Technical Standards for the Application of the Capital Requirement for Financial Entities

Alameda Juan Pablo II, between 15 and 17 Av. Norte, San Salvador, El Salvador.
Tel. (503) 2281-8000 www.bcr.gob.sv
CNBCR-10/2023 NRP-44

TECHNICAL STANDARDS FOR THE APPLICATION OF THE CAPITAL REQUIREMENT FOR FINANCIAL ENTITIES

Approval: 11/28/2023
Effective Date: 01/01/2024

THE NORMS COMMITTEE OF THE CENTRAL RESERVE BANK OF EL SALVADOR,

CONSIDERING:

I. That Article 20, fourth clause of the Banks Law, establishes that, during the first three years of operation of a bank, the ratio between its capital fund and the sum of its weighted assets referred to in Article 41 of this law, shall be at least fourteen point five percent (14.5%) at the end of said period; the Superintendency shall determine whether or not to reduce the aforementioned percentage to twelve percent (12%).

II. That Article 41, first clause of the Banks Law, establishes that, in order to constantly maintain their solvency, banks must present at all times a ratio of at least twelve percent (12%) between their capital fund and the sum of their weighted assets, net of depreciation, reserves, and provisioning for impairment.

III. That Article 25, first clause of the Law of Cooperative Banks and Savings and Credit Societies, establishes that in order to constantly maintain their solvency, cooperative banks must present at all times a ratio of at least twelve percent (12%) between their capital fund and the sum of their weighted assets, net of depreciation, reserves, and provisioning for impairment.

IV. That Article 25, sixth clause of the Law of Cooperative Banks and Savings and Credit Societies, establishes that, during the first three years of operation of a cooperative bank, the ratio between its capital fund and the sum of its weighted assets referred to in this article shall be at least fourteen point five percent (14.5%). At the end of said period, the Superintendency shall determine whether or not to reduce the aforementioned percentage to twelve percent (12%).

V. That Article 155 of the Law of Cooperative Banks and Savings and Credit Societies, establishes that savings and credit societies shall be subject to the provisions of the Banks Law, except as provided in Book IV of the aforementioned Law.

VI. That Article 2, first clause of the Law on Supervision and Regulation of the Financial System, establishes that the Financial Supervision and Regulation System has the objective of preserving the stability of the financial system and ensuring its efficiency and transparency, as well as ensuring the safety and solidity of the members of the financial system in accordance with what is established by said Law, other applicable laws, regulations, and technical norms issued for this purpose, all in concordance with international best practices on the matter.

VII. That Article 99, third clause, letter a) of the Law on Supervision and Regulation of the Financial System, establishes that it is the responsibility of the Norms Committee of the Central Reserve Bank of El Salvador to approve technical norms, instructions, and provisions that the laws regulating the supervised entities establish must be issued to facilitate their application, especially those relating to solvency requirements, liquidity, provisions, reserves, classification of risky assets, criteria for establishing the need for consolidation, good corporate governance practices, transparency of information, and on any other aspect inherent to risk management by the supervised entities.

VIII. That in accordance with Article 101, fourth clause of the Law on Supervision and Regulation of the Financial System, the powers to approve, modify, and repeal technical norms that must be complied with by the members of the financial system and other supervised entities are transferred to the Central Reserve Bank of El Salvador.

THEREFORE,

in virtue of the regulatory powers conferred by Article 99 of the Law on Supervision and Regulation of the Financial System,

AGREES to issue the following:

TECHNICAL STANDARDS FOR THE APPLICATION OF THE CAPITAL REQUIREMENT FOR FINANCIAL ENTITIES

CHAPTER I
OBJECT, SUBJECTS, AND TERMS

Object
Art. 1.- These Norms have as their objective to establish the provisions that allow the calculation of capital requirements for the subjects obligated to comply with them, in accordance with applicable laws.

Subjects
Art. 2.- The subjects obligated to comply with the provisions established in these Norms are:
a) Banks incorporated in El Salvador; b) Subsidiaries established abroad of banks incorporated in El Salvador; c) Branches of foreign banks established in the country; d) National subsidiaries and joint venture companies of banks incorporated in El Salvador; e) Companies in which an exclusive-purpose holding company is a minority investor, when those companies do not have regulations on this matter in another Law; f) Cooperative banks; g) Federations formed by cooperative banks and also by savings and credit societies; h) Savings and credit societies; i) Banco de Fomento Agropecuario; and j) Banco Hipotecario, S.A.

