SBS Resolution No. 1760-2021: Amends the Regulation for the Calculation of Effective Capital Requirements for Credit Risk and the Accounting Manual for Financial System Companies

Los Laureles Nº 214 - Lima 27 - Peru Tel.: (511) 6309000 Lima, June 16, 2021

SBS Resolution
No. 01760 - 2021

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

CONSIDERING:

That Article 186 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 the General Law), provides that the Superintendence shall determine the methodologies for measuring credit, market, and operational risk that will be used by companies to calculate effective capital requirements;

That the aforementioned article also states that for the calculation of the effective capital requirement for credit risk, companies must use the standard method or internal models, according to the provisions of the General Law;

That, through SBS Resolution No. 14354-2009 and its amending norms, the Regulation for the Effective Capital Requirement for Credit Risk (hereinafter the Regulation) was approved, which establishes the methodology to be applied, as well as the requirements that financial system companies must meet to carry out the calculation of the effective capital requirement for credit risk using the standard method or methods based on internal ratings;

That, through SBS Resolution No. 895-98 and its amending and complementary norms, the Accounting Manual for Financial System Companies (hereinafter the Accounting Manual) was approved;

That, considering the international standards of the Basel Committee on Banking Supervision and with the aim of applying a methodology more sensitive to risk, it has been considered appropriate to modify the Regulation regarding the calculation of the effective capital requirement for credit risk for exposures in certificates of participation in mutual funds and investment funds;

That, considering that mutual funds or investment funds may present within their investment portfolios financial instruments in which financial system companies are not permitted and/or authorized to invest according to what is established in Article 221 of the General Law, it is convenient to establish that investments in mutual funds and investment funds by financial system companies weight 1000% for the proportion corresponding to investments that the aforementioned funds have made and that such companies are not permitted and/or authorized to make;

That, considering that currently the Regulation results in an effective capital requirement for credit risk lower than adequate for certain revolving and non-revolving consumer exposures with a delay greater than ninety (90) days, it is convenient to modify the weighting of the aforementioned consumer exposures with a delay greater than ninety (90) days under the standard method;

That, considering the high recovery value of pledge credits that have the guarantee of jewelry or gold objects, due to the execution of said guarantees, it is convenient to modify the calculation of the effective capital requirement for credit risk of such exposures;

That, likewise, it is necessary to modify Report 2-A1 “Assets and Contingent Weighted by Credit Risk – Standard Method” of the Accounting Manual to adapt it to what is approved through this Resolution;

That, in order to collect opinions from the general public regarding the proposals for modification of the applicable regulations to supervised companies, the pre-publication of this norm was ordered 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;

Being in accordance with the opinion of the Adjunct Superintendencies of Banking and Microfinance, Risks, Economic Studies, and Legal Advice; and,

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

RESOLVES:

Los Laureles Nº 214 - Lima 27 - Peru Tel.: (511) 6309000

Article First.- Modify the Regulation for the Effective Capital Requirement for Credit Risk, approved by SBS Resolution No. 14354-2009 and its amending norms, hereinafter the Regulation, in the following terms:

1. Incorporate letter oo) in Article 2° according to the following text:

“Article 2°.- General Definitions
(…) oo) Credit Valuation Adjustment (CVA): CVA reflects the adjustment of the prices of derivative transactions, as a consequence of a potential default by the counterparty.

2. Incorporate as the last paragraph of Article 20°, the following text:

“Article 20°.- Exposures with small businesses, micro-enterprises, and consumer exposures (…) In the case of non-revolving and revolving consumer exposures consisting of pledge credits that have the guarantee of jewelry or gold objects, for the credit amount covered up to 80% of the value of the guarantee, a weighting factor of 100% corresponds, while for the credit amount exceeding 80% of the value of the guarantee, a weighting factor of 250% corresponds. Regarding the valuation methodology of the guarantee, a gold value consistent with the international price of the troy ounce of gold must be considered. The value of gold cannot exceed the minimum between the average value of the troy ounce of gold in the last thirty (30) days and the last available closing data.”

3. Substitute Article 22° of the Regulation, as follows:

“Article 22°.- Equity exposures other than exposures in mutual funds and investment funds

Equity exposures with multilateral development banks and with companies affiliated to the swap and clearing systems determined by the Superintendence correspond to a weighting factor of 100%. The rest of the equity exposures receive a weighter of 300% if they are traded in centralized mechanisms and 400% if they are not. The treatment of exposures in mutual funds and investment funds is excluded.”

