January 1, 2018. Likewise, the increase or decrease determined by comparing the balance of the "Results of the Period" account with a cutoff date of December 31, 2018 obtained in accordance with the Single Chart of Accounts (MUC), with the balance determined for that same date, obtained by the application of the new accounting framework in the transition period from January 1, 2018 to December 31, 2018, will also be deferred.

FOURTH: The annexes of the Norm on Capital Adequacy are modified in order to adjust them to the new accounting framework applicable to banking and financial institutions, which are attached to this resolution.

FIFTH: The provisions established in this norm will be applicable from January 1, 2019.

SIXTH: This norm will enter into force from its notification, without prejudice to its subsequent publication in La Gaceta, Official Journal.

Annexes 1, 2, 3, 4, 5, 6 A1 and 6 A2 will be incorporated at the end of this. (F) S. Rosales C (F) M. Díaz O. (F) Fausto Reyes B. (F) Illegible (Silvio Moisés Casco Marenco) (F) Illegible (Rafael Ángel Avellán Rivas) Secretary

RAFAEL ÁNGEL AVELLÁN RIVAS Secretary of the Board of Directors SIBOIF