Resolution SBS No. 975-2016: Regulation on Subordinated Debt Applicable to Financial System Companies

Los Laureles Nº 214 - Lima 27 - Perú Telf. : (511)6309000 Fax: (511) 6309239 1 Lima, February 24, 2016 Superintendence Resolution No. 975 -2016 The Superintendent of Banks, Insurance, and Private Pension Fund Administrators

CONSIDERING:

That, 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, authorizes financial system companies to issue and incur subordinated debt;

That, in accordance with what is established by articles 184 and 233 of the General Law, subordinated debt may be considered in the calculation of the effective equity of level 1, level 2, and level 3 of financial system companies, when it meets the requirements established by the Superintendence through a general norm;

That, through SBS Resolution No. 4727-2009, the Regulation on Subordinated Debt applicable to Financial System Companies was approved, in which the characteristics that these instruments must meet to be considered in the calculation of the effective equity of level 1, level 2, or level 3 of financial system companies are established;

That, in order to improve the quality of the effective equity of financial system companies and adapt the regulatory framework of the Superintendence to the recommendations of the Basel Committee on Banking Supervision, it is convenient to modify the requirements that subordinated debt must meet to be considered in the calculation of effective equity;

That, likewise, in line with said recommendations and to reinforce the solvency requirements of financial system companies, it is convenient to modify the effective equity requirement for credit risk for intangible assets and tax assets for deferred taxes;

That, for the purpose of collecting opinions from the general public regarding the proposals for modification of the regulations applicable to supervised companies, the prepublication of this norm was ordered under the provisions of Supreme Decree No. 001-2009-JUS;

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

Los Laureles Nº 214 - Lima 27 - Perú Telf. : (511)6309000 Fax: (511) 6309239 2 In exercise of the powers conferred by paragraphs 7 and 9 of article 349 of the aforementioned General Law.

RESOLVES:

Article First.- Approve the Regulation on Subordinated Debt applicable to Financial System Companies, which forms an integral part of this Resolution.

“REGULATION ON SUBORDINATED DEBT APPLICABLE TO FINANCIAL SYSTEM COMPANIES

CHAPTER I
GENERAL PROVISIONS

Article 1°.- Scope
This Regulation is applicable to the companies included in letters A, B, and C of article 16 of the General Law, to the National Bank, to the Development Financial Corporation (COFIDE), to the Agricultural Bank, and to the MIVIVIENDA S.A. Fund, authorized to issue and/or incur subordinated debt.

Article 2°.- Definitions
For the purposes of this Regulation, the following definitions shall be considered:

1. Forgiveness: Waiver by creditors of the right to collect subordinated debt issued or received by a company indicated in the scope of the Regulation. Forgiveness may be temporary or permanent, as contemplated in the issuance documents.

2. Redeemable subordinated debt: Subordinated debt whose principal is cancelled within a specified period.

3. Non-redeemable subordinated debt: Subordinated debt whose principal is not amortized and generates periodic profitability perpetually.

4. Subordinated debt convertible into shares: Subordinated debt that, prior to its maturity date or on that date, may be converted into shares of the issuing company of the instruments or the recipient of the loan.

5. Companies: The companies included in letters A, B, and C of article 16 of the General Law, the National Bank, the Development Financial Corporation (COFIDE), the Agricultural Bank, and the MIVIVIENDA S.A. Fund, authorized to issue and/or incur subordinated debt, according to articles 8 and 12 of this Regulation.

6. Legal entities: In accordance with the definition in the Special Norms on Linkage and Economic Group, approved by SBS Resolution No. 5780-2015.

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7. Hybrid instruments: Instruments that combine characteristics of capital and debt. Hybrid instruments include, among others, non-redeemable subordinated debt, subordinated debt mandatorily convertible into shares, and perpetual preferred shares with cumulative dividend rights.

8. Non-accumulative interest: When the issuer of the subordinated debt or the recipient of the subordinated loan does not make the interest payments within the reference period, the holder of the instruments representing subordinated debt or the grantor of the subordinated loan loses the right to receive said interests, such that the interests not paid in the reference period are not enforceable.

9. Accumulative interest: When the issuer of the subordinated debt or the recipient of the subordinated loan does not make the interest payments within the reference period, the holder of the instruments representing subordinated debt or the grantor of the subordinated loan does not lose the right to receive said interests, such that the interests not paid in the reference period are enforceable in the future.

10. Securities Market Law: Securities Market Law, approved by Legislative Decree No. 861 and its modifying norms.

11. General Law: 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.

12. Accounting equity: Own resources of the companies, constituted by the difference between assets and liabilities. It includes, among other items, shareholder investment, donations, issuance premiums, capital in process, reserves, accumulated results, and the result of the period, net of losses, if any. It does not include subscribed capital until it has been integrated into capital.

13. Effective equity: Extra-accounting amount that serves as backing for the company's operations. It is equal to the sum of basic equity (level 1) and supplementary equity (levels 2 and 3). Its composition and limits are indicated in the General Law and regulatory norms issued by the Superintendence.

14. Regulation on the computation of reserves, profits, and instruments representing capital in the effective equity of financial system companies: Regulation on the computation of reserves, profits, and instruments representing capital in the effective equity of financial system companies, approved by SBS Resolution No. 4595-2009 and its amendments.

15. Step-up: One or more increases in the interest rate, on pre-established dates, calculated with respect to the yield on the date of placement or grant. Rate adjustments are not considered step-up. A rate adjustment is understood as a change in rate, provided that the implicit spread in the initial rate with respect to the final rate does not increase.

