Resolution No. JPRF-F-2023-061: Incorporation of a Transitional Provision in Chapter XVIII on Risk Asset Classification and Provisioning for Public and Private Financial Sector Entities

THE FINANCIAL POLICY AND REGULATION BOARD
CONSIDERING:
That, Article 82 of the Constitution of the Republic of Ecuador prescribes that the right to legal security is based on respect for the Constitution and the existence of prior, clear, public legal norms applied by competent authorities; That, Article 226 of the Constitution orders that: “State institutions, their agencies, dependencies, public servants, and persons acting under state authority shall exercise only the competencies and powers attributed to them in the Constitution and the law. They shall have the duty to coordinate actions for the fulfillment of their purposes and to make effective the enjoyment and exercise of rights recognized in the Constitution.”; That, Article 308 of the Magna Carta determines that financial activities are a public order service and may be exercised in accordance with the law, with prior authorization from the State; these activities shall have the fundamental purpose of preserving deposits and meeting financing requirements to achieve the country's development objectives, and shall intermediated captured resources efficiently to strengthen national productive investment and socially and environmentally responsible consumption, for which the State shall promote access to financial services and the democratization of credit; That, Article 309 ibidem establishes that: “The national financial system is composed of the public, private, and popular and solidary sectors, which intermediated public resources. Each of these sectors shall have specific and differentiated regulatory and control entities, which shall be responsible for preserving their safety, stability, transparency, and solidity. These entities shall be autonomous. The directors of control entities shall be administratively, civilly, and criminally liable for their decisions.”; That, Article 13 of the Organic Code of Monetary and Finance, Book I, reformed by the Organic Reforming Law to the Organic Code of Monetary and Finance for the Defense of Dollarization, published in the Official Register Supplement No. 443 of May 3, 2021, created the Financial Policy and Regulation Board, part of the Executive Function, as a public law legal entity, with administrative, financial, and operational autonomy, responsible for the formulation of credit, financial, securities, insurance, and prepaid comprehensive health care services policy and regulation; That, numbers 1, 2, and 3 of Article 14 of the same legal body, provide that it corresponds to the Financial Policy and Regulation Board:
“1. Formulate credit, financial, including insurance policy, prepaid comprehensive health care services, and securities policies;
2. Issue regulations that allow maintaining the integrity, solidity, sustainability, and stability of the national financial, securities, insurance, and prepaid comprehensive health care services systems in accordance with what is provided in Article 309 of the Constitution of the Republic of Ecuador;
3. Issue micro-prudential regulations for the national financial, securities, insurance, and prepaid comprehensive health care services sectors, based on proposals presented by the respective superintendencies, within their respective scopes of competence and without prejudice to their independence.”;

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That, Article 14 ibidem further provides that, for the fulfillment of its functions, “the Financial Policy and Regulation Board shall issue norms in matters within its competence, without being able to alter legal provisions. The Financial Policy and Regulation Board may issue regulations by segments, economic activities, and other criteria.”; That, Article 14.1 of the Organic Code of Monetary and Finance, Book I, mandates that, for the performance of its functions, the Financial Policy and Regulation Board must comply with the following duties and exercise the following powers:
“7. Issue the prudential regulatory framework to which financial, securities, insurance, and prepaid comprehensive health care services entities must adhere, a framework that must be coherent, not give rise to regulatory arbitrage, and cover, at least, the following: (...) c) Levels of concentration of credit and financial operations; and, applicable provisions, for the aforementioned operations. These levels may be defined by segments, economic activities, and other criteria; (...)
26. Establish, with the purpose of stimulating development, economic reactivation, and financial stability, with adequate technical backing, the system of interest rates and provisions applicable to credit, financial, commercial, and other operations, which may be defined by segments, economic activities, and other criteria. In the execution of these parameters, the principles of financial stability and solidity shall be considered and guaranteed at all times. (...);”;
That, Article 150 of the aforementioned Code determines that entities of the national financial system shall be subject to the regulation issued by the Monetary and Financial Policy and Regulation Board; That, Article 204 ibidem, in relation to asset quality, contingencies, and the constitution of provisions, establishes that:
“Entities of the national financial system, in order to reflect the true quality of assets and contingencies, shall classify them permanently and constitute the provisions established by this Code and the regulations issued by the Monetary and Financial Policy and Regulation Board to cover the risks of uncollectibility, the loss of asset value, and to support adequate macroeconomic performance.”; That, Article 206 of the cited Organic Code, regarding the obligation to provision, determines that:
“Public and private financial entities shall constitute the following provisions:

