Resolution SBS No. 3953-2022: Regulation for the Requirement of Effective Equity for Additional Risks

Lima, December 22, 2022

S.B.S. Resolution
No. 03953-2022

The Superintendent of Banks, Insurance and Private Pension Fund Administrators

CONSIDERING:

That, through Legislative Decree No. 1531, article 199-B of the General Law of the Financial System and of the Insurance System and Organic Law of the Superintendence of Banks and Insurance – Law No. 26702 and its amendments (hereinafter, General Law), is incorporated, to continue adapting the regulatory framework to the Basel III standard: Global regulatory framework for strengthening banks and banking systems, of December 2010 and revised in June 2011, of the Basel Committee on Banking Supervision;

That, through SBS Resolution 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 by economic cycle, concentration risk (individual, sectoral and regional), market concentration risk, interest rate risk in the banking book (banking book) and other risks are established;

That, therefore, it is necessary to issue the corresponding regulation for the requirements of effective equity for additional risks, to adapt it to what is established in Legislative Decree No. 1531 and modify the calculation methodology for the requirement of effective equity for concentration risk in order to capture with greater sensitivity the risk, the individual concentration risk;

That, likewise, it is necessary to make modifications to the format and the methodological notes of Report No. 4-B1 – Requirement of Effective Equity for Credit Concentration Risk – Individual Concentration Risk, Report No. 4-B2 – Requirement of Effective Equity for Credit Concentration Risk – Sectoral Concentration Risk, Report No. 4-B3 – Requirement of Effective Equity for Credit Concentration Risk – Regional Concentration Risk, Report No. 4-C – Requirement of Effective Equity for Interest Rate Risk in the Banking Book (Banking Book) and Report No. 4-D – Summary of Equity Requirements and eliminate Report No. 2-D Requirement of Effective Equity for Credit, Market and Operational Risks and Calculation of the Global Limit referred to in the first paragraph of article 199 and the Twenty-Fourth Transitory Provision of the General Law of Chapter V of the Accounting Manual for Companies of the Financial System;

That, for the purpose of collecting opinions from the general public regarding the proposals for modification of the regulation applicable to supervised companies, the pre-publication of the draft resolution on the matter was ordered on the electronic portal of the Superintendence, under the provisions of the Thirty-Second Final and Complementary Provision of the General Law and Supreme Decree No. 001-2009-JUS and its amendments;

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

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

RESOLVES:

Article First.- Approve the Regulation for the Requirement of Effective Equity for Additional Risks, which forms an integral part of this Resolution, as indicated below:

“REGULATION FOR THE REQUIREMENT OF EFFECTIVE EQUITY FOR ADDITIONAL RISKS

CHAPTER I
GENERAL PRINCIPLES

Article 1.- Scope
This regulation applies to the companies included in letters A, B and C of article 16 of the General Law, to the Bank of the Nation, to the Agropecuario Bank, to the Development Financial Corporation (COFIDE) and to the MIVIVIENDA S.A. Fund, hereinafter companies.

Article 2.- Definitions
For the application of this Regulation, the following definitions must be considered:
a) Direct credits: Represents the financing that, under any modality, the companies of the financial system grant to their clients, originating on their part the obligation to deliver a determined sum of money, in one or several acts, including even the obligations derived from refinancings and restructurings of existing credits or debts. b) General Law: General Law of the Financial System and of the Insurance System and Organic Law of the Superintendence of Banks and Insurance, Law No. 26702, and its modifying norms. c) Macro region: Grouping of departments according to their geographical proximity for the purposes of this regulation. d) Minimum requirement of effective equity: Global limit established by the General Law in numeral 3 of article 199. e) Concentration risk: That risk that is generated as a consequence of a significant proportion of the credit portfolio being assigned to the same individual, economic sector or geographical region.

f) Economic sector: Grouping of economic activities according to the International Standard Industrial Classification (ISIC) for the purposes of this Regulation. g) Superintendence: Superintendence of Banks, Insurance and Private Pension Fund Administrators.