16. Superintendence: Superintendence of Banks, Insurance, and Private Pension Fund Administrators.

Article 3°.- Subordinated debt computable in effective equity

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Subordinated debt computable in effective equity is that which meets the following conditions:

1. It shall be initially valued at the amount of its placement or grant, and said amount must be fully cancelled.

2. It is not acquired by the company itself, any legal entity or legal body that it controls, any legal entity or legal body in which it maintains significant ownership or over which it exercises significant influence in management, in accordance with what is established in the Special Norms on Linkage and Economic Group approved by SBS Resolution No. 5780-2015 and in the Regulation on the Acquisition of Property in the Social Capital of Supervised Companies and Significant Owners approved by SBS Resolution No. 6420-2015.

3. It cannot be financed directly or indirectly (through third parties) by the company itself.

4. It cannot be guaranteed or covered by the company itself, any legal entity or legal body that it controls, any legal entity or legal body in which it maintains significant ownership or over which it exercises significant influence in management, in accordance with what is established in the Special Norms on Linkage and Economic Group approved by SBS Resolution No. 5780-2015 and in the Regulation on the Acquisition of Property in the Social Capital of Supervised Companies and Significant Owners approved by SBS Resolution No. 6420-2015.

5. It is not subject to any agreement, whether contractual or of another type, that improves the legal or economic priority in case of intervention, or dissolution and liquidation of the company that issues and/or receives the subordinated debt.

6. Payment before its maturity or redemption by lottery is not permitted without prior authorization from the Superintendence; in case it includes an early redemption option, said option may only be exercised by the issuer or recipient of the subordinated debt and only with prior authorization from the Superintendence.

Subordinated debt computable in effective equity may be represented by instruments representing debt or by loans.

Article 4°.- Authorization to issue subordinated debt or incur subordinated loans

To issue instruments representing subordinated debt or incur subordinated loans, companies must submit to the Superintendence a request for a favorable opinion or authorization, respectively. The request must indicate whether the instruments representing debt or the loans will be used for the computation of effective equity, attaching the information required in articles 9 and 13 of this Regulation, as applicable.

After evaluating the adequate compliance with the respective requirements, the Superintendence will issue the resolution with a favorable opinion or authorization within thirty (30) business days following the submission of the corresponding request containing complete information.

Any modification in the conditions of the issuance contracts for instruments representing subordinated debt or subordinated loans that affects their computation in effective equity, when the draft contracts have been reviewed by the Superintendence in accordance with articles 9 and 13 of this Regulation, requires its favorable opinion or prior authorization, respectively.

Los Laureles Nº 214 - Lima 27 - Perú Telf. : (511)6309000 Fax: (511) 6309239 5

Article 5º.- Application of norms on shareholders and capital to subordinated debt convertible into shares

The provisions of Chapter I of Title III of Section One of the General Law shall apply to creditors and/or holders of subordinated debt convertible into shares, insofar as relevant, at the time of conversion.

Article 6°.- Early Redemption

In case the subordinated debt includes an early redemption option, the company shall not generate expectations that the early redemption option will be exercised. In this way, it shall not explicitly or implicitly indicate that the instruments will or may be reimbursed or repurchased, except in the following cases:

a) After the intervention of the company; or liquidation and dissolution; or

b) When the entity has obtained prior authorization in accordance with what is established in the Regulation.

The company shall also not explicitly or implicitly indicate that the Superintendence will authorize the exercise of the early redemption option.

CHAPTER II
INSTRUMENTS REPRESENTING SUBORDINATED DEBT

Article 7°.- Definition

Instruments representing subordinated debt confer credit rights on their holders that must present the characteristics established in article 3 of this Regulation to be computable in effective equity.

Instruments representing subordinated debt include redeemable and non-redeemable subordinated bonds and subordinated bonds convertible into shares.

Article 8°.- Companies authorized to issue instruments representing subordinated debt

The following are authorized to issue instruments representing subordinated debt:

1. Banking companies;

2. Financial companies;

3. Other multiple operation companies that are authorized to issue instruments representing subordinated debt in accordance with what is established in articles 285 to 288 of the General Law;

4. Specialized companies that are authorized to issue instruments representing subordinated debt, as deemed appropriate by the Superintendence;

5. Investment banks; and,

6. The National Bank, the Agricultural Bank, COFIDE, and the MIVIVIENDA S.A. Fund.

Article 9°.- Requirements for the issuance of instruments representing subordinated debt

For the issuance of instruments representing subordinated debt, companies must attach to the request referred to in article 4 of this Regulation, a certified copy of the agreement of the respective social body, a copy of the draft issuance contract, and a technical study of the issuance.

The technical study of the issuance shall include, at a minimum, the following aspects:

1. Report on the evaluation of the impact of the financial instrument on the risk profile of the issuing company, which must include:

a) Executive Summary: Main aspects of the impact study on the company's risk profile.

b) Background: Objectives of the issuance and use of resources, previous issuances of the company and its risk classifications.

c) Description of the Program / Issuance: Characteristics of the issuance and the financial instrument and the projected schedule for issuances.

d) Market Analysis: Analysis of the supply and demand of the financial instrument and potential investors.

e) Economic and financial evaluation: Comprises risk analysis and financial projections:

e.1) Risk Analysis: Impact on interest rate risk (earnings at risk and net asset value at risk); impact on exchange rate risk (limits on global position of overselling and overbuying); impact on liquidity position (liquidity ratios, liquidity gaps, and concentration of liabilities); for structured financial products, information shall be provided on their design, yield, risks, and hedging mechanisms in accordance with current regulation.

e.2) Impact on financial indicators: Effective equity, global capital ratio, additional equity requirement, and other financial indicators.

e.3) Financial projections for a 3-year period: Assumptions of the projections, estimation of issuance rates, projected cash flow of the projected issuances (monthly flows), impact on the income statement, net present value (sensitivity analysis with scenarios). Projections for the indicators indicated in paragraph e.2) shall also be included.

