Resolution SBS No. 03921-2021: Amend the Regulation for Additional Effective Equity Requirements and Issue Other Provisions

Los Laureles Nº 214 - Lima 27 - Perú Telf.: (511) 6309000 Lima, December 23, 2021

S.B.S. Resolution
No. 03921 - 2021

The Superintendent of Banks, Insurance and Private Pension Fund Administrators:

CONSIDERING:

That, through Resolution SBS No. 8425-2011 and its amendments, the Regulation for the Requirement of Additional Effective Equity (hereinafter the Regulation) was approved, in which the requirements for additional effective equity for interest rate risk in the banking book, market concentration risk, sectoral, individual and regional concentration risk, other risks, and equity requirements for the effect of economic cycle fluctuations are established;

That, the Basel Committee on Banking Supervision published the documents “A framework for dealing with domestic systemically important banks” (2012) and “Global systemically important banks: revised assessment methodology and the higher loss absorbency requirement” (2018) with the objective of requiring greater regulatory capital from those financial system companies whose bankruptcy would negatively impact the real economy and the stability of the financial system at both local and global levels;

That, it is necessary to modify the calculation of the additional effective equity requirement for market concentration risk established in the Regulation, considering the criteria of size, interconnectedness, substitutability and complexity, in order to adapt it to international standards and obtain a methodology more sensitive to risk;

That, likewise, it is necessary to modify Chapter V “Complementary Information” of the Accounting Manual for Financial System Companies, approved by Resolution SBS No. 895-98 and its modifying and complementary norms, to incorporate Report No. 4-E “Information to calculate the Market Concentration Risk Indicator”;

Los Laureles Nº 214 - Lima 27 - Perú Telf.: (511) 6309000

That, in order to collect opinions from the general public regarding the proposed modifications to the regulations applicable to supervised companies, the prepublication of this norm was ordered under the provisions of the Thirty-Second Final and Complementary Provision of the General Law of the Financial System and the Insurance System and the Organic Law of the Superintendence of Banks and Insurance – Law No. 26702 and its amendments, hereinafter General Law, and Supreme Decree No. 001-2009-JUS and its amendments;

Having the approval of the Adjunct Superintendencies of Banking and Microfinance, Risk, Economic Studies and Legal Advice; and,

In exercise of the powers conferred by numerals 7, 9 and 13 of article 349 of the General Law.

RESOLVES:

Article First.- Modify the Regulation for the Requirement of Additional Effective Equity, approved by Resolution SBS No. 8425-2011 and its amendments, in the following terms:

1. Incorporate letters j), k), l), m) and n) into Article 2 according to the following text:

“ j) Size: Dimension collected in the market concentration risk assessment, which measures the magnitude to which a company’s activities commit an important proportion of the financial system and economic activity. The larger a company is, the more difficult it is for others to quickly assume its activities, which increases the probability that in the event of insolvency, the normal functioning and confidence in the financial system will be altered. k) Interconnectedness: Dimension collected in the market concentration risk assessment, which measures the connectivity that exists between companies in the financial system. This is relevant because the financial stress generated by the insolvency of one company could increase the probability of deterioration in others, mainly due to common contractual obligations. l) Substitutability and financial infrastructure: Dimension collected in the market concentration risk assessment, which measures the difficulty that companies in the financial system would have in replacing the operations that other companies perform, both with retail and non-retail clients. The greater the role a company has within a line of business or as a provider of a particular service, the greater the negative effects generated by its eventual financial insolvency will be.

Los Laureles Nº 214 - Lima 27 - Perú Telf.: (511) 6309000

m) Complexity: Dimension collected in the market concentration risk assessment, which measures the difficulty of the business, structure and operations of a financial system company. The more complex a company is, the greater the costs and time necessary for its resolution. n) Economic Group: According to the definition contemplated in article 8 of the Special Norms on Linkage and Economic Group approved by Resolution SBS No. 5780-2015, or the norm that replaces it.

2. Replace Chapter IV with the following:

“CHAPTER IV
ADDITIONAL EFFECTIVE EQUITY REQUIREMENT FOR MARKET CONCENTRATION RISK

Article 29.- Nature of market concentration risk
Companies that generate significant risk due to market concentration, whether due to their large size, high interconnectedness, difficult substitutability and high complexity, impose additional risks on the financial system that are not captured in the effective equity requirements considered in the first paragraph of article 199 of the General Law. These additional risks are related to the negative effects that the financial deterioration or eventual insolvency of these companies would have on the stability of the financial system as a whole and on the country’s economic activity.