4. Include Article 22°-A in the Regulation, according to the following wording:

Los Laureles Nº 214 - Lima 27 - Peru Tel.: (511) 6309000

“Article 22-A°.- Exposures in mutual funds and investment funds

1.1 For exposures in certificates of participation in Mutual Funds or Investment Funds, the company must choose to calculate the risk weighting factor for each of these exposures under one or more of the following three approaches:

a) Transparency approach - “look-through approach”: The exposures comprised in the Mutual Funds or Investment Funds must be weighted as if they were directly held by the company, including any exposure arising from derivative transactions of the fund. The company must meet the following conditions to apply this approach:

i) The company must have sufficient and frequent information on the underlying assets of the fund. The frequency of said information must be at least monthly. Likewise, it must be guaranteed that the financial information has sufficient granularity to calculate the weighting factors.

ii) The information referred to in the previous subsection must be verified at least annually by an independent third party, such as a depositary entity, custodian, among others.

For derivative transactions of the fund, the exposure to the underlying will be calculated as the product of the nominal exposure to the underlying and the risk weighter applicable to the underlying according to the Regulation. Likewise, for all exposures in derivatives, the credit equivalent exposure will be calculated according to Article 26° of the Regulation and an additional charge equivalent to the multiplication of the credit equivalent exposure by a factor of 1.5, for the concept of credit valuation adjustment (CVA). Both the credit equivalent exposure and the charge for the concept of CVA will be multiplied by the risk weighter associated with the counterparty.

The company may use the weighting factor calculated by independent third parties in case it does not have sufficient or adequate information to carry out said calculation. If this is adopted, the company must consider a weighter 1.2 times greater than what would be applicable if the exposure were directly held by the company. Likewise, the company must make available to the Superintendence the information that the independent third party used to carry out the calculation of said weighting factor.

On the other hand, with the exception of hedging derivative exposures, the proportion corresponding to investments and derivatives that Mutual Funds or Investment Funds have made directly or indirectly and that the company is not permitted and/or authorized to make, receives a weighting factor of 1000%.

If applicable, the leverage adjustment described in subsection 1.4 of this article must be considered.

b) Mandate-based approach: The company must use this approach when it does not meet the conditions to apply the transparency approach as stated in letter a). To apply this approach, the company must base itself on the information from the current prospectuses of each Mutual Fund or Investment Fund in which it has participation at the reporting date or on the regulations applicable to said funds. The risk-weighted assets of the exposures of the Mutual Fund or Investment Fund are calculated as the sum of: i) the Fund’s assets weighted by the risk weighting factors corresponding to them, assuming that investment in said assets is made up to the maximum amounts permitted according to the prospectus of the Mutual Fund or Investment Fund or the applicable regulations; ii) the product of the nominal exposure to the underlying of the derivative and the risk weighter applicable to the underlying according to the Regulation, and iii) the credit equivalent exposure of the exposures with derivatives of the fund, calculated according to Article 26° of the Regulation, and a charge equivalent to the multiplication of the credit equivalent exposure by a factor of 1.5 for the concept of credit valuation adjustment (CVA). Both the credit equivalent exposure and the charge for the concept of CVA will be multiplied by the risk weighter associated with the counterparty.

For the calculation of the risk-weighted assets of the instruments permitted by the fund, the following procedure must be followed:

i) Indicate for each of the permitted instruments the maximum participation percentages that the prospectus or the regulations applicable to said funds have delimited, taking into account if they are debt or equity instruments, short or long term, if they are issued in national currency or foreign currency, in the local or foreign market, among other relevant aspects.

ii) Determine for each of the permitted instruments listed above, the corresponding risk weighting factor according to this Regulation. If more than one risk weighter can be applied to an exposure, the highest risk weighter will be applied.

iii) Select the permitted instruments that have the highest risk weighting factor, i.e., the riskiest instruments, up to completing 100% of the amount in which the Mutual Fund or Investment Fund can invest. Determine the participation amount of each asset from its maximum participation percentage and the total exposure amount against the Mutual Fund or Investment Fund.

iv) From the selected permitted instruments, sum the product of the participation amounts according to subsection iii) by their respective risk weighting factors according to subsection ii), which will be equivalent to the total risk-weighted assets of the permitted instruments.

For the calculation of the exposure to the underlying of derivative transactions of the fund, the following guidelines will be applied:

The exposure to the underlying of the derivative will be calculated as the product of the nominal exposure to the underlying and the risk weighter applicable to the underlying according to the Regulation. If the underlying is unknown, the total nominal amount of derivative positions must be used to carry out the calculation. Likewise, if the nominal amount of the derivatives is unknown, it must be estimated using the maximum nominal amount of derivative transactions permitted under the investment prospectus.