2. The format for presenting projected financial statements for a three (3) year period must correspond to the accounting standards approved by the Superintendence.

3. In addition to printed documentation, the financial analysis must be presented in electronic files, in Excel format with formulas.

For the aforementioned issuances, the norms approved by the Superintendence regarding the general procedure or the expedited procedure for the series issuance of financial instruments shall apply, when applicable.

Article 10°.- Placement

Instruments representing subordinated debt may be placed through public or private offering.

In case the issuance of instruments representing subordinated debt is carried out in Peru, for the purposes of its placement through public offering, issuing companies must comply with the provisions established in the Securities Market Law. The registration of the instruments in the Public Registry of the Securities Market, under the responsibility of the Superintendence of the Securities Market (SMV), requires the prior presentation of the resolution of favorable opinion issued by the Superintendence, in accordance with article 4 of this Regulation.

CHAPTER III
SUBORDINATED LOANS

Article 11°.- Definition

Subordinated loans are contracts under which companies incur subordinated debt, redeemable, non-redeemable, or convertible into shares, which must present the characteristics established in article 3 of this Regulation to be computable in effective equity.

Article 12°.- Companies authorized to incur subordinated loans

The following are authorized to incur subordinated loans:

1. Multiple operation companies;

2. Specialized companies;

3. Investment banks; and,

4. The National Bank, the Agricultural Bank, COFIDE, and the MIVIVIENDA S.A. Fund.

Article 13º.- Requirements for incurring subordinated loans

Companies wishing to incur subordinated loans must attach to the request referred to in article 4 of this Regulation, a certified copy of the agreement of the respective social body, a copy of the draft loan contract, and a technical study of the loan.

The technical study of the loan shall include, at least, the following:

1. Identification of the lender, amount of the loan, currency, maturity, interest, and payment period thereof.

2. Impact on interest rate risk (earnings at risk and net asset value at risk); impact on exchange rate risk (limits on global position of overselling and overbuying); impact on liquidity position (liquidity ratios, liquidity gaps, and concentration of liabilities); for structured financial products, design, yield, risks, and hedging mechanisms in accordance with current regulation.

3. Effect of the loan on effective equity, global capital ratio, additional equity requirement, and other financial indicators.

4. Assumptions of the projections and sensitivity analysis of the flows destined for the payment of the loan for a 3-year period; projections for the indicators indicated in paragraph 3 for a 3-year period.

5. Impact on the income statement for a 3-year period.

In addition to printed documentation, the financial analysis must be presented in electronic files, in Excel format with formulas.

CHAPTER IV
COMPUTATION OF SUBORDINATED DEBT IN EFFECTIVE EQUITY

Article 14°.- Non-redeemable subordinated debt computable in level 1 effective equity

Los Laureles Nº 214 - Lima 27 - Perú Telf. : (511)6309000 Fax: (511) 6309239 8

Subordinated debt may be considered as part of the level 1 effective equity of companies provided it meets the general characteristics indicated in article 3 of this Regulation and complies, at a minimum, with the requirements indicated below:

1. Perpetuity:

Subordinated debt is considered perpetual if it has no maturity date and does not contain a step-up or other incentive for early amortization.

Subordinated debt may contemplate an early redemption option but only at the initiative of the issuer or recipient of the loan, after a minimum period of five (5) years counted from its issuance or grant, taking into account the following:

a. The company must abstain from generating expectations that the early redemption option will be exercised;

b. The company shall not exercise the early redemption option, unless: i) it substitutes the subordinated debt with another element that meets the characteristics to form part of level 1 effective equity, and said substitution is carried out under conditions that are sustainable considering the company's income generation capacity; or, ii) it demonstrates that the global limit and additional effective equity requirements are met after exercising the early redemption option; and,

c. The company must have prior approval from the Superintendence to exercise the early redemption option.

Early redemptions due to changes in legislation, tax norms, and other regulations or due to the occurrence of events beyond the company's control are not subject to the five (5) year period mentioned in the previous paragraph, but prior approval from the Superintendence must be obtained.

2. Loss Absorption:

This is subordinated debt with non-accumulative interest. The company may at all times, at its sole discretion, indefinitely suspend the payment of accrued but unpaid interest. Interest that has already accrued but has not been paid must be reversed.

The indefinite suspension of interest payment does not constitute a default event nor impose restrictions on the issuer or recipient of subordinated debt, except for the prohibition of profit distribution to holders of ordinary shares.

The subordinated debt instrument cannot incorporate the payment of interest adjusted periodically, based, in whole or in part, on the credit solvency of the company.

The instrument shall not have characteristics that hinder the recapitalization of the company, such as provisions requiring that the issuer of the subordinated debt or recipient of the subordinated loan compensate the holder of subordinated debt or grantor of the subordinated loan if a new instrument is issued at a lower price or a new loan is granted with a higher interest during a specified period of time.