Article 30.- Determination of market concentration risk
The evaluation to identify companies that must maintain additional effective equity for market concentration risk is carried out annually and is based on the calculation of a Market Concentration Risk Indicator that considers aspects related to the size, interconnectedness, substitutability and financial infrastructure, and the complexity of financial system companies. The methodology for constructing this indicator is found in Annex 3 of this Regulation.

The calculation of the Market Concentration Risk Indicator must be carried out by Banking Companies and State Companies of the Financial System (Banco de la Nación, Banco Agropecuario, Corporación Financiera de Desarrollo - COFIDE and Fondo MIVIVIENDA S.A.) incorporated in the country. Other Multiple Operations Companies incorporated in the country that are part of an Economic Group formed by a Banking Company must also calculate the aforementioned indicator.

This Superintendence may require any other company not mentioned above to carry out the calculation of the Market Concentration Risk Indicator, if it deems it appropriate. Likewise, in the event that the Market Concentration Risk Indicator does not capture important effects of market concentration risk in the financial system, and these effects could be captured by additional indicators to those considered in this methodology, this Superintendence may require additional effective equity for market concentration risk using other indicators it deems appropriate.

Article 31.- Additional effective equity requirement for market concentration risk
The additional effective equity requirement for market concentration risk is based on the value resulting from the calculation of the Market Concentration Risk Indicator, considering the percentages established in the last column of the following table:

Bracket
Market Concentration Risk Indicator
(Points)
Additional effective equity requirement
(% of total APR)
6th From 35 onwards 3.0
5th From 29 and less than 35 2.5
4th From 23 and less than 29 2.0
3rd From 17 and less than 23 1.5
2nd From 11 and less than 17 1.0
1st From 5 and less than 11 0.5
0th Less than 5 0.0

For the determination of the additional effective equity requirement for market concentration risk, companies required to calculate the Market Concentration Risk Indicator according to what is indicated in the second paragraph of Article 30 of this Regulation will multiply the total risk-weighted assets and contingencies (total APR) by the percentage corresponding to the bracket to which they belong according to the calculated value of the Market Concentration Risk Indicator.

In the case of companies that belong to the same Economic Group, the applicable Market Concentration Risk Indicator is that corresponding to the sum of the indicators of each of said companies. In these cases, the requirement can be met in two ways, according to what is indicated below:

a) The company that has the highest level of assets within the Economic Group fulfills the requirement. In this case, the total APRs to be used for the requirement calculation correspond to the sum of the total APRs of each of the companies that make up the Economic Group. Likewise, only the company with the highest level of assets must send in Report No. 4-D the amount of the corresponding requirement.

Los Laureles Nº 214 - Lima 27 - Perú Telf.: (511) 6309000

b) Each of the companies within the Economic Group fulfills the requirement. In this case, each company will calculate the corresponding requirement based on its total APRs, but considering for this purpose the Market Concentration Risk Indicator of the Economic Group. Likewise, all companies part of the Economic Group must send in Report No. 4-D the amount of the corresponding requirement.

The manner in which the additional effective equity requirement for market concentration risk is covered must be reported to this Superintendence through a communication signed by the General Manager on the same date that Report No. 4-D is sent.

3. Incorporate as the Fifth Final and Transitional Provision the following:

Upon the entry into force of Resolution SBS No. 03921-2021, companies will have a period of two (2) years to comply with the additional effective equity requirement for market concentration risk under the provisions approved by Resolution SBS No. 03921-2021. This adjustment will be carried out according to the following schedule:

Adjustment Year Percentage of Additional Effective Equity for Market Concentration Risk December-2022 75% December-2023 100%

4. Replace Annex 3 with the following:

“ANNEX 3
Additional effective equity requirement for market concentration risk Market Concentration Risk Indicator The Market Concentration Risk Indicator measures the relative importance of a company within the financial system, considering four categories: size, interconnectedness, substitutability and financial infrastructure, and complexity. This indicator ranges from 0 to 100, where a higher value represents a higher market concentration risk.