1. Specific provisions for the devaluation of assets and contingencies;
2. Generic provisions;
3. Provisions for the economic cycle; and,
4. Any other provision determined by the Monetary and Financial Policy and Regulation Board.
   Financial entities, for the determination of the aforementioned provisions, shall be subject to the norms established by the Board (...);”; That, General Provision Twenty-Ninth of the Organic Code of Monetary and Finance, Book I,

____________________________ provides that in current legislation where the "Monetary and Financial Policy and Regulation Board" is mentioned, it shall be replaced by "Financial Policy and Regulation Board"; That, Transitional Provision Fiftieth-Fourth ibidem, provides that resolutions contained in the Codification of Monetary, Financial, Securities, and Insurance Resolutions shall remain in effect until the Monetary Policy and Regulation Board and the Financial Policy and Regulation Board decide what is appropriate, within the scope of their competencies; That, through Office No. SB-DS-2023-0015-O of January 13, 2023, the Acting Superintendent of Banks, submits to the Financial Policy and Regulation Board a proposal for “Reform to the Standard for Productive Credit Classification with analysis of the ASOBANCA proposal”, concerning what is established in one of the Transitional Provisions of Chapter XVIII "Classification of Risk Assets and Constitution of Provisions by Entities of the Public and Private Financial Sectors under the Control of the Superintendent of Banks", Title II “National Financial System”, Book I “Monetary and Financial System” of the Codification of Monetary, Financial, Securities, and Insurance Resolutions. For this effect, it presented as support the following documents:
(i) Technical Report No. SB-INRE-2023-0030-M of January 11, 2023, approved by the National Superintendents of Risks and Studies, of Control of the Public Financial Sector, and of Control of the Private Financial Sector of the Superintendent of Banks, regarding “CLASSIFICATION OF PRODUCTIVE CREDITS”; (ii) Legal Report No. SB-INJ-2023-0041-M of January 12, 2023, approved by the National Legal Superintendent of the Superintendent of Banks, regarding “ANALYSIS OF THE REFORM PROPOSAL BY ASOBANCA FOR THE SUB-SUBSEGMENTATION AND CLASSIFICATION OF PRODUCTIVE CREDITS”; and, (iii) Draft resolution; That, the Technical Secretariat of the Financial Policy and Regulation Board, through Memorandum No. JPRF-ST-2023-0007-M of January 27, 2023, submits to the President of the Board the following reports:
a) Technical Report No. JPRF-CTSF-2023-001 of January 27, 2023, issued by the Technical Coordination of the Financial System of the Board, regarding the provisions for the classification of credit subjects of the productive segment, concerning the amount up to which internal models or delinquency models are considered, in which it was determined the need to evaluate the factors of the expert model methodology, so that they consider in their application the particularities of the sector attended, especially those of the productive credit sub-segment for SMEs. b) Legal Report No. JPRF-CJF-2023-004 of January 27, 2023, issued by the Coordination of Financial Policies and Norms of the Board, which concludes that: (i) The Financial Policy and Regulation Board, as responsible for the formulation of policy and issuance of regulation of the financial system, has legal competence to issue the prudential regulatory framework to which financial entities must adhere, which covers the levels of concentration of credit and financial operations and applicable provisions to the aforementioned operations, and also to establish provisions applicable to credit, financial, commercial, and other operations, in accordance with what is established in Article 14.1 of the Organic Code of Monetary and Finance, Book I, in numbers 7 letter c) and 26, in concordance with Articles 204 and 206 ibidem; and (ii) The respective reform to be made in Chapter XVIII “Classification of risk assets and constitution of provisions by entities of the public and private financial sectors under the control of the Superintendent of Banks” of Title II “National Financial System” of Book I “Monetary and Financial System” of the Codification of Monetary, Financial, Securities, and Insurance Resolutions, is legally viable in light of the legal considerations exposed by this Coordination in the present report;