Likewise, subordinated debt must have a mechanism that allows it to absorb losses pro rata and pari passu through its conversion into common shares, or through permanent or temporary forgiveness.

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The conversion mechanism into common shares or the forgiveness must be activated by the issuer of the instrument representing subordinated debt or the recipient of the subordinated loan when the indicator "Adjusted Effective Equity divided by Total Risk-Weighted Assets and Contingencies Adjusted" is below any of the following values:
a. 5.125% b. A level higher than 5.125%, when so indicated by the company and specified in the issuance documents. In this case, levels for the indicator that stops the conversion into common shares or forgiveness mechanism; and for the indicator that initiates maximum recomposition, in the case of temporary forgiveness, must also be established in the issuance documents, to the satisfaction of the Superintendency.

As a consequence of the application of the aforementioned mechanism, the conversion or forgiveness will be applied until the aforementioned indicator reaches at least 6% or the subordinated debt is exhausted.

The company will have ninety (90) calendar days to apply the mechanism, counted from the month-end to which the indicator calculation corresponds.

The calculation of the indicator is detailed below:

Adjusted effective equity is composed of the following concepts:

• Social capital – common shares
  Plus
• Share premium - common shares
• Capital in process – common shares
• Legal reserve
• Special legal reserves
• Discretionary reserves that can only be reduced with prior approval of the Superintendency
• Donations
• Accumulated profit
• Net profit of the period
  Minus
• Common shares in treasury
• Issuance discount - common shares
• Accumulated loss
• Excess of unrealized losses on investments available for sale over accumulated profits and period profit, without an agreement to capitalize profits or an agreement to capitalize future profits
• Net loss of the period
• Goodwill

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• Intangible assets (does not include goodwill but does include software, brands, assets recognized by the difference between the fair value and the nominal value of the acquired credit portfolio, as well as other intangible assets)
• Deferred income tax assets net of deferred income tax liabilities, associated with temporary differences (excess of 10% of adjusted effective equity), only in cases where the deferred income tax asset associated with temporary differences is greater than or equal to the deferred income tax liability.
• Deferred income tax assets associated with tax losses generated in previous periods
• Deficit of provisions
• Total deductions - literal C of article 184 of the General Law

Total risk-weighted assets and contingencies adjusted are determined as follows:

• Total risk-weighted assets and contingencies
  Minus
• Risk-weighted intangible assets (does not include goodwill but does include software, brands, assets recognized by the difference between the fair value and the nominal value of the acquired credit portfolio, as well as other intangible assets)
• Deferred income tax assets net of deferred income tax liabilities, associated with temporary differences (excess of 10% of adjusted effective equity) risk-weighted, only in cases where the deferred income tax asset associated with temporary differences is greater than or equal to the deferred income tax liability.
• Deferred income tax assets associated with tax losses generated in previous periods risk-weighted

The conversion into common shares, as well as permanent or temporary forgiveness, will be applied pro rata and pari passu among all holders and/or creditors of subordinated debt computable in Level 1 effective equity as of the date of conversion or forgiveness.

In the case of conversion into common shares, the company must take into consideration the book value of the subordinated debt and the value of the shares, as established in the issuance documents. The provisions of Chapter I of Title III of the First Section of the General Law shall apply, to the extent relevant, at the time of conversion into common shares.

In the case of temporary forgiveness, the recomposition of the subordinated debt will occur gradually, pro rata and pari passu only when the aforementioned indicator is greater than or equal to 7%. In this case, the maximum recomposition to be made plus the coupon payment corresponding to the forgiven amount will be determined, at the close of the economic year and with audited Financial Statements, by the following calculation:

Where,

• Profits without agreement: profits of the period and accumulated without capitalization agreement.

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• : Nominal amount (before forgiveness) of all subordinated debt computable in Level 1 effective equity that was subject to forgiveness.
• : Total amount of Level 1 effective equity of the company

In the event of supervision, intervention, or dissolution and liquidation, the interest and principal of the non-redeemable subordinated debt computable in Level 1 effective equity, in that order, pro rata and pari passu, will be applicable to absorb the company's losses that remain after the instruments computable in Level 1 effective equity have been applied. This must have been expressly contemplated in the documentation and information relative to the instrument necessary for investor decision-making.

Article 15°.- Non-redeemable subordinated debt computable in Level 2 effective equity

Non-redeemable subordinated debt may be considered as part of the Level 2 effective equity of companies provided it meets the general characteristics indicated in article 3 of this Regulation and complies, at a minimum, with the requirements indicated below:

1. Perpetuity:
   Subordinated debt is considered perpetual if it has no maturity date and does not contain a step-up or other incentive for early amortization.
   Subordinated debt may contemplate an early redemption option but only at the initiative of the issuer or recipient of the loan, after a minimum period of five (5) years from its issuance or granting, taking into consideration the following:
   a. The company must refrain from generating expectations that the early redemption option will be exercised; b. The company shall not exercise the early redemption option, unless: i) it substitutes the subordinated debt with another hybrid element that meets the characteristics to form part of Level 2 effective equity or with another instrument that meets characteristics to form part of a better level of effective equity, and such substitution is carried out under conditions that are sustainable considering the company's income generation capacity; or, ii) it demonstrates that the global limit and the requirements for additional effective equity are met after the exercise of the early redemption option; and,
   c. The company must have prior approval from the Superintendency to exercise the early redemption option.