Article 3.- Sufficiency of effective equity
3.1 According to article 199-B of the General Law, companies must have a level of effective equity above the global limit established in numeral 3 of article 199 and the cushions established in article 199-A of said Law, based on the risk profile of their business.
3.2 To determine the level of effective equity for additional risks, companies must have a process to evaluate the sufficiency of their effective equity based on their risk profile, which must follow the guidelines established by the Superintendence. This level of effective equity must be at least the one obtained from the methodology described in this Regulation, otherwise what is established in article 218 of the General Law will apply.

Article 4.- Calculation of the requirement of effective equity for additional risks
4.1 The requirement of effective equity for additional risks will be equal to the sum of the requirements of effective equity calculated for each of the following components:
a) Concentration risk b) Interest rate risk in the banking book (banking book)
4.2 The following articles describe the methodologies for the calculation of the requirement of effective equity for additional risks according to the mentioned components.

Article 5.- Information to be sent to the Superintendence 1
Companies will present to the Superintendence, via the External Capture and Validation Sub-Module (SUCAVE), the reports indicated below, in accordance with their corresponding methodological notes:

• Report No. 4-B1 – Requirement of Effective Equity for Individual Concentration Risk
• Report No. 4-B2 – Requirement of Effective Equity for Concentration Risk according to Economic Sector
• Report No. 4-B3 – Requirement of Effective Equity for Regional Concentration Risk
• Report No. 4-C - Requirement of Effective Equity for Interest Rate Risk in the Banking Book (Banking Book)
• Report No. 4-D - Summary of Equity Requirements

CHAPTER II
REQUIREMENT OF EFFECTIVE EQUITY FOR CONCENTRATION RISK

1 Article substituted by SBS Resolution No. 2467-2023, published on 24.07.2023.

Article 6.- Types of concentration
In this Regulation, two types of concentration are distinguished:
(i) Individual concentration: It is related to the distribution of the company's portfolio among individual debtors.
(ii) Sectoral concentration: It is related to the distribution of the company's portfolio among the different (a) economic sectors and (b) geographical regions.

Article 7.- Scope of the requirement of effective equity for concentration risk
The requirement of effective equity for concentration risk applies to the direct credit portfolio of companies.

Article 8.- Maximum requirements for each type of concentration
8.1 The requirement of effective equity for concentration risk is calculated by multiplying the percentages determined according to the level of individual and sectoral concentration by the requirement of effective equity for credit risk obtained according to the Regulation for the Requirement of Effective Equity for Credit Risk.
8.2 The maximum percentages that will be required of a company if its portfolio is completely concentrated in a specific type of concentration are detailed in the following table:
Individual:
8%
Sectoral: 30%
Economic sector: 22% Regional: 8%

Article 9.- Exposures subject to the calculation of the requirement of effective equity for concentration risk
(i) Individual concentration: for the calculation of the requirement for individual concentration, the direct credits corresponding to the twenty (20) main debtors of the company must be considered, applying the single risk criterion in accordance with what is established in article 203 of the General Law and in the Special Norms on Linkage and Economic Group. (ii) Sectoral concentration: for the calculation of the requirement for economic sector and regional concentration, all direct credits are considered.

Article 10.- Limit to be subject to the requirement of effective equity for individual concentration risk
For the company to be subject to the requirement of effective equity for individual concentration risk, the direct credits of the twenty (20) main debtors of the company, as stated in article 9 of this Regulation, applying the single risk criterion, must represent more than 5% of the total direct credits of the company.

Article 11.- Calculation of the requirement of effective equity for individual concentration risk
11.1 For the calculation of the requirement of effective equity for individual concentration risk, the company must only consider the total direct credits corresponding to its twenty (20) main debtors applying the single risk criterion, as stated in article 9 of this Regulation.

11.2 The balance of these credits is divided by the total balance of direct credits of the company, to determine the individual concentration indicator that will be used in the calculation of the requirement of effective equity for this risk. The company will obtain the rate to calculate the requirement of effective equity for individual concentration risk by multiplying the mentioned indicator by the 8% referred to in paragraph 8.2 of article 8 of this Regulation.
11.3 The requirement of effective equity for individual concentration risk will be equal to the multiplication of the rate calculated according to the previous paragraph by the requirement of effective equity for credit risk obtained according to the Regulation for the Requirement of Effective Equity for Credit Risk. The calculation of the requirement of effective equity for individual concentration risk is detailed in Report No. 4-B1.

Article 12.- Calculation of the requirement of effective equity for concentration risk according to economic sector
12.1 For the calculation of the requirement of effective equity for concentration risk according to economic sector, the company must calculate the concentration indicator of the direct credits, segmented into 19 economic sectors (including the housing mortgage segment) plus the consumption segment, which are detailed in Annex 1 of this Regulation. The calculation of the concentration indicator according to economic sector is detailed in Report No. 4-B2.
12.2 The company obtains the rate to calculate the requirement of effective equity for concentration risk according to economic sector using the calculated concentration indicator according to economic sector, taking into account the following table:

Value of the Concentration Indicator according to economic sector | Rate of requirement of effective equity for concentration risk according to economic sector 1 | 22% 2 | 19% 3 | 17% 4 | 15% 5 | 13% 6 | 11% 7 | 10% 8 | 9% 9 | 8% 10 | 7% 11 or higher | 0%

12.3 The requirement of effective equity for concentration risk according to economic sector is equal to the multiplication of the rate calculated above by the requirement of effective equity for credit risk obtained according to the Regulation for the Requirement of Effective Equity for Credit Risk.

Article 13.- Calculation of the requirement of effective equity for regional concentration risk
13.1 To determine the requirement of effective equity for regional concentration risk, the regional concentration indicator of the direct credits must be calculated, segmented into the 8 macro regions presented in Annex 2 of this Regulation. This indicator is adjusted by the population of each macro region, as well as by the contribution of each region to national production. The calculation of the regional concentration indicator is detailed in Report No. 4-B3.
13.2 The company obtains the rate to calculate the requirement of effective equity for regional concentration risk using the calculated regional concentration indicator, taking into account the following table:

Value of the Regional Concentration Indicator | Rate of requirement of additional effective equity for regional concentration risk 1 | 8.0% 2 | 6.5% 3 | 5.0% 4 | 4.0% 5 | 3.0% 6 or higher | 0.0%

13.3 The requirement of effective equity for regional concentration risk is equal to the multiplication of the rate calculated above by the requirement of effective equity for credit risk obtained according to the Regulation for the Requirement of Effective Equity for Credit Risk.

Article 14.- Requirement of effective equity for concentration risk
The requirement of effective equity for concentration risk is equal to the sum of the requirement corresponding to individual concentration, the requirement corresponding to concentration according to economic sector and the requirement corresponding to regional concentration.

Article 15.- Frequency of updating the calculation of the requirement of effective equity for concentration risk
The calculation of the requirement of effective equity for concentration risk is carried out monthly, for which Reports No. 4-B1, 4-B2 and 4B-3 must be used. For the calculation of regional concentration, the adjustment of the population and of the participation in national production by macro region is carried out by the Superintendence when it deems it pertinent.

CHAPTER III
REQUIREMENT OF EFFECTIVE EQUITY FOR INTEREST RATE RISK IN THE BANKING BOOK (BANKING BOOK)

Article 16.- Interest rate risk in the banking book (banking book)
Interest rate risk in the banking book (banking book) is the possibility of losses derived from fluctuations in interest rates that affects the profits and equity value of the company. It is generated from assets, liabilities and off-balance sheet positions, which do not form part of the trading portfolio defined in the Regulation for the Requirement of Effective Equity for Market Risk. It can come from four sources:

• Repricing risk: possibility of losses derived from differences in maturity or repricing periods between the assets, liabilities and off-balance sheet positions of the company.
• Basis risk: possibility of losses derived from the imperfect correlation existing between the interest rates of active and passive positions with similar repricing characteristics.
• Yield curve risk: possibility of losses derived from the imperfect correlation between the interest rates associated with different maturities, which cause changes in the yield curve.
• Option risk: possibility of losses derived from the exercise of explicit or implicit options present in active or passive positions.

Article 17.- Requirement of effective equity for interest rate risk in the banking book (banking book)
17.1 Companies must use interest rate risk measurement models in the banking book (banking book) in order to calculate the Value at Risk (VaR) in equity. For this purpose, the methodology established in Annex No. 7-B “Measurement of Interest Rate Risk – Value at Risk in Equity” of the Accounting Manual for Companies of the Financial System must be used.
17.2 If the ratio “Value at Risk in equity / Effective equity” is greater than 15%, the requirement of effective equity will be equal to the VaR minus the amount that represents 15% of the effective equity. If the ratio is less than or equal to 15%, the requirement will be zero. The following formula summarizes the calculation of the additional requirement of effective equity for interest rate risk in the banking book (banking book).

K banking book interest rate risk = Max [ 0, VaR – 15%*EE t]

Where:
K banking book interest rate risk = Requirement of effective equity in new soles VaR = Value at Risk in new soles coming from Annex No. 7-B of the Accounting Manual for Companies of the Financial System EE t = Effective equity

17.3 The calculation of this requirement must be carried out monthly, for which Report No. 4-C must be used.
17.4 Companies that require maintaining additional effective equity for interest rate risk in the banking book (banking book) must communicate to the Superintendence within a period of thirty (30) business days from the occurrence of the excess, the causes that generated this greater exposure and, in case the excess has not been corrected within this period of thirty (30) business days, they must also include a plan approved in their Risk Committee with specific deadlines to reduce their exposure to said risk or increase their effective equity, so that the VaR / EE indicator does not exceed the threshold of 15% of the Effective Equity.

COMPLEMENTARY FINAL PROVISIONS

First.- Use of voluntary provisions to decrease the requirement of effective equity for additional risks Companies that have generic voluntary provisions not included as Level 2 effective equity, may use up to 70% of said provisions to decrease the requirement of effective equity for additional risks corresponding to concentration risk and interest rate risk in the banking book (banking book). Procyclical provisions cannot be considered as voluntary provisions. Companies that use voluntary provisions to decrease the requirement of effective equity for additional risks cannot use said provisions to net exposures when calculating risk-weighted assets for credit risk.

Second.- Power of action of the Superintendence The Superintendence, independently of the pre-established rules in this Regulation, can take additional actions to preserve or allow the use of effective equity for additional risks in some institutions when events occur that put at risk the stability of one or more institution(s) of the financial system.

Third.- Requirement of effective equity for concentration risk and for interest rate risk in the banking book (banking book) of companies that are applying internal models If a company calculates its requirement of effective equity for credit risk using the advanced IRB method for a percentage greater than 75% of its credit portfolio, the company may develop its own models for the estimation of the requirement of effective equity for concentration risk. The use of said models is subject to their approval by the Superintendence. If a company calculates its requirement of effective equity for market risk using internal models, the company may develop its own models for the estimation of the requirement of effective equity for interest rate risk in the banking book (banking book). The use of said models is subject to their approval by the Superintendence.

COMPLEMENTARY TRANSITORY PROVISIONS

Sole.- Adaptation period
Upon entering into force of this Regulation, companies will have until December 2023 to complete the requirement of effective equity for concentration risk. This gradualism applies only to the excess of the required capital with respect to the additional requirement of effective equity for concentration risk calculated in December 2022. This deadline only applies to companies that are not within an adaptation plan, within the framework of what is established in article 218 of the General Law. Companies that have a plan adapt their level of effective equity according to what is established in said plan.

Article Second.- Annexes 1 and 2 of the Regulation for the Requirement of Effective Equity for Additional Risks attached to this Resolution are approved, which are published on the Institutional Portal (www.sbs.gob.pe), in accordance with what is established in Supreme Decree No. 001-2009-JUS and its amendments.

Article Third.- The Accounting Manual for Companies of the Financial System approved by SBS Resolution No. 895-98 and its modifying and complementary norms is modified, according to what is indicated in Annex A attached to this Resolution, which is published on the Institutional Portal (www.sbs.gob.pe), in accordance with what is established in Supreme Decree No. 001-2009-JUS and its amendments.

Article Fourth.- This Resolution enters into force on January 1, 2023, from which date the Regulation for the Requirement of Additional Effective Equity, approved by SBS Resolution No. 8425-2011 and its amendments, is repealed.

Register, communicate and publish,

MARIA DEL SOCORRO HEYSEN ZEGARRA
Superintendent of Banks, Insurance and AFP