Terms
Art. 3.- For the purposes of these Norms, the terms indicated below have the following meaning:
a) Central Bank: Central Reserve Bank of El Salvador; b) Obligated Subjects: Subjects obligated to comply with these Norms; and c) Superintendency: Superintendency of the Financial System.

CHAPTER II
DETERMINATION OF CAPITAL FUND

Capital Fund
Art. 4.- The capital fund shall be the sum of Primary Capital plus Supplementary Capital, deducting from these, when applicable:
a) The value of the participation in the capital of subsidiaries located abroad; b) The value of participations in the capital of subsidiaries and joint venture companies, in accordance with Articles 24 of the Banks Law and 12 and 13 of the Law of Cooperative Banks and Savings and Credit Societies; c) Additional resources that, in any form, the obligated subjects provide to their subsidiaries abroad, as well as guarantees, sureties, and bonds issued to respond for the obligations of their subsidiaries located abroad; and d) Other participations in the capital of any company.

Primary Capital
Art. 5.- The components of primary capital are:
a) Subscribed share capital; b) The legal reserve; and c) Other capital reserves, derived from received profits.

Supplementary Capital
Art. 6.- The components of supplementary capital are:
a) Results from previous exercises, on which no determination has been made; b) Undistributable profits referred to in the first clause of Article 40 of the Banks Law and the first clause of Article 21 of the Law of Cooperative Banks and Savings and Credit Societies, depending on the type of entity; c) Fifty percent (50%) of the profits of the current exercise, net of the provision for Income Tax; d) Seventy-five percent (75%) of the Surplus from revaluation of fixed assets authorized by the Superintendency, as follows:
i) For banks: from requests received until January 31, 1998; and ii) For cooperative banks, federations, and savings and credit societies: from requests received until December 31, 2001. e) Fifty percent (50%) of voluntary impairment reserves, which shall not be deducted from the loan portfolio for purposes of weighted assets; f) Convertible bonds, when the Superintendency has authorized through a general resolution that they form part of the supplementary capital, in accordance with the Banks Law; g) Subordinated debt for five or more years, up to fifty percent (50%) of the value of Primary Capital. For purposes of the amount computable in the capital fund, this shall be calculated as follows:
i) Before five years to maturity, up to the value of the loan balance. ii) From the beginning of the five years to maturity, the debt balance decreased by an accumulative 20% annually, as follows:
5.0 years before maturity: 80%
4.0 years before maturity: 60%
3.0 years before maturity: 40%
2.0 years before maturity: 20%
Last year before maturity: 0% h) Convertible loans, as follows:
i) For banks: when the term is greater than one year. ii) For cooperative banks, federations, and savings and credit societies: when the term does not exceed one year.

From the sum of all the above components, the value of accumulated losses and current exercise losses, if any, shall be deducted.
For purposes of determining the capital fund, Supplementary Capital will be accepted up to a sum equal to Primary Capital.

CHAPTER III
CAPITAL REQUIREMENTS

Regarding Weighted Assets
Art. 7.- Obligated subjects must present, at all times, a ratio between their capital fund and the sum of their weighted assets of at least twelve percent (12%).

During the first three years of operation of a new obligated subject, the capital requirement regarding weighted assets shall be fourteen point five percent (14.5%). At the end of that period, the Superintendency shall determine whether or not to reduce it to twelve percent (12.0%). If the Superintendency's resolution is that the bank must continue with the fourteen point five percent (14.5%) percentage, this shall be for a maximum period of three years.

Weighting of Assets and Contingent Rights
Art. 8.- The weighting of assets, contingent rights, net of depreciation, reserves, and provisioning for impairment, shall be carried out as follows:

1. Without weighting:
   a) Cash availability; remittances in transit shall not be included in this concept; b) Money deposits in the Central Reserve Bank of El Salvador; c) Investments in securities issued or guaranteed by the State, the Central Reserve Bank of El Salvador, or the Deposit Guarantee Institute; d) Stock market investments made in securities issued or guaranteed by the State, the Central Reserve Bank, or the Deposit Guarantee Institute; e) Assets and contingencies deducted from the capital fund, which are mentioned in letters a), b), c), and d) of Article 4 of these Norms; f) Deposits and high-liquidity, low-risk securities that constitute the liquidity reserve referred to in Chapter VI of Title II of the Banks Law and Chapter III, Title I of Book Two of the Law of Cooperative Banks and Savings and Credit Societies; g) Credits, guarantees, sureties, and bonds, fully guaranteed with money deposits in the same entity; h) Assets under fiduciary administration that are constituted as public benefit trusts and those constituted with the purpose of guaranteeing the fulfillment of payment obligations previously contracted or to be contracted, by the settlor with a third party; up to the amount of their net assets; i) Credits guaranteed with resources from the Salvadoran Guarantee Fund in the proportion in which they have been guaranteed, in accordance with what is established in Article 80 of the Law of the Development Bank of the Republic of El Salvador; and j) Availability in Pay.

2. Weighted at twenty percent (20%):
   a) Funds in transit for local and foreign remittances; and b) Assets under fiduciary administration, up to the amount of their net assets that do not meet the conditions mentioned in letter h) of numeral 1 of this article.

3. Weighted at fifty percent (50%):
   a) Loans guaranteed by other local obligated subjects; b) Credits granted to other obligated subjects, except for convertible loans, which shall be weighted at one hundred percent; c) Money deposits in other local obligated subjects; d) Guarantees, sureties, and bonds that are not fully guaranteed with money deposits; e) The value of letters of credit, net of guarantee deposits, prepayments, and provisions; f) Long-term credits granted to middle and low-income families for the acquisition of housing, fully guaranteed with a duly registered mortgage. Long-term credits are considered those granted for five or more years, to middle and low-income families for the acquisition of housing, and whose granted amount does not exceed two hundred fifty thousand dollars (US$ 250,000.00); g) Loans guaranteed by Salvadoran reciprocal guarantee companies; and h) Other payment commitments on behalf of third parties.

4. Weighted between zero and one hundred fifty percent:
   Investments in securities issued by foreign states or central banks according to the country risk rating of the issuer, as follows:

Risk Category | AAA to AA- | A- to BBB+ | BBB- to BB+ | B- to Inferior to B- and Unrated Risk Weighting | 0% | 20% | 50% | 100% | 150%

For the equivalence of country risk categories issued by different Risk Classifiers, the table described in numeral 7 of Section VI Constitution of Reserves for Country Risk of the Accounting Manual for Deposit-Collecting Institutions and Holding Company (NCF-01) shall be used.

5. Weighted between twenty and fifty percent:
   Money deposits in first-line foreign banks or with investment grade and loans, guarantees, sureties, and bonds that are guaranteed by first-line banks or with investment grade are weighted according to their risk rating as follows:

Risk Category | AAA to A- | BBB+ to BBB-
Risk Weighting | 20% | 50%

The classification of first-line banks is regulated in the "Technical Standards to Determine First-Line Foreign Financial Entities" (NRP-80), issued by the Central Reserve Bank of El Salvador through its Norms Committee.

6. Weighted at one hundred percent (100%):
   The total value of assets not contemplated in the previous numerals shall be weighted at one hundred percent (100%).

Additional Capital Requirement
Art. 9.- Banks that, in accordance with Article 197 of the Banks Law, request authorization from the Superintendency to have non-resident credits or to be invested abroad, for an amount greater than seventy-five percent (75%) of the capital fund, must previously and at all times show minimum capital coefficients according to the risk band they assume, as follows:

Band of credit operations ratio in other countries to Capital Fund | Minimum Capital Requirement from year 2005 onwards More than 75% and up to 100% | 12.70% More than 100% and up to 125% | 13.40% More than 125% and up to 150% | 14.00%

Requirement Regarding Liabilities and Contingent Commitments Art. 10.- The capital fund of the subjects obligated to its compliance shall not be less than seven percent (7%) of their total obligations or liabilities with third parties.

Minimum Capital Fund
Art. 11.- In no case shall the capital fund of an obligated subject be less than the minimum required subscribed share capital, which is determined in accordance with the Banks Law or the Law of Cooperative Banks and Savings and Credit Societies, depending on the type of entity.

CHAPTER IV
CALCULATION DATE AND REMISSION TO THE SUPERINTENDENCY

Art. 12.- Obligated subjects must establish the position of their capital fund on the last day of each month and remit it to the Superintendency within the first five business days of the following month, according to models presented in Annex No. 1 and No. 2, signed by the manager or whoever holds an equivalent position; except for those corresponding to the months of June and December of each year, which shall be within the first ten business days of the immediate subsequent month.

Additionally, obligated subjects must calculate the capital requirement on the last business day of each week, except when this corresponds to the last day of the month; said calculation must be remitted to the Superintendency in the first two business days of each week.

The deadlines mentioned in the previous provision do not constitute an exception to inform about capital fund insufficiencies, and if such insufficiency occurs, it must be reported to the Superintendency with a mention of the details of the measures and commitments considered necessary to remedy the deficiency.

Art. 13.- Obligated subjects must keep in their files for a period of no less than one year, the documents and off-balance sheet information used for the calculation of the capital requirement.

Art. 14.- The Superintendency may request the calculation of capital requirements at any date it deems convenient.

Art. 15.- The Superintendency may modify the weighting of trusts, based on the assets in which the corresponding capital has been invested.

Art. 16.- Articles 9 and 15 above do not apply to the obligated subjects described in letters f), g), and h) of Article 2 of these Norms.

CHAPTER V
OTHER PROVISIONS AND EFFECTIVE DATE

Art. 17.- Investments in securities issued by the Social Fund for Housing between December 16, 1999, and December 31, 2000, will have zero weighting, for purposes of calculating the capital fund, provided they are fully guaranteed with mortgage portfolio and that the investment in the aforementioned securities is in addition to investments as of June 30, 1999, in securities issued by said Fund.

The aforementioned investments, in no case, may exceed fifty percent (50%) of the Capital Fund of the respective bank.

Art. 18.- The calculation and capital requirement for exclusive-purpose holding companies and for financial conglomerates as a whole, is regulated in the "Technical Standards for the Application of the Capital Requirement to Financial Conglomerates" (NRP-62).

Sanctions
Art. 19.- Non-compliance with the provisions contained in these Norms will be sanctioned in accordance with what is established in the Law on Supervision and Regulation of the Financial System.

Repeal
Art. 20.- These Norms repeal the "Norms for the application of the Capital Requirement to the entities regulated by the Banks Law and the Law of Cooperative Banks and Savings and Credit Societies" (NPB3-04), approved on March 16, 2000, in Session No. CD-15/2000, by the Superintendency of the Financial System, whose Organic Law was repealed by Legislative Decree No. 592, which contains the Law on Supervision and Regulation of the Financial System, published in the Official Journal No. 23, Volume 390, dated February 2, 2011.

Transitory
Art. 20-A.- From the entry into force of the modifications approved by the Norms Committee of the Central Reserve Bank of El Salvador in Session No. 11/2024, of December 19, 2024, entities will have a period of one month to make the corresponding adjustments for their implementation.

Art. 20-B.- From the entry into force of the modifications approved by the Norms Committee of the Central Reserve Bank of El Salvador in Session No. 02/2026, of February 26, 2026, entities will have until March 31, 2026, to make the corresponding adjustments for their implementation.

Unforeseen Aspects
Art. 21.- Aspects not provided for in the matter of regulation in these Norms will be resolved by the Central Bank through its Norms Committee.

Effective Date
Art. 22.- These Norms will enter into force as of January 1, 2024.

Modifications:
(1) Modifications in articles 8, 16, 18, and Annex No. 2 and incorporation of article 20-A, approved by the Central Bank through its Norms Committee, in Session No. CN-11/2024, dated December 19, 2024, with effect from January 3, 2025. (2) Modifications in article 8 and Annex No. 2, approved by the Central Bank through its Norms Committee, in Session No. CN-10/2025, dated December 17, 2025, with effect from January 2, 2026. (3) Modifications in article 8 and Annex No. 2, and incorporation of article 20-B, approved by the Central Bank through its Norms Committee, in Session No. CN-02/2026, dated February 26, 2026, with effect from March 31, 2026.