NCF-02

COUNTRY RISK

Approval: 12/14/2023
Validity: 01/01/2024

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

CONSIDERING:
I. That Article 7 of the Law on Supervision and Regulation of the Financial System establishes the entities subject to the supervision of the Superintendency of the Financial System.
II. That Article 99 of the Law on Supervision and Regulation of the Financial System establishes that the Central Reserve Bank, by virtue of said Law, is the institution responsible for approving the technical regulatory framework that must be issued in accordance with this Law and other laws regulating supervised entities. In fulfilling this responsibility, the Central Reserve Bank must ensure that the applicable regulatory framework for the financial system is periodically reviewed, aiming for timely updates.
III. That Article 99, third paragraph, letter a), of the Law on Supervision and Regulation of the Financial System establishes that it is the responsibility of the Committee of Standards of the Central Reserve Bank of El Salvador to approve technical norms on any other aspect inherent to risk management by supervised entities.
IV. That Article 99, third paragraph, letter c), of the Law on Supervision and Regulation of the Financial System establishes that it is the responsibility of the Committee of Standards of the Central Reserve Bank of El Salvador to establish criteria for the valuation of assets, liabilities, and the establishment of provisions and reserves for risks, all of the foregoing in accordance with what is established in this Law and other applicable laws, with the aim of reflecting the real liquidity and solvency situation of the regulated entities.

THEREFORE, by virtue of the regulatory powers conferred upon it by Article 99 of the Law on Supervision and Regulation of the Financial System, AGREES to issue the following:

NCF-02

COUNTRY RISK

Approval: 12/14/2023
Validity: 01/01/2024

TECHNICAL STANDARDS FOR THE ESTABLISHMENT OF RESERVES FOR COUNTRY RISK

CHAPTER I

OBJECT, SUBJECTS AND TERMS

Object
Art. 1.- These Norms have as their objective to determine the criteria for establishing policies and procedures for the identification, review, and control of country risk in activities involving the placement of resources abroad; as well as to establish the calculation bases and timing for the establishment of accounting reserves to represent said risk.

Subjects
Art. 2.- The subjects obliged to comply with the provisions established in these Norms are:
a) National or foreign subsidiaries of banks or holding companies of exclusive purpose constituted in El Salvador; b) Insurance companies constituted in El Salvador and their affiliates; c) Branches of foreign insurers operating in El Salvador; d) Cooperatives providing insurance services; e) Official credit institutions; (2) f) Any entity subject to the supervision of the Superintendency of the Financial System, authorized to carry out placements abroad; and (2) g) National or foreign subsidiaries of investment banks constituted in El Salvador. (2)

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) Entity(ies): Subject obliged to comply with these Norms; and c) Superintendency: Superintendency of the Financial System.

CHAPTER II

CONCEPT, ASSETS SUBJECT TO RESERVES AND POLICIES

Concept of country risk
Art. 4.- "Country risk" shall be understood as the risk assumed when maintaining or committing resources in a foreign country, due to potential impediments to obtaining their recovery derived from adverse effects in the economic, social, political environment, or natural disasters occurring in the country where the source generating the counterparty's cash flows is located. Country risk comprises sovereign risk, political risk, and transfer risk. a) Sovereign risk: is represented by the difficulties an entity might face in carrying out recovery actions against the debtor, for reasons of sovereignty; b) Political risk: encompasses all those human acts that make it difficult for debtors of a country to fulfill their obligations, for example: wars, civil disturbances, terrorism, drug trafficking, legal provisions, and other similar events; and c) Transfer risk: is the situation that prevents debtors of a country from fulfilling their obligations due to the scarcity of the currency in which the obligation is denominated or that can be accepted by the creditor.