The steps for calculating the Market Concentration Risk Indicator are as follows:

a. Companies required to calculate the Market Concentration Risk Indicator according to what is indicated in the second paragraph of Article 30 of this Regulation must report to this Superintendence the information required in Report No. 4-E, corresponding to the December close of each year, no later than the last business day of March of the following year.

Los Laureles Nº 214 - Lima 27 - Perú Telf.: (511) 6309000

b. This Superintendence will calculate at the level of each subcategory of Table No. 1, the total value of the cells of Report No. 4-E corresponding to all Multiple Operations Companies and State Companies of the Financial System (Banco de la Nación, Banco Agropecuario, Corporación Financiera de Desarrollo - COFIDE and Fondo MIVIVIENDA S.A.) incorporated in the country. Likewise, it will publish this total value on the Supervised Portal no later than the last business day of June of each year.

Table No. 1: Information reported by companies required to calculate the Market Concentration Risk Indicator

Category Subcategory Cells of Report No. 4-E
Size Total Exposure A1
Interconnectedness
Assets within the financial system B15
Liabilities within the financial system B27
Securities outstanding B32
Substitutability and financial infrastructure
Payment system C4
Service points C8
Complexity
Notional value of over-the-counter derivatives D5 Value of assets held for trading and available for sale D10

c. Each company required to calculate the Market Concentration Risk Indicator according to what is indicated in the second paragraph of Article 30 of this Regulation must calculate its value according to the methodology indicated in Table No. 2. Companies that, as a result of this calculation, require maintaining additional effective equity for market concentration risk, must do so no later than the last business day of December of each year and report it in Report 4-D. The percentage of additional effective equity requirement resulting from this calculation will be applied monthly to the total APRs of each month during the following 12 months.

Table No. 2: Construction of the Market Concentration Risk Indicator”

Report Cell
Sum of Report No. 4-E cells at the level of all multiple operations companies and state companies of the financial system incorporated in the country Relative Participation Weighting Relative Participation x Weighting

A1 ∑A1 A1/∑A1 0.2500 X1 = (A1/∑A1) x 0.2500
B15 ∑B15 B15/∑B15 0.0834 X2 = (B15/∑B15) x 0.0834 B27 ∑ B27 B27/∑B27 0.0833 X3 = (B27/∑B27) x 0.0833 B32 ∑B32 B32/∑B32 0.0833 X4 = (B32/∑B32) x 0.0833 C4 ∑C4 C4/∑C4 0.1250 X5 = (C4/∑C4) x 0.1250 C8 ∑C8 C8∑C8 0.1250 X6 = (C8/∑C8) x 0.1250 D5 ∑D5 D5/∑D5 0.1250 X7 = (D5/∑D5) x 0.1250 D10 ∑D10 D10/∑D10 0.1250 X8 = (D10/∑D10) x 0.1250 Market Concentration Risk Indicator (X1 + X2 + X3 + X4 + X5 + X6 + X7+ X8 ) x 100

Article Second.- Incorporate Report No. 4-E “Information to calculate the Market Concentration Risk Indicator” into Chapter V “Complementary Information” of the Accounting Manual for Financial System Companies approved by Resolution SBS No. 895-98 and its modifying and complementary norms, according to the format attached to this Resolution and published on the Institutional Portal (www.sbs.gob.pe), as provided in Supreme Decree No. 001-2009-JUS and its amendments. This report must be sent annually via SUCAVE with the information corresponding to the December close of each year, no later than the last business day of March of the following year.

Article Third.- Modify note 4a of Annex 9 of the Regulation for the Supervision of Financial and Mixed Conglomerates approved by Resolution SBS No. 11823-2010 and its amendments with the following text: “Additional equity requirements established in the Regulation for the Requirement of Additional Effective Equity (Resolution SBS No. 8425-2011 and its amendments)”.

Article Fourth.- This Resolution enters into force the day after its publication in the Official Newspaper El Peruano.

Register, communicate and publish.

Los Laureles Nº 214 - Lima 27 - Perú Telf.: (511) 6309000

MARIA DEL SOCORRO HEYSEN ZEGARRA
Superintendent of Banks, Insurance and Private Pension Fund Administrators