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

Resolution No. CD-SIBOIF-926-4-ENE26-2016
Dated January 26, 2016

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

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

CONSIDERING

I
That Article 2 of Law No. 316, the Law of the Superintendence of Banks and Other Financial Institutions, empowers the Superintendence to safeguard the interests of depositors who entrust their funds to financial institutions.

II
That to preserve public safety and confidence in said financial institutions, the Superintendence must promote and control their solvency, establishing a relationship between the capital calculation base and credit and notional risk assets.

III
That it is necessary to regulate what is established in Articles 19 and 20 of Law No. 561, the General Law of Banks, Non-Bank Financial Institutions, and Financial Groups, regarding the minimum required capital and credit and notional risk assets.

IV
That Article 10 of Law 316, the Law of the Superintendence of Banks and Other Financial Institutions, and its reform contained in Law 552, the Law of Reforms to the aforementioned Law 316, empower the Board of Directors of the Superintendence to issue the norms and provisions necessary for compliance with the aforementioned laws;

V
That in order to improve the quality of capital of financial institutions, it is necessary to deduct from primary capital those assets with null value in a liquidation, such as, prepaid taxes, other prepaid expenses, deferred income tax, improvements to leased properties, software, other deferred charges, and stationery, supplies, and other materials.

VI
That it is required to adjust the calculation methodology for the notional amount of assets for exchange rate risk to the dynamics of the country's exchange rate policy.

In exercise of its powers,

HAS ISSUED

CD-SIBOIF-926-4-ENE26-2016

The following:

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

FIRST: Articles 4, 5, 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, and its reforms, are hereby reformed, 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 cannot be refunded under any concept.

B. Adjustments for Revaluation of Assets (Fixed Assets). These adjustments cannot be taken into account as a component of secondary capital, while the Board of Directors of the Superintendence has not issued a norm regulating this matter.

C. Other Equity Reserves;

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

E. Results of the Current Period;

F. 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 clause for mandatory payment of yield, it must allow for deferral in case the profitability of the financial institution does not allow for its 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.
8) There are no accelerated amortization clauses (step up) or other incentives for early amortization.
9) The instrument cannot 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 Law of Banks, 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 subsection, 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.

G. 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 cannot 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 subsection cannot 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:

[Table omitted for brevity in thought, but present in source logic]

When the financial institution incurs in any of the situations that warrant the application of preventive measures as established in the General Law of Banks, 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 subsection, 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 subsection, borne by debtor financial institutions that incur in any of the situations that warrant the application of preventive measures established in the General Law of Banks, will not be applicable to multilateral financial entities, except for the suspension of interest payments.

H. Generic Provisions: Refers to credit provisions constituted voluntarily by the financial institution to cover unidentified losses. For the purposes of calculating secondary capital, these generic provisions cannot exceed 1.25% of the total risk-weighted credit assets.

In accordance with Article 20 of the General Law of Banks, secondary capital cannot exceed one hundred percent of primary capital.

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

a) The following will 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%

1) The book value of purchased goodwill, derived from mergers or acquisitions of institutions, both those assigned to fixed assets and those not assigned (accounted for in deferred charges).
2) Accumulated results of previous periods in case of losses.
3) Non-capitalizable donations that have refund conditions.
4) Other assets accounted for in deferred charges net of amortizations: prepaid taxes, other prepaid expenses, deferred income tax, improvements to leased properties, software, other deferred charges, and stationery, supplies, and other materials. These accounts will also not be counted within the assets.

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

1) Results of the Current Period, in case of losses.
2) Valuation deficits for available-for-sale investments.

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

1) Any pending adjustments to be constituted;
2) The book value of investments in capital instruments issued by subsidiaries, if the investing financial institution exercises direct or indirect control over the majority of the capital of the issuing entity; and associates, if the investing financial institution or any entity member of the group exercises direct or indirect control over a percentage equal to or greater than 20% of the capital of the issuing entity. 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 subsection, are understood to be any of the following: common or ordinary shares, preferred shares, other participation titles in the capital of the issuing entity, and subordinated debt instruments.

Art. 7 Notional Amount of Assets for Exchange Rate Risk.- The notional amount of assets for exchange rate risk shall be understood as the sum of 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 the 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, depreciations, 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 assets for exchange rate risk."

SECOND: Financial societies constituted in accordance with the General Law of Banks and what is established in Decree No. 15-L, published in La Gaceta, Official Journal No. 77 of April 10, 1970, will apply the following gradualness to comply with the deductions referred to in Article 5, subsection a, numeral 4 of this norm:

December 31, 2016: 25%
December 31, 2017: 50%
December 31, 2018: 75%
December 31, 2019: 100%

The balance of other assets accounted for in deferred charges net of amortizations to be considered will be the balance cut off at the date of entry into force of this norm. Subsequent increases in these accounts must be included at 100%.

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

(f) Ovidio Reyes R. (f) V. Urcuyo V. (f) Gabriel Pasos Lacayo (f) Fausto Reyes B. (f) illegible (Silvio Moisés Casco Marenco) (f) illegible (Freddy José Blandón Argeñal) (f) U. Cerna B. Secretary.

URIEL CERNA BARQUERO
Secretary of the Board of Directors SIBOIF