For the calculation of the credit equivalent exposure of derivative transactions of the fund, the following guidelines will be applied:

In case the first component of the credit equivalent exposure is unknown, the sum of the nominal amounts of derivatives compensated with the same counterparty will be used as a proxy; or the nominal amount of the individual derivative in case it is a single transaction with the counterparty or compensation is not allowed. In case the second component of the credit equivalent exposure of compensated positions of financial derivative instruments is not known, it will be calculated as 15% of the sum of the nominal values of the derivatives compensated with the same counterparty; or 15% of the nominal amount of the individual derivative in case it is a single transaction with the counterparty or compensation is not allowed. If the nominal amount of derivatives contracted with the same counterparty is unknown, it must be estimated using the maximum nominal amount of derivative transactions permitted under the investment prospectus.

On the other hand, with the exception of hedging derivative exposures, the proportion corresponding to investments and derivatives that Mutual Funds or Investment Funds have made directly or indirectly and that the company is not permitted and/or authorized to make, receives a weighting factor of 1000%.

If applicable, the leverage adjustment described in subsection 1.4 of this article must be considered.

c) 1000% Weighter - “fall-back approach”: The company that cannot use either of the two methods mentioned above must apply a risk weighting factor of 1000% to exposures in certificates of participation in Mutual Funds or Investment Funds.

1.2 Treatment of funds that invest in other funds

When a company maintains an investment in a fund that it has identified through the transparency or mandate-based approaches, which in turn invests in another fund, the risk weighter applied to the latter can be determined using any of the three approaches mentioned above. For all subsequent layers (in case the second fund invests in another fund in turn), the risk weighters applied for the investment in the other fund can be determined by the transparency approach, provided that this approach has been used to determine the risk weighter of the fund of the previous layer. Otherwise, the “fall-back approach” must be applied.

1.3 Application of multiple approaches

A company may use a combination of the three approaches described above to determine the effective capital requirement for credit risk of an exposure in a (1) Mutual Fund or in an individual Investment Fund, provided that the conditions to apply said approaches are met.

1.4 Leverage adjustments

In case the Mutual Fund or Investment Fund is permitted to leverage, to determine the effective capital requirement for the exposure in the fund, a leverage adjustment equivalent to the average risk weighting factor multiplied by the fund’s leverage must be applied. The maximum weighter after applying the leverage adjustment will be 1000%.

Thus, after calculating the risk-weighted assets under the transparency or mandate-based approaches, the average risk weighting factor of the fund will be calculated as the quotient of the risk-weighted assets and the total assets of the fund.

Using the average risk weighting factor of the fund and taking into account the level of leverage, the risk-weighted assets of an investment in a fund would be calculated as follows:

APR investment = Average fund risk weighter * Leverage * Exposure in the fund

Leverage is calculated as the quotient of the total assets of the fund between the total equity of said fund.

This formula could also be expressed as follows:

APR investment = Risk-weighted assets of the fund * % of participation shares

5. Substitute letter b) and letter d) of Article 28° of the Regulation, as follows:

“Article 28°.- Treatment of exposures with delay

(…) b) 100% when specific provisions are greater than or equal to 20% of the accounting balance of the exposure. Does not apply to revolving and non-revolving consumer exposures, nor to housing mortgage credits.

(…) d) 150% or that resulting from the application of Article 20°, in case this is greater than 150%, for revolving and non-revolving consumer exposures.”

Article Second.- Modify Report No. 2-A1 “Assets and Contingent Weighted by Credit Risk – Standard Method” of Chapter V “Complementary Information” of the Accounting Manual for Financial System Companies, in the following terms:

a) Modify the section corresponding to Non-Revolving Consumption and Revolving Consumption of the first table, as follows:

Type of Exposure I/ Risk Weighter Non-Revolving Consumption I.7/ 100% 150% of which:
150%: without including with delay
150% with delay
250% of which:
250%: without including with delay
250% with delay
Revolving Consumption
I.8/
100%
150% of which:
150%: without including with delay
150% with delay
250% of which:
250%: without including with delay
250% with delay

b) Modify the section corresponding to Equity of the first table, as follows:

Type of Exposure I/ Risk Weighter Equity I.14/ 100% 300%

Los Laureles Nº 214 - Lima 27 - Peru Tel.: (511) 6309000

400%
Weighter for certificates of participation in mutual funds Weighter for certificates of participation in investment funds

c) Incorporate in the table “Distribution by risk weighters” the following row between “Weighter for certificates of participation in mutual funds” and “Weighter for credit derivatives”:

26 Weighter for certificates of participation in investment funds

d) Substitute the second paragraph of note I.14. as follows:

“(…) In the case of exposures in certificates of participation in mutual funds or investment funds, the weighted average weighter of all exposures in certificates of participation in mutual funds or investment funds, as applicable, must be recorded, which allows the total risk-weighted assets of credit of said exposures to be the calculated according to what is established in Article 22-A° of the Regulation for the Effective Capital Requirement for Credit Risk.”

Article Third.- This Resolution enters into force for information corresponding to July 2021.

Register, communicate, and publish.

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