Título VIII. Capital y reservas

Banks and financial companies shall permanently maintain a minimum amount of equity in relation to their exposure to credit, market and other risks, in accordance with the general regulations issued for such purpose by the Monetary Board, with the favorable vote of three-fourths of all its members, upon prior report of the Superintendency of Banks.

The minimum amount of equity required for exposure to the indicated risks and the respective weightings shall be established by the Monetary Board with the favorable vote of three-fourths of its members, at the request of the Superintendency of Banks. Such amount may not be less than the equivalent of ten percent (10%) of assets and contingencies, both weighted according to their risk. The weightings shall be determined by general regulation of the Monetary Board based on best international practices. In any case, any amendment to the required minimum amounts and to the risk weightings shall be applied gradually and shall be notified with prudent advance notice.

The computable capital of a bank shall be the sum of primary capital plus supplementary capital, deducting therefrom investments in shares of domestic and foreign banks, financial companies, insurance companies, surety companies, general deposit warehouses, specialized financial services companies, brokerage houses, offshore entities or off shore entities, companies supporting banking activities where at least twenty-five percent (25%) of their capital is held therein and the capital assigned to branches abroad.

Supplementary capital shall be acceptable as part of computable capital up to the amount of primary capital.

Primary capital is composed of:

a.Paid-in capital;

b.The legal reserve;

c.Reserves of a permanent nature derived from retained earnings;

d.Other permanent capital contributions; and,

e.Contributions by the State in the case of state banks.

Supplementary capital is composed of:

a.Profits for the fiscal year;

b.Profits from prior fiscal years;

c.Surplus from revaluation of assets, up to fifty percent (50%) of primary capital, which may not be distributed until the revalued asset is sold;

d.Other capital reserves;

e.Debt instruments convertible into shares;

f.Subordinated debt contracted for a term of more than five years, up to fifty percent (50%) of primary capital. For purposes of computing subordinated debt within supplementary capital, during the last five years to its maturity, an annual cumulative discount factor of twenty percent (20%) shall be applied;

g.Bonds combining debt and capital characteristics; and,

h.Other components which, based on international standards, the Monetary Board determines, subject to prior opinion of the Superintendency of Banks.

Accumulated losses and current fiscal year losses, and specific reserves for specified assets of doubtful recovery, shall be deducted, first, from supplementary capital and, if it proves insufficient, from primary capital.

The Monetary Board, upon proposal by the Superintendency of Banks and based on international standards, may determine the characteristics that the components of supplementary capital must meet.

The equity position shall be the difference between computable equity and required equity, and computable equity not less than the sum of required equity shall be maintained.

When computable capital is less than required capital, a capital deficiency shall exist, in which case the capital regularization procedure contained in this Law shall be followed.

The controlling company or the responsible company shall monthly consolidate the financial statements of the companies comprising the financial group and cause at least the legal minimum amount of equity to be permanently maintained, both on a consolidated basis and individually for each of its members. The consolidated requirement may not be less than the sum of the equity requirements imposed by the rules applicable to each of them.

Where any of the companies forming part of the financial group lacks regulations on minimum risk capital, the capital adequacy provisions issued by the Monetary Board for such cases shall apply to such company.

The patrimonial deficiency resulting from the process of consolidation of the financial statements of the companies comprising the financial group shall be remedied by the controlling entity or the responsible company, for which the patrimonial regularization contained in this Law shall apply.