Early redemptions due to changes in legislation, tax rules, and other regulations or due to the occurrence of events beyond the company's control are not subject to the five (5) year period mentioned in the previous paragraph, but prior approval from the Superintendency must be obtained.

2. Loss Absorption:
   The instrument must not incorporate a coupon or dividend based, in part or totally, on the company's creditworthiness.
   The holder of subordinated debt must not have the right to accelerate future agreed payments, except in the event of supervision, intervention, or dissolution and liquidation.

In the event of supervision, intervention, or dissolution and liquidation, the interest and principal of the non-redeemable subordinated debt computable in Level 2 effective equity, in that order, pro rata and pari passu, will be applicable to absorb the company's losses that remain after the instruments computable in Level 1 effective equity and the hybrid instruments representing capital computable in Level 2 effective equity have been applied.

Los Laureles Nº 214 - Lima 27 - Perú Telf. : (511)6309000 Fax: (511) 6309239 12 This must have been expressly contemplated in the documentation and information relative to the instrument necessary for investor decision-making.

Article 16°.- Redeemable subordinated debt computable in Level 2 effective equity

Redeemable subordinated debt may be considered as part of the Level 2 effective equity of companies provided it meets the general characteristics indicated in article 3 of this Regulation and complies, at a minimum, with the requirements indicated below:

1. Maturity:
   Its original maturity term must be greater than or equal to five (5) years and does not contain a step-up or other incentive for early amortization.
   Subordinated debt may include an early redemption option at the initiative of the issuer or recipient of the loan but only after a minimum period of five (5) years from its issuance, taking into consideration the following:
   a. The company must refrain from generating expectations that the early redemption option will be exercised; b. The company shall not exercise the early redemption option, unless: i) it substitutes the subordinated debt with another non-hybrid element that meets the characteristics to form part of Level 2 effective equity or with another instrument that meets characteristics to form part of a better level of effective equity, and such substitution is carried out under conditions that are sustainable considering the company's income generation capacity; or, ii) it demonstrates that the global limit and the requirements for additional effective equity are met after the exercise of the early redemption option; and,
   c. The company must have prior approval from the Superintendency to exercise the early redemption option.

Early redemptions due to changes in legislation, tax rules, and other regulations or due to the occurrence of events beyond the company's control are not subject to the five (5) year period mentioned in the previous paragraph, but prior approval from the Superintendency must be obtained.

In the case of subordinated debt containing an early redemption option, the maturity of such debt will be considered the nearest date for the exercise of the option, except in the case where the early redemption option can only be executed at the initiative of the issuer or recipient of the loan and subject to prior approval of the Superintendency, in which case the originally agreed maturity date will be considered as the debt's maturity.

During the five (5) years prior to its maturity, for the purposes of its computation in Level 2 effective equity, an annual discount factor of twenty percentage points shall be applied proportionally to the balance of the subordinated debt principal, such that in the last year it is not computable.

2. Loss Absorption:
   The instrument must not incorporate a coupon or dividend based, in part or totally, on the company's creditworthiness.

Los Laureles Nº 214 - Lima 27 - Perú Telf. : (511)6309000 Fax: (511) 6309239 13 The holder of subordinated debt must not have the right to accelerate future agreed payments, except in the event of intervention, or dissolution and liquidation.

In the event of intervention, or dissolution and liquidation, the interest and principal of the redeemable subordinated debt computable in Level 2 effective equity, in that order, pro rata and pari passu, will be applicable to absorb the company's losses that remain after the instruments computable in Level 1 effective equity, the hybrid instruments representing capital and debt computable in Level 2 effective equity, and the non-hybrid instruments representing capital computable in Level 2 effective equity have been applied. This must have been expressly contemplated in the documentation and information relative to the instrument necessary for investor decision-making.

Article 17°.- Redeemable subordinated debt computable in Level 3 effective equity

1. Maturity:
   Redeemable subordinated debt may be considered as part of the Level 3 effective equity of companies that can only be destined to support market risk, provided it meets the general characteristics indicated in article 3 of this Regulation; its original maturity term is greater than or equal to two (2) years and does not contain a step-up or other incentive for early amortization; and is subject to the condition that interest payments nor principal payments will proceed, even at maturity, when the company's effective equity is lower than the minimum established in the first paragraph of article 199 of the General Law.

Subordinated debt may include an early redemption option but only after a minimum period of two (2) years from its issuance or granting, taking into consideration the following:
a. The company must refrain from generating expectations that the early redemption option will be exercised; b. The company shall not exercise the early redemption option, unless: i) it substitutes the subordinated debt with another element that meets the characteristics to form part of Level 3 effective equity or with another instrument that meets characteristics to form part of a better level of effective equity, and such substitution is carried out under conditions that are sustainable considering the company's income generation capacity; or, ii) it demonstrates that the global limit and the requirements for additional effective equity are met after the exercise of the early redemption option.
c. The company must have prior approval from the Superintendency to exercise the early redemption option.

Early redemptions due to changes in legislation, tax rules, and other regulations or due to the occurrence of events beyond the company's control are not subject to the two (2) year period mentioned in the previous paragraph, but prior approval from the Superintendency must be obtained.

In the case of subordinated debt containing an early redemption option, the maturity of such debt will be considered the nearest date for the exercise of the option, except in the case where the early redemption option can only be executed at the initiative of the issuer or recipient of the loan and subject to prior approval of the Superintendency, in which case the originally agreed maturity date will be considered as the debt's maturity.

