Regulation (NAP) on the Adequacy of Own Funds and Solvency Ratio

Banco Central de S. T. P.	N A P <br> PERMANENT APPLICATION STANDARD	CÓDIGO <br> EO 99
PROPOSER(S)	ENTRY INTO FORCE	ISSUE DATE	DOC NO.	PG 1/2
D.S.B.	03/03/2008	26/11/2007	10/07

Subject: Adequacy of Own Funds and Solvency Ratio

The Central Bank of São Tomé and Príncipe, exercising its powers under letters d, e, and f) of Article 38 of its Organic Law and Articles 29 and 30 of the Financial Institutions Act;

Considering the need to adapt current regulations to international banking supervision principles and the capital agreement approved by the Basel Committee on Banking Supervision, hereby determines the following:

Article 1.
Subjects
All authorized financial institutions operating in São Tomé and Príncipe, including "offshore" banks regulated by Decree-Law 62/95, must observe:
a) The minimum capital established by the Financial Institutions Act and the Regulation on the Application for Authorization to Operate, such that the bank's total own funds are at all times not less than the minimum capital value; b) An adequate relationship between the amount of its qualified own funds and its asset elements and off-balance sheet items, weighted according to their respective risks, especially credit, market, and operational risks.

Article 2.
Calculation of the Solvency Ratio

1. The ratio referred to in letter b) of the preceding paragraph shall be designated as the solvency ratio and shall be calculated as follows:

$$\frac{\text{FP}}{\text{TAPRC + TAPRM + VEAPRO}} \text{ X 100,}$$

Where:
FP – Qualified own funds, determined according to Annex 1.
TAPRC – Total risk-weighted assets for credit risk, determined according to Annex 2.
TAPRM – Total risk-weighted assets for market risk, ascertained according to Annex 3.
VEAPRO – Equivalent value in risk-weighted assets for operational risk, ascertained according to Annex 4.

Vistos: [Assinatura] Dados de Revogação:

Banco Central de S. T. P.	N A P <br> PERMANENT APPLICATION STANDARD	CÓDIGO <br> EO 99
PROPOSER(S)	ENTRY INTO FORCE	ISSUE DATE	DOC NO.	PG 2/2
D.S.B.	03/03/2008	26/11/2007	11/07

2. The solvency ratio value may not be less than 12%.

Article 3.
Risk-Weighted Assets
Whenever asset risk is calculated in terms of capital requirement, the equivalent value in terms of risk-weighted assets shall be found by multiplying by the factor 100/12.

Article 4.
Reference Periods for Calculation

1. Institutions must calculate their solvency ratio with reference to the periods of March 31, June 30, September 30, and December 31 of each year, communicating to the Central Bank by the tenth day of the following month the results obtained, as well as all elements considered in their respective calculations.
2. The weightings referred to in letter b) of Article 1 are defined according to the instructions annexed to this NAP.

Article 5.
Entry into Force

1. This standard enters into force immediately, with authorized banks in non-compliance required to adjust within six months.
2. The aforementioned period does not apply to banks in non-compliance with the then-current standard that have been notified by the Central Bank, or have established a memorandum of understanding with it, to promote capital reconstruction.

Article 6.
Final Provisions
3. Regulation 2 of October 27, 1992, and Instruction 2.1 of the same date are hereby revoked.

Banco Central de São Tomé e Príncipe, 03 March 2008

Vistos: [Assinatura] Dados de Revogação:

Banco Central de S. T. P.	N A P <br> PERMANENT APPLICATION STANDARD	CÓDIGO <br> EO 99
PROPOSER(S)	ENTRY INTO FORCE	ISSUE DATE	DOC NO.	PG 1/2
D.S.B.	03/03/2008	26/11/2007	10/07

ANNEX 1 – Determination of Qualified Own Funds

1. The qualified own funds of financial institutions result from the sum of basic own funds and supplementary own funds, calculated under this Annex.

2. Basic own funds correspond to the following elements:
   a) Paid-up capital, including the portion represented by non-removable preferred shares with non-cumulative dividends, and issuance premiums; b) Legal, statutory, and other reserves formed by undistributed profits; c) Results carried forward from previous financial years; minus:
   a) Intangible fixed assets b) Current year negative results, at month-end. c) Treasury shares held.

3. Supplementary own funds correspond to the following elements:
   a) Revaluation reserves of fixed assets, limited to 50% of basic capital, and reserves for maintaining capital value, as authorized by law or Central Bank regulation; b) Non-removable participation certificates and premiums obtained from their issuance above par; c) Subordinated loans, subject to Central Bank approval of conditions; d) Unencumbered/available portion of removable preferred shares; e) Provision for general banking risks, including credit risk, constituted after specific provisions for losses and asset write-downs, up to a limit of 1.25% of total risk-weighted assets.

Vistos: [Assinatura] Dados de Revogação:

Banco Central de S. T. P.	N A P <br> PERMANENT APPLICATION STANDARD	CÓDIGO <br> EO 99
PROPOSER(S)	ENTRY INTO FORCE	ISSUE DATE	DOC NO.	PG 2/2
D.S.B.	03/03/2008	26/11/2007	10/07

4. Removable preferred shares with a fixed redemption date occurring within 10 years of issuance are not considered own funds.

5. The sum of the elements indicated in points 2), 3), and 4) of paragraph 3 (supplementary funds) may not exceed 50% of basic own funds.

6. Total supplementary funds may not exceed total basic funds.

7. From the sum of basic and supplementary own funds, all bank participations in the capital of other banks or financial institutions must be deducted.

Vistos: [Assinatura] Dados de Revogação:

Banco Central de S. T. P.	N A P <br> PERMANENT APPLICATION STANDARD	CÓDIGO <br> EO 99
PROPOSER(S)	ENTRY INTO FORCE	ISSUE DATE	DOC NO.	PG 1/1
D.S.B.	03/03/2008	26/11/2007	10/07

ANNEX 2 – Risk-Weighted Assets for Credit Risk

1. Asset elements and off-balance sheet items must be weighted according to their credit risk.

2. Bank asset elements are classified into risk categories with specific risk weights, called weighting coefficients. Multiplying the weighting coefficient by the asset value yields the risk-weighted asset value. Summing all risk-weighted assets yields the total risk-weighted assets for credit risk.

3. Off-balance sheet elements, valued according to the criteria established in the Chart of Accounts for the Banking System, are first converted into equivalent credit values and then weighted by risk categories.

4. TAPRC – Total Risk-Weighted Assets for Credit Risk is the sum of asset elements and off-balance sheet items weighted by risk as per points 2 and 3 above, and will constitute one of the components of the solvency ratio denominator.

5. The weighting of assets and off-balance sheet items will be carried out according to Instructions 2.2 and 2.3 of October 27, 1992.

Vistos: [Assinatura] Dados de Revogação:

Banco Central de S. T. P.	N A P <br> PERMANENT APPLICATION STANDARD	CÓDIGO <br> EO 99
PROPOSER(S)	ENTRY INTO FORCE	ISSUE DATE	DOC NO.	PG 1/2
D.S.B.	03/03/2008	26/11/2007	10/07

ANNEX 3 – Risk-Weighted Assets for Market Risk

1. Market risk is defined as the risk of loss in balance sheet and off-balance sheet accounts due to market price variations, including instruments related to interest rate risks comprising bank trading portfolios (primary or derivative), and instruments related to exchange rate risks in all balance sheet and off-balance sheet elements.

2. Banks maintaining a trading portfolio of interest rate instruments must submit to the Central Bank, prior to portfolio composition, the procedures they will adopt to determine the own funds required to cover market risk for that portfolio.

3. The aforementioned procedure must be consistent with one of the alternatives presented by the Basel Committee on Banking Supervision in the document "Amendment to the Capital Accord to incorporate market risk", issued in January 1996 and updated in April 1998.

4. Market risk related to exchange rates must be calculated in two stages. The first is measuring exposure in each foreign currency in which the bank holds a position. The second is measuring risks inherent to long and short positions in different currencies.

5. The bank's net position in each currency shall be calculated by adding:
   – Net spot position (all assets minus all liabilities denominated in that currency, including accrued but not yet received interest receivable and payable); and – Net position in forward operations, including futures contracts and swaps.

Vistos: [Assinatura] Dados de Revogação:

Banco Central de S. T. P.	N A P <br> PERMANENT APPLICATION STANDARD	CÓDIGO <br> EO 99
PROPOSER(S)	ENTRY INTO FORCE	ISSUE DATE	DOC NO.	PG 2/2
D.S.B.	03/03/2008	26/11/2007	10/07

6. The net position in each currency shall be converted at the buying exchange rate of the Central Bank bulletin. The general net foreign currency position will be the greater absolute value between the two values: the sum of long positions and the sum of short positions.

7. The minimum own funds required for market risk related to exchange rates shall be 8% of the general net position, ascertained per the previous point.

8. The capital value required for market risk, calculated per the previous point, shall be multiplied by 100/12 to find TAPRM – Total Risk-Weighted Assets for Market Risk, which will form the denominator of the Solvency Ratio.

Vistos: [Assinatura] Dados de Revogação:

Banco Central de S. T. P.	N A P <br> PERMANENT APPLICATION STANDARD	CÓDIGO <br> EO 99
PROPOSER(S)	ENTRY INTO FORCE	ISSUE DATE	DOC NO.	PG 1/1
D.S.B.	03/03/2008	26/11/2007	10/07

ANNEX 4 – Risk-Weighted Assets for Operational Risk

1. Operational risk is the risk of loss arising from inadequate or failed internal processes, people, or systems, or from external events.

2. The capital required to cover operational risk shall be calculated as follows:
   Cop = [Σ(RB 1 a 3 x 0,15)] / n, where:
   Cop = capital required for operational risk
   RB1 = Gross income, if positive, from the last three financial years. n = number of financial years with positive gross income.

3. Gross income is the sum of net interest income and net non-interest income*, before deducting any provision and operating expenses, excluding realized gains or losses from the sale of trading securities.

4. For the purposes of the preceding paragraph, net non-interest income refers to service revenues, commissions and other benefits, as well as net revenues from foreign currency transactions and other net revenues.

5. The capital value required for operational risk, calculated as above, shall be multiplied by 100/12 to find VEAPRO – Equivalent Value in Risk-Weighted Assets for Operational Risk, which will form the denominator of the Solvency Ratio.

6. Banks must also adopt in their management the guidelines contained in the document "Recommended Practices in Operational Risk Management" issued by the Basel Committee on Banking Supervision.

7. Another system may be established by the Central Bank for "offshore" banks regulated under Decree-Law 62/95, according to their developed activities.

Vistos: [Assinatura] Dados de Revogação: