Capital Adequacy Chapter I Document 1.6

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1 The Secretary of the Board of Directors of Banco Central de Cuba CERTIFIES That the Board of Directors of Banco Central de Cuba by making use of the powers granted by Decree Law No Article 53 clause g), in the meeting held on February 25, 2000, at the proposal of Esteban Martel Sotclongo, Superitendent, adopted tire following: AGREEMENT No. 27 As a result of the analysis of the capital adequacy ratio to be applied by financial institutions and taking into consideration that the; Basel Committee states as to risk that the weighting of the Rights over national entities of the state sector and loans guaranteed by such entities may be established at the discretion of the country among 0, 10, 20 or 50%, the weighting percentage to be applied in such case is modified, taking it from the 20% established in Agreement 229 of November 23, 1998 to 50%. For all the aforementioned it is adopted the following: REGULATIONS FOR CAPITAL ADEQUACY Section I Definitions For the purposes hereby, the terms that appear below have the following meaning: a) Common or ordinary share : Type of share that has the basic rights of property, including the voting right. b) Capital : Contribution of monetary or non-monetary resources free of any encumbrance by those who constitute financial institutions. c) Net capital : As to the financial institutions that adopt the form of mercantile societies, it is made rip of common shares issued and totally paid. As to the financial institutions adopting the form of state entities, net capital is constituted by legal capital, state investment funds and investment financing. d) Legal capital ': It is the cash amount assigned to the state financial institution at the time of its formation.

2 e) Capital adequacy ratio : It establishes the proportion in which the capital supports the weighted asset by its level of risk. It is calculated by dividing the total capital for the weighted assets. f) Goodwill : Extra value acquired by a business (out of the intrinsic value of its net asset, due to the concurrence of certain circumstances, such as: good reputation, good mercantile relations, advantages of the premises of the establishment, proper administration and favor of the public. g) Disclosed reserves : It is made up of legal reserves, surplus and/or retained profits. They are identifiable in the accounts publicly disclosed by the financial institution and do not have any encurnbrance. h) Subsidiaries : Those entities whose original capital mostly belongs to a parent company established in accordance with a third State jurisdiction. i) State entities : State bodies and organs, state enterprises, budgeted units, state owned investment units of and any other entities linked to the State Budget. j) Cuban mercantile societies. The companies created in the national territory in accordance with the Tracie Code, including those created under the legislation in force as to foreign investrnent. Section II About the parts of the capital 1) The capital adequacy ratio numerator is made up of the total capital, which is formed by basic capital elements (tranch 1) and additional capital elements (tranch 21). 2) Basic capital (tranch ') is the key element of the total capital, mainly composed of net capital and disclosed reserves minus goodwill, other intangible assets and non-disclosed losses in the current year. Tranch 1 of the capital should represent at least 50% of total capital and is composed of the following items: a) Capital paid in common shares. b) Legal capital, state investment funds and investments financing. c) Disclosed reserves (premium over shares, retained profits, general and legal reserves). 3) Additional capital (tranch 2) of total capital is limited to a maximum of 100% of the total of tranch 1. It is composed of the following items:

3 a) General reserve fund or general reserves to cover loan losses that may arise in the future, but that have not been identified up to that moment. The amount of these finds or reserves shall be limited to a maximum 1.25% of the assets at risk. b) Fixed term subordinated debt, with a minimum original maturity term superior to five years. Fixed term subordinated debt is limited to a maximum 50% of the elements within tranch 1. 4) Some items are deducted of the total capital of financial institutions in order to calculate the capital adequacy ratio. These assets are: a) Investments in subsidiary institutions that carry out non- consolidated banking and financial operations in national systems. These deductions are necessary to constrain the multiple use of the same resources by different members of the group. b) Losses in previous periods as well as the current period. c) Advances granted on future dividends. Section III About the risk weighting system 5) The denominator of the capital adequacy ratio is calculated taking into account: a) Weighting of balance assets b) Double weighting of operations out of the balance such as guarantees, endorsements and documentary credits. 6) The percentage weightings established to analyze the balance assets subject to risks are showed in Annex 1 of the present regulation; it has been taken into account the portfolio evaluation and the influence that variables such as: risk, liquidity, guarantees and the guarantor may have in these assets. 7) Items out of the balance suffer a double weighting: a) First, they are multiplied for a conversion factor in function of the shared risk, equalizing them with balance operations as it is established in Annex 2. b) Second, the coefficient that corresponds to that kind of risk is applied in order to include it in the denominator, as it is established in Annex 1.

4 Section IV About the capital adequacy ratio 8) A minimum 15% of the capital is established as the capital adequacy ratio for financial institutions in relation to the total of assets weighted by the level of risk; this capital is known as adequate capital. 9) Banco Central de Cuba may establish the increment of capital or reserves in order to maintain the solvency of any financial institution when it considers it necessary, and shall fix the term for its fulfillment in the correspondent communication. 10) Financial institutions that foresee, at their own decision, to carry out a modification to its capital, shall notify it by written notice to Banco Central de Cuba, at least thirty (30) calendar days before doing so. 11) The Banking Supervision Body shall look after the fulfillment of what is stipulated in the present resolution. 12) Violations to all the aforementioned shall be punished in accordance with what is established in the