Los Laureles Nº 214 - Lima 27 - Perú Telf. : (511)6309000 Fax: (511) 6309239 14 During the two (2) years prior to its maturity, for the purposes of its computation in Level 3 effective equity, an annual discount factor of fifty percentage points shall be applied proportionally to the balance of the subordinated debt principal, such that in the last year it is not computable.

2. Loss Absorption:
   The instrument must not incorporate a coupon or dividend based, in part or totally, on the company's creditworthiness.

The holder of subordinated debt must not have the right to accelerate future agreed payments, except in the event of intervention, or dissolution and liquidation.

In the event of intervention, or dissolution and liquidation, the interest and principal of the redeemable subordinated debt computable in Level 3 effective equity, in that order, pro rata and pari passu, will be applicable to absorb the company's losses that remain after the instruments computable in Level 1 effective equity, the hybrid instruments representing capital and debt computable in Level 2 effective equity, the non-hybrid instruments representing capital and debt computable in Level 2 effective equity, and the instruments representing capital computable in Level 3 effective equity have been applied. This must have been expressly contemplated in the documentation and information relative to the instrument necessary for investor decision-making.

Article 18°.- Subordinated debt convertible into shares computable in effective equity

Non-redeemable subordinated debt convertible into shares will be treated as follows:

• As a hybrid instrument computable in Level 1 effective equity when such debt meets the requirements indicated in article 14 of this Regulation, and the shares meet the necessary characteristics to be considered as part of Level 1 effective equity, in accordance with what is stated in the Regulation on the computation of reserves, profits, and instruments representing capital in the effective equity of companies of the financial system.
• As a hybrid instrument computable in Level 2 effective equity when such debt meets the requirements indicated in article 15 of this Regulation and the shares meet the necessary characteristics to be considered as part of Level 1 effective equity or as Level 2 hybrid instruments, in accordance with what is stated in the Regulation on the computation of reserves, profits, and instruments representing capital in the effective equity of companies of the financial system.

Redeemable subordinated debt convertible into shares will be considered as redeemable subordinated debt computable in Level 2 or 3 effective equity, and the provisions of articles 16 and 17 of this Regulation will apply to it.

Article 19°.- Redeemable subordinated debt with a term equal to or greater than sixty (60) years

When redeemable subordinated debt, convertible or not into shares, has an original maturity equal to or greater than sixty (60) years, it will be considered to meet the requirement of perpetuity referred to in numeral 1 of article 14, provided it has a residual term equal to or greater than twenty (20) years and, therefore, may be considered as a hybrid instrument computable in Level 1 or 2 effective equity, provided it meets the requirements required in articles 14 or 15, respectively, and the limits contemplated in article 20 of this Regulation.

When the residual term of the aforementioned subordinated debt is less than twenty (20) years, it will be considered as the redeemable subordinated debt referred to in article 16 of this Regulation, taking into account the limits contemplated in article 20 of this Regulation.

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Article 20°.- Limits in the computation of effective equity

Non-redeemable subordinated debt, subordinated debt convertible into shares, and other hybrid instruments, that meet the requirements to be computed as Level 1 effective equity, will be considered in that level up to the limit contemplated in the last paragraph of literal A of article 184 of the General Law. The excess over said limit will be considered as corresponding to hybrid instruments computable in Level 2 effective equity.

The redeemable subordinated debt contemplated in article 16 of this Regulation, as well as the other instruments that receive the same treatment as the aforementioned redeemable subordinated debt, will be considered in Level 2 effective equity up to the limit contemplated in numeral 2 of article 185 of the General Law. The excess over said limit will not be computed in the effective equity of the companies.

The redeemable subordinated debt contemplated in article 17 of this Regulation, as well as the other instruments that receive the same treatment as the aforementioned redeemable subordinated debt, will be considered in Level 3 effective equity up to the limit contemplated in numeral 3 of article 185 of the General Law. The excess over said limit will not be computed in the effective equity of the companies.

Simultaneously, compliance with the limit established in numeral 1 of article 185 of the General Law must be taken into account. The excess over said limit will not be computed in the effective equity of the companies.

CHAPTER V
OTHER PROVISIONS

Article 21°.- Investment in subordinated debt

For the calculation of the effective equity of companies, with the exception of COFIDE, the amount of the following must be deducted:

1. Investment in instruments representing subordinated debt issued by companies of the financial and insurance system of the country or abroad.
2. Investment in instruments representing subordinated debt issued by legal persons or legal entities with which financial statements must be consolidated.
3. Subordinated loans granted to companies of the financial and insurance system of the country or abroad.
4. Subordinated loans granted to legal persons or legal entities with which financial statements must be consolidated.

Article 22°.- Loss absorption of subordinated debt not computable in effective equity

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In the event of intervention, or dissolution and liquidation, the interest and principal of the subordinated debt, in that order, other than that referred to in Articles 14° to 19°, shall be applied to absorb the losses of the company that remain after the accounting equity has been fully applied.

FINAL PROVISIONS

First.- Subordinated debt issued or contracted from the entry into force of this Regulation This Regulation is applicable to subordinated debt issued or contracted from its entry into force.
Favorable opinions and/or authorizations issued by the Superintendence regarding subordinated debt that has not yet been issued or contracted as of the date of entry into force of this Regulation shall remain valid provided that the new debt issued or contracted complies with the requirements contemplated in this Regulation, to the satisfaction of the Superintendence.

Second.- Treatment of subordinated debt issued or contracted prior to the entry into force of this Regulation Subordinated debt issued or contracted prior to the entry into force of this Regulation that does not comply with the requirements established herein may continue to be recognized for the purposes of computing effective capital in accordance with the following:

a) Subordinated debt computable in Level 1 effective capital In this case, the subordinated debt shall be subject to a ten percent (10%) annual discount starting from the month of January 2017. In this regard, in January 2017, the subordinated debt must be recognized for the purposes of computing effective capital at a maximum of ninety percent (90%) of the amount of debt computable in December 2016, and decrease annually in the following years, in the month of January, by ten percent (10%) of said amount. In this way, in January 2026, such subordinated debt will have been fully discounted from Level 1 effective capital.

The amount not computable in Level 1 effective capital may be computed as a Level 2 hybrid instrument referred to in Article 19° of the Regulation on Subordinated Debt applicable to financial system companies, approved by Resolution SBS No. 4727-2009, provided it has a residual term equal to or greater than fifteen (15) years. When the residual term of the aforementioned subordinated debt is less than fifteen (15) years, it shall be computed as Level 2 redeemable subordinated debt referred to in Article 16° of the Regulation on Subordinated Debt applicable to financial system companies, approved by Resolution SBS No. 4727-2009.

The limits indicated in Article 20° of this Regulation and in Article 185° of the General Law are applicable.

b) Subordinated debt computable in Level 2 effective capital It is subject to what is stated in Article 16° of the Regulation on Subordinated Debt applicable to financial system companies, approved by Resolution SBS No. 4727-2009,

Los Laureles Nº 214 - Lima 27 - Perú Telf. : (511)6309000 Fax: (511) 6309239 17 as well as to what is stated in Article 20° of this Regulation and in Article 185° of the General Law.

Within a period of sixty (60) business days following the entry into force of this Regulation, companies must submit to the Superintendence a report with the impact estimates and the measures to be adopted for the restoration of their effective capital.”

Article Second.- Modify the Accounting Manual for Financial System Companies approved by Resolution SBS No. 895-98 and its modifying and complementary norms, in accordance with the Annex attached to this Resolution and published on the Institutional Portal (www.sbs.gob.pe), as provided in Supreme Decree No. 001-2009-JUS.

Article Third.- Modify the Regulation for the Requirement of Effective Capital for Credit Risk, approved by Resolution SBS No. 14354-2009 and its modifying norms, as follows:

1. Replace the last paragraph of Article 15° “Exposures with public sector entities” with the following text:

“Article 15°.- Exposures with public sector entities (...)
Exposures with the National Superintendence of Tax Administration (SUNAT) receive a weighting factor of 20%. However, the following must be taken into account:
a) Deferred income tax assets arising from loss carryforwards receive a weighting factor of 1000%. b) Net deferred income tax assets from deferred income tax liabilities, arising from temporary differences that do not exceed the 10% threshold of the adjusted effective capital referred to in Article 14° of the Regulation on Subordinated Debt applicable to Financial System Companies, approved by Resolution SBS No. 975-2016, will receive a weighting factor of 250%. The adjusted effective capital will be calculated taking into consideration all deductions that do not depend on the 10% threshold. Applicable only in cases where the deferred income tax asset associated with temporary differences is greater than or equal to the deferred income tax liability. c) Net deferred income tax assets from deferred income tax liabilities, arising from temporary differences that exceed the 10% threshold of the adjusted effective capital referred to in Article 14° of the Regulation on Subordinated Debt applicable to Financial System Companies, approved by Resolution SBS No. -2016, will receive a weighting factor of 1000% for the excess. The adjusted effective capital will be calculated taking into consideration all deductions that do not depend on the 10% threshold. Applicable only in cases where the deferred income tax asset associated with temporary differences is greater than or equal to the deferred income tax liability.”

2. Replace Article 24° “Exposures in other assets” with the following text:

“Article 24°.- Exposures in other assets
The following weighting factors must be applied:

Los Laureles Nº 214 - Lima 27 - Perú Telf. : (511)6309000 Fax: (511) 6309239 18 a) Cash on hand and gold bullion held in own safe deposit boxes or delivered in custody receive a weighting factor of 0%. b) Intangible assets and assets recognized due to the difference between fair value and nominal value of acquired credit portfolios, net of accumulated amortization, receive a weighting factor of 1000%. c) Exposures in other assets not previously considered, including net fixed assets, assets adjudicated, recovered, or received in payment of debts, among others, receive a weighting factor of 100%.”

3. Incorporate as the Eleventh Final Provision, the following:

“Eleventh.- Companies will have a gradual adaptation schedule for the application of the weightings referred to in letters a), b), and c) of the last paragraph of Article 15° “Exposures with public sector entities” and letter b) of Article 24° “Exposures in other assets”, according to the following table:

Date	Deferred income tax assets arising from loss carryforwards	Intangible assets and assets recognized due to the difference between fair value and nominal value of acquired credit portfolios, net of accumulated amortization	Deferred income tax assets arising from temporary differences – Letter b) of Article 15°	Deferred income tax assets arising from temporary differences – Letter c) of Article 15°
January 2017	100%	100%	25%	100%
January 2018	200%	200%	50%	200%
January 2019	300%	300%	75%	300%
January 2020	400%	400%	100%	400%
January 2021	500%	500%	125%	500%
January 2022	600%	600%	150%	600%
January 2023	700%	700%	175%	700%
January 2024	800%	800%	200%	800%
January 2025	900%	900%	225%	900%
January 2026	1000%	1000%	250%	1000%

Article Fourth.- Replace the first paragraph of the First Final and Transitional Provision of the Regulation for the Requirement of Additional Effective Capital, approved by Resolution SBS No. 8425-2011 and its modifying norm, with the following:

“Companies that have voluntary general provisions not included as Level 2 effective capital may use up to 70% of said provisions to reduce the requirement for additional effective capital of the non-cyclical components (concentration risk, market concentration risk, interest rate risk in the banking book, and other risks). The effective capital requirement for the economic cycle may in no case be offset with voluntary provisions.”