Assets subject to
Art. 5.- For the purposes of these Norms, assets or rights of the entity in which the resources granted or committed are used abroad, or where the source of payment is located outside El Salvador, are considered subject to country risk reserves. The following are exempt from country risk reserves:
a) Placements on behalf of others that do not result in commitments for the entity; b) Operations that have been guaranteed with money in the same creditor entity, except for the portion of risk not covered; c) The portion of operations guaranteed by a joint debtor domiciled in the country of the creditor entity; and d) Securities and any other type of investment in instruments issued by Institutions with Supranational status or International Organizations according to their constitutive agreement; as well as deposits made in said Institutions.

Imputation of country risk
Art. 6.- Country risk is imputable to the country in which the debtor or payer is domiciled and from which the return on invested resources must be obtained.
Notwithstanding, the risk of a country different from that of the debtor may be used in the following cases:
a) The country risk of the parent company will be considered in the case of branches and subsidiaries, when the former has the quality of joint debtor; and b) The country risk of the guarantor will be considered, when this has an investment-grade rating from one of the internationally recognized risk rating agencies.

Policies and criteria for country risk
Art. 7.- It corresponds to the Higher Administrative Body of the entities to establish:
a) Policies regarding the use of resources in foreign assets, setting adequate diversification and imposing credit and investment limits by country; as well as policies related to the monitoring and control of country risk; b) An administrative unit responsible for the control and monitoring of country risk, formed by qualified personnel according to their internal policies; c) Periodic evaluations, at least monthly, of country risk reserves, according to the methodology mentioned in these Norms; and d) Reports that reveal and allow ensuring that the reserve for country risk is determined by an adequate technical evaluation and that there is permanent monitoring of its coverage. The guidelines and agreements of the Higher Administrative Body on this matter must be duly expressed in the respective minutes book.

CHAPTER III

INFORMATION, EVALUATION AND RATING OF COUNTRY RISK

Information on country risk
Art. 8.- The entity must keep available to Internal Audit, External Audit, and the Superintendency, information related to the country risk evaluation, in accordance with the policies of Article 7 of these Norms. To this effect, it must keep the following information updated:
a) File of each country in which the entity maintains placements in assets or commitments; b) Report containing relevant aspects and conclusions that determine the risk category of the country under evaluation; c) Organization manual of the unit in charge of country risk and the corresponding procedures manual; d) The updated report on each country issued by internationally recognized risk rating agencies; and e) Any other information necessary to evidence the country risk rating.

Evaluation of country risk
Art. 9.- Entities that place or commit their resources in other countries will use, to determine the degree of country risk, the sovereign risk ratings of countries issued by internationally recognized risk rating agencies, for long-term obligations. Below, the country risk categories, the equivalences between the nomenclature of long-term obligations used by internationally recognized risk rating agencies, and the minimum reserve percentages that must be established for each category are established:

Categories	Standard & Poor's	FITCH	MOODY'S	% of Reserves
1. Countries with low risk	AAA<br>AA (+/-)<br>AAA<br>AA (+/-)<br>Aaa<br>Aa (1,2,3)			0%
2. Countries with normal risk	A (+/-)<br>A (+/-)<br>A (1, 2, 3)			0%
3. Countries with moderate risk	BBB (+/-)<br>BBB (+/-)<br>Baa (1, 2, 3)			1%
4. Countries with difficulties	BB (+/-)<br>BB (+/-)<br>Ba (1, 2, 3)<br>B+<br>B+<br>B1<br>B<br>B<br>B2<br>B -<br>B -<br>B 3			10%<br>20%<br>30%<br>40%
5. Dubious countries	CCC+<br>CCC+<br>Caa1<br>CCC<br>CCC<br>Caa2<br>CCC -<br>CCC -<br>Caa 3			50%<br>60%<br>70%
6. Countries with serious problems or unclassified.	CC<br>C<br>D<br>CC<br>C<br>D<br>Ca<br>C			100%

The ratings considered to determine the country risk category must be the most recent ones issued by the risk rating agencies.