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That, the Financial Policy and Regulation Board, in an extraordinary session convened by technological means on January 28, 2023 and carried out through video conference on January 30, 2023, at 11:30 a.m., resolved to suspend the treatment of the single point on the agenda and resume the session at 5:00 p.m. on the same day; That, the Technical Secretariat of the Financial Policy and Regulation Board, through Memorandum No. JPRF-ST-2023-0010-M of January 30, 2023, submits to the President of the Board the Technical-Legal Report No. JPRF-CTSFCJF-2023-001 of January 30, 2023, which contains the scope of the Technical Report No. JPRF-CTSF-2023-001 and Legal Report No. JPRF-CJF-2023-004, cited above, and in which it states that:
“(...) it is pertinent to clarify that the reform proposal presented by the Technical Secretariat is oriented to establish a transitional period for the application of delinquency classification for debtors of productive segment credits less than US$ 100,000 (One hundred thousand United States dollars), which addresses the request of the Superintendent of Banks to evaluate the factors of the methodology for the classification of productive credit (expert model), and that this Technical Secretariat deemed necessary for, in its application, to consider the particularities of the sector attended through the indicated credit segment. For the aforementioned reasons, it is recommended to incorporate a Transitional Provision in Chapter XVIII "Classification of Risk Assets and Constitution of Provisions by entities of the public and private financial sectors under the control of the Superintendent of Banks", Title II “National Financial System”, of Book I “Monetary and Financial System” of the Codification of Monetary, Financial, Securities, and Insurance Resolutions.”; That, the Financial Policy and Regulation Board, in the reinstatement of the extraordinary session carried out through video conference on January 30, 2023, at 5:00 p.m., reviewed Memorandum No. JPRF-ST-2023-0010-M of January 30, 2023, issued by the Technical Secretariat of the Board, as well as the corresponding draft resolution; That, the Financial Policy and Regulation Board, in an extraordinary session convened by technological means on January 28, 2023 and carried out through video conference on January 30, 2023, reviewed and approved the following Resolution; and, In exercise of its functions, RESOLVES:
SINGLE ARTICLE.- Incorporate a Transitional Provision in Chapter XVIII "Classification of Risk Assets and Constitution of Provisions by entities of the public and private financial sectors under the control of the Superintendent of Banks", Title II “National Financial System”, of Book I “Monetary and Financial System” of the Codification of Monetary, Financial, Securities, and Insurance Resolutions, with the following text:
“From January 30, 2023, until June 30, 2023 inclusive, debtors of productive segment credits less than US$ 100,000 (One hundred thousand United States dollars of America), shall be classified by delinquency. Debtors of credits greater than US$ 100,000 (One hundred thousand

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United States dollars) shall be classified with the internal tracking models provided for in number 1.1.4 "Methodologies and/or internal credit classification systems" of this standard.”
GENERAL PROVISIONS
FIRST.- The Superintendent of Banks shall communicate to its controlled entities the content of this Resolution.
SECOND.- The Superintendent of Banks shall submit to the Financial Policy and Regulation Board by April 30, 2023, a detailed report on the review (or adjustment) of the parameters of the expert model for the classification of productive credit operations exceeding US$ 40,000 (Forty thousand United States dollars).
FINAL PROVISION.- This Resolution shall enter into force from the present date, without prejudice to its publication in the Official Register. Publish this Resolution on the website of the Financial Policy and Regulation Board, within a maximum term of two days from its issuance.
COMMUNICATE.- Given in the Metropolitan District of Quito, on January 30, 2023.
THE PRESIDENT,
Mgs. María Paulina Vela Zambrano
The preceding Resolution was processed and signed by Master María Paulina Vela Zambrano, President of the Financial Policy and Regulation Board, in the Metropolitan District of Quito, on January 30, 2023.- I CERTIFY.
TECHNICAL SECRETARIAT
Dr. Nelly Arias Zavala