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Article Fifth.- This Resolution shall enter into force from the day following its publication in the Official Gazette El Peruano, from which date the Regulation on Subordinated Debt applicable to financial system companies, approved by Resolution SBS No. 4727-2009, is repealed, except for what is provided in the second article, which shall enter into force for information corresponding to July 2016.

Register, communicate, and publish.

JAVIER MARTÍN POGGI CAMPODÓNICO
Superintendent of Banks, Insurance, and Private Pension Fund Administrators (e)

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ANNEX

I. Modify Chapter V “Complementary Information” of the Accounting Manual for Financial System Companies, in the following terms:

1. Incorporate risk weightings of 25%, 75%, 125%, 175%, 200%, 225%, 250%, 300%, 400%, 600%, 700%, 800%, and 900% in the “Type of Exposure” corresponding to “Public Sector Entities” of Report 2-A1 “Assets and Contingencies Weighted for Credit Risk – Standard Method”.

2. Incorporate risk weightings of 200%, 300%, 400%, 500%, 600%, 700%, 800%, 900%, and 1000% in the “Type of Exposure” corresponding to “Others” of Report 2-A1 “Assets and Contingencies Weighted for Credit Risk – Standard Method”.

3. Incorporate risk weightings of 25%, 125%, 175%, 225%, 600%, 700%, 800%, and 900% in the section corresponding to “Distribution by risk weightings” of Report 2-A1 “Assets and Contingencies Weighted for Credit Risk – Standard Method”.

4. Incorporate Report No. 34 “Adjusted Effective Capital – Total Adjusted Weighted Risk Assets and Contingencies”, according to the following format. This report must be submitted monthly via SUCAVE within a period not exceeding 15 calendar days from the end of the month to which the information corresponds.

REPORT NO. 34
ADJUSTED EFFECTIVE CAPITAL – TOTAL ADJUSTED WEIGHTED RISK ASSETS AND CONTINGENCIES

COMPANY : ......
AS ..... OF ...... OF ......

A. Adjusted Effective Capital

Accounts	Accounting Manual Denomination	Amount S/.
Plus:
310101	Share Capital - Common Shares
320201	Premium (Discount) of shares - Common Shares
320301	Capital in Process - Common Shares
3301	Legal Reserve
3302	Special Legal Reserves
330301	Discretionary reserves that can only be reduced with prior authorization of the Superintendence
3201	Donations
380101	Accumulated profit with capitalization agreement
380102	Accumulated profit without capitalization agreement
390101	Net profit of the period with capitalization agreement
390102	Net profit of the period without capitalization agreement
380104	Gain by equity method corresponding to investments that are deducted from effective capital
Minus: Deductions
310401	Treasury common shares
380201	Accumulated Loss
3902	Net loss of the period
(1904.07-1904.09.07) + 17(p)	Goodwill
380203	Provision for devaluation of assets placed in real estate capitalization
380204 or 380204(p)	Excess of unrealized losses on available-for-sale investments over accumulated profits and net profit of the period, without agreement of profit capitalization or agreement of future profit capitalization
380205	Loss by equity method corresponding to investments that are deducted from effective capital
1904 (p)-(1904.07-1904.09.07) (p)	Intangible assets (does not include goodwill but does include software, trademarks, assets recognized due to the difference between fair value and nominal value of acquired credit portfolios, as well as other intangible assets)
1903.02.01 – 2903.01	Net deferred income tax assets from deferred income tax liabilities, associated with temporary differences (excess of 10% of adjusted effective capital). Applicable only in cases where the deferred income tax asset associated with temporary differences is greater than or equal to the deferred income tax liability.
1903.02.02	Deferred income tax asset associated with tax losses generated in previous periods (Provision Deficit)
	Total Section C “Other deductions” - Report No. 3 (100%) (1)
	Total (A)

B. Total Adjusted Weighted Risk Assets

Accounts	Accounting Manual Denomination	Amount S/.
	Total assets and contingencies weighted for risk
Minus:
	Weighted risk intangible assets (does not include goodwill but does include software, trademarks, assets recognized due to the difference between fair value and nominal value of acquired credit portfolios, as well as other intangible assets)
	Net deferred income tax assets from deferred income tax liabilities, associated with temporary differences (excess of 10% of adjusted effective capital) weighted for risk. Applicable only in cases where the deferred income tax asset associated with temporary differences is greater than or equal to the deferred income tax liability.
	Deferred income tax assets associated with tax losses generated in previous periods weighted for risk
	Total (B)

C. Indicator

Indicator referred to in numeral 2 of Article 14° of the Regulation on Subordinated Debt applicable to Financial System Companies (%):	(A/B)* 100

Methodological Notes:
(1) Amounts reported in Report No. 3 “Effective Capital”.

5. Modify Annex No. 12-II “Control of Subordinated Debt”, according to the attached format. This report must be submitted monthly via SUCAVE within a period not exceeding 15 calendar days from the end of the month to which the information corresponds.