Use of internal models
Art. 10.- Entities may use internal measurement models to assign the risk rating of countries in which they operate; the resulting reserves cannot be lower than those established based on Article 9 of these Norms; the methodology must include the following six categories:

Category 1: Countries with low risk.
Countries denoting the lowest expectation of credit risk are located in this category. It is assigned only in the case of punctual payment capacity, exceptionally strong for external financial commitments. This capacity is very unlikely to be affected by foreseeable events.

Category 2: Countries with normal risk.
Countries showing a low expectation of credit risk are located in this category. It is assigned to cases of strong punctual payment capacity for external financial commitments. This capacity is somewhat more susceptible to adverse conditions and situations than in the case of the immediately superior rating.

Category 3: Countries with moderate risk.
Countries showing a low expectation of credit risk are located in this category. It is assigned to cases of adequate punctual payment capacity for external financial commitments. This capacity is susceptible to deterioration under adverse conditions and situations.

Category 4: Countries with difficulties.
Countries showing a possibility of development or significant credit risk are located in this category. It is assigned to cases of moderate or insufficient punctual payment capacity for external financial commitments. This capacity is contingent and sustained by the conditions of the economic environment.

Category 5: Dubious countries.
Countries in which the development of credit risk is very probable are located in this category. It is assigned to cases where the capacity for default is real and payment depends on the conditions of the economic environment.

Category 6: Countries with serious problems. Countries that have defaulted on some or all of their obligations, and the credit risk has materialized, are located in this category. This capacity is totally dependent on the conditions of the economic environment.

Minimum elements of internal country risk evaluation models Art. 11.- Internal models will include two analyses, the base analysis and the complementary analysis, which must consider the following elements to evaluate and classify country risk:
a) Base Analysis:
i. Analysis of the macroeconomic behavior of the country regarding the existence or not of significant imbalances, for which the structure and economic performance, economic growth prospects, degree of fiscal flexibility, monetary stability, situation of the financial sector, macroeconomic policy, trade policy, direct investment policy, external liquidity, external debt, labor market, and dynamism of the private sector must be analyzed;
ii. Analyze the country's financial commitments regarding whether it complies or not:

1. With the payment of international financial obligations; and
2. The payment of external debt service;
   iii. Consider whether the country has or does not have financing for foreign trade activities; and
   iv. Any other that is considered convenient to include and that has not been considered in the previous points.

b) Complementary Analysis: Will consider all other aspects that are of interest to examine the situation of each evaluated country, among them:
i. Timeliness, reliability, and sufficiency of available economic and financial information;
ii. Political and social stability;
iii. Compliance with regulations;
iv. Conflicts with other countries;
v. Natural disaster; and
vi. Any other that is considered convenient to include and that has not been considered in the previous points.

Countries rated must be downgraded at least to the category immediately below that resulting from the base analysis, when weaknesses or important disruptive factors derive from the complementary analysis.

Timing for rating countries
Art. 12.- Countries must be rated before the placement of resources is approved, and the country risk reserve must be established when the asset account shows a balance under its charge, for which one of the categories indicated in Article 9 of these Norms must be assigned. In the case that there is more than one classification, the one representing the highest level of risk will be considered. In the case that there are two equal classifications, the one that repeats most will be considered. (1) If a country lacks a sovereign risk rating, it will be classified in category 6 referring to countries with serious problems, with a reserve requirement of 100%. When country risk is documented, the entity may change the rating and make the respective adjustments.

Calculation of reserves by risk categories Art. 13.- Reserves for country risk ratings are independent of any other credit or banking risk reserve; therefore, they must be established on the uncovered risk. To this effect, the gross value of the corresponding asset according to accounting records must be considered, minus balances backed by guarantees related in Article 5 of these Norms; in no case can the total sum of reserves be greater than the gross value of the affected asset.

Voluntary reserves
Art. 14.- Subjects obliged to comply with these Norms may voluntarily establish additional country risk reserves, with no limitations other than their own will.

Accounting applications for the establishment of reserves Art. 15.- The accounting of increases and release of the country risk reserve will be done at least once a month, in the following manner:
a) Increases will cause a debit in the income statement account to apply – prior years' profits and a credit in the restricted equity account – undistributable profits; and b) Decreases will cause a debit in the restricted equity account – undistributable profits and a credit in the income statement account to apply – prior years' profits. Increases or decreases will occur due to changes in risk categories, due to increases or decreases in the balances of instruments subject to reserves, or due to corrections determined by the Superintendency or by external auditors.

Coverage and frequency of evaluations
Art. 16.- One hundred percent of placements in deposits, investments, loans, contingent operations, and any other balances representing country risk, must have their corresponding risk rating. To this effect, entities must keep perfectly identified all operations that require reservation according to these Norms and must associate each of them with the country to which the risk is attributed and with the other reserves established. Subjects obliged to comply with these Norms must keep their assets subject to country risk evaluated at all times; in the case that they have technological or operational limitations to comply with the foregoing, they must communicate this to the Superintendency and request permission to update once a month while such limitations are overcome.

Summary of assets with country risk
Art. 17.- Obligated subjects must prepare at least monthly and make available to the Superintendency, the "Summary of Assets Subject to Country Risk" and the determination of adjustments to the reserve due to changes in asset balances or country ratings, according to the model of Annex No. 1 of these Norms.

CHAPTER IV

OTHER PROVISIONS AND VALIDITY

Sanctions
Art. 18.- 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. 19.- These Norms repeal the "Standards to Establish Provisions for Country Risk" (NCES-02), approved on October 22, 2002, 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.

Unforeseen Aspects
Art. 20.- Unforeseen aspects in regulatory matters in these Norms will be resolved by the Central Bank through its Committee of Standards.

Validity
Art. 21.- These Norms will enter into force starting from January 1, 2024.

MODIFICATIONS:
(1) Modifications to Article 12, approved by the Central Bank through its Committee of Standards, in Session No. CN-05/2025, on June 30, 2025, with validity starting from July 15, 2025.
(2) Modifications to Article 2, approved by the Central Bank through its Committee of Standards, in Session No. CN-09/2025, on November 10, 2025, with validity starting from November 25, 2025.

NCF-02

COUNTRY RISK

Approval: 12/14/2023
Validity: 01/01/2024

Annex No. 1

ENTITY: __________________________________________ SUMMARY OF ASSETS SUBJECT TO COUNTRY RISK, AT _____________ (Balances in thousands of United States dollars)

A. Country Information

	Country «X»	Country «Y»	Country «Z»	Observations
A.1 Classification
A.2 Risk Rating Agency
A.3 Date of Classification
A.4 Source

B. Account Balances

	Country «X»	Country «Y»	Country «Z»	Total	Observations
B.1 Liquidity
B.2 Repurchase Agreements
B.3 Investment Financial Instruments
B.4 Loans
B.5 Other Assets
B.6 Physical and Intangible Assets
B.7 Financial Guarantees Granted
B.8 Sub-Total
B.9 Excluded Balances, per Art. 5 of these Norms
B.10 Total Affected Assets (B.8 - B.9)

C. Determination of Reserve

	Country «X»	Country «Y»	Country «Z»	Total	Observations
C.1 Required Reserve Percentage
C.2 Country Risk Reserve (B.10 X C.1)
C.3 Previous Month Balance
C.4 Month Adjustments (C.2 – C.3)

Notes:

• Country columns are established according to the needs of each entity.
• A.3: The most recent classification must be considered; in any case, the issuance date of the classification must not be delayed by more than six months.
• A.4: The source refers to the evidence supporting the rating, for example: website, magazine published by the Rating Agency, copy of the rating document, etc.
• B.9: These balances must be fully identified and properly justified.
• C.1: The percentage of the required reserve is in accordance with the table detailed in Article 9 of these Norms.

Name and signature of the responsible executive: ___________________________________________________