Regulation on the Establishment of Countercyclical Provisions

Page 1 of 5 RESOLUTION NO. CD-SIBOIF-1016-1-SEP19-2017 dated September 19, 2017 REGULATION ON THE ESTABLISHMENT OF COUNTERCYCLICAL PROVISIONS

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

CONSIDERING

I

That subsections 1) and 2), and the last paragraph of Article 10 of Law 316, the Law of the Superintendence of Banks and Other Financial Institutions, and its reforms contained in Law 552, the Law of Reforms to the aforementioned Law 316, establish that it corresponds to the Board of Directors of the Superintendence of Banks and Other Financial Institutions (Board of Directors) to issue general norms to strengthen and preserve public security and confidence in the institutions under its supervision, inspection, oversight, and audit.

II

That the current growth of economic activity is above its historical average.

III

That during periods of growth in economic activity, financial institutions might relax their credit granting criteria and have no incentives to consider the cyclical profile of their policies or the externalities associated with said profile, and therefore might not establish an adequate level of provisions.

IV

That financial institutions must establish higher provisions during periods of growth in economic activity, which can be used to address potential losses in adverse systemic situations, seeking a stable relationship between provisions and the credit portfolio.

In exercise of its powers,

RESOLVES

CD-SIBOIF-1016-1-SEP19-2017

To issue the following:

REGULATION ON THE ESTABLISHMENT OF COUNTERCYCLICAL PROVISIONS

Page 2 of 5 CHAPTER I GENERAL PROVISIONS

Article 1. Concepts.- For the purposes of this regulation, the terms indicated in this article, both in uppercase and lowercase, singular or plural, shall have the following meanings:

a) Gross credit portfolio: Corresponds to the principal balance of credit operations of institutions in current status, extended, restructured, overdue, and in judicial collection, in accordance with the Single Chart of Accounts.

b) Financial institution: For the purposes of this regulation, a financial institution shall be understood as banks, financial companies, and the branches thereof established in the country, which, in accordance with the General Banking Law, can capture resources from the public.

c) General Banking Law: Law 561, General Banking Law, Non-Banking Financial Institutions and Financial Groups, published in Official Gazette No. 232, of November 30, 2005.

d) Superintendence: Superintendence of Banks and Other Financial Institutions.

e) Superintendent: Superintendent of Banks and Other Financial Institutions.

Article 2. Objective.- This regulation aims to mitigate the macroprudential risk of credit, by establishing additional countercyclical provisions to the provisions referred to in the Regulation on Credit Risk Management, to strengthen the stability of the financial system.

Article 3. Scope.- The provisions of this regulation are applicable to banks, financial companies, and branches of foreign banks established in Nicaragua.

CHAPTER II INITIAL COUNTERCYCLICAL PROVISIONS FUND

Article 4. Establishment of the initial countercyclical provisions fund.- Financial institutions must establish an initial countercyclical provisions fund, in córdobas with value maintenance, over a period of up to 4 years, from the date of approval of this regulation.

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The establishment of this fund will be communicated by the Superintendent, for each financial institution, and will be determined by the following formula:

Initial countercyclical provisions fund = Latent Loss - Average of the monthly balance of individual provisions for uncollectible credit portfolio (Account 3201 of the Single Chart of Accounts) during 2016.

Where:

Latent Loss = Average of the monthly balance of the gross portfolio in 2016 * αp

The alpha factor (αp) is defined as the average of the ratios between the balance of individual provisions for uncollectible credit portfolio and the balance of the total gross portfolio, for each financial institution over the period covering January 2008 to December 2016.

αp = ∑ ( Balance of Prov Ct ) n t=1 n

Where: Ct = Gross portfolio balance in month t Balance of Prov = Balance of individual provisions for uncollectible total credit portfolio in month t. n = 108 observations.

To determine the initial fund expressed in dollars, the initial fund in córdobas of countercyclical provisions to be established over the next four years will be divided by the average daily official exchange rate during 2016.

Article 5. Plan for the establishment of the initial fund.- 1 The SIBOIF will calculate the initial countercyclical provisions fund and prorate it monthly in equal amounts over the period of up to 4 years referred to in Article 4 of this regulation. The Superintendent may temporarily suspend the establishment of the initial countercyclical provisions fund, as well as reactivate its continuity. The time during which the establishment of the initial fund remains suspended will not count as part of the aforementioned period. The

1 Article 5 modified on September 11, 2018, by Resolution No. CD-SIBOIF-1072-1-SEP11-2018

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Superintendent will inform the Board of Directors when suspending or reactivating the establishment of the fund.

Article 6. Use of the countercyclical provisions fund.- After the establishment of the countercyclical provisions fund is completed, it may be used when the moving average of the year-over-year growth of real quarterly GDP, of the last four quarters, is less than the historical average of the year-over-year growth of real quarterly GDP, from the first quarter of 2006. In such a case, the fund will be used exclusively to establish the monthly increases of specific provisions for portfolios classified as B, C, D, and E.

Article 7. Sanctions.- In the event that an institution uses the initial countercyclical provisions fund without having met the aforementioned trigger, or uses it to establish provisions other than those mentioned in the previous paragraph, the Superintendent will sanction the financial institution in accordance with the powers established in the current legal and regulatory framework.

Article 8. Accounting of the countercyclical provisions fund.- The expense record, derived from the establishment of the fund, must be recognized in the income statement, against a complementary asset account. In accordance with the Single Chart of Accounts, the expense account will be named "Expense for countercyclical provisions" and the complementary asset account will be named "Countercyclical provisions fund". Additionally, the monthly adjustment for value maintenance of the fund must be recognized in the account "Expenses for exchange effects".

CHAPTER III FINAL PROVISIONS

Article 9. Post-review.- After the period for the establishment of the initial countercyclical provisions fund established in Art. 5 of this regulation has elapsed, the methodology for the calculation, establishment, and use of this countercyclical provisions fund will be reviewed.

Article 10. Special Application.- The Superintendent, prudently and through a reasoned resolution, may make adjustments to the methodology for calculating the countercyclical provisions fund for financial institutions that, due to exceptional circumstances, warrant a special application.

Article 11. Validity.- This regulation will enter into force upon its notification, without prejudice to its subsequent publication in La Gaceta, Official Gazette. (f) Ovidio R. (f) V. Urcuyo (f) Gabriel Pasos Lacayo (f) Fausto Reyes (f) illegible (Silvio Moisés Casco Marenco) (f) illegible (Freddy José Blandón Argeñal) (f) illegible (Edelberto Zelaya Castillo) Ad Hoc Secretary.

Page 5 of 5 URIEL CERNA BARQUERO Secretary of the Board of Directors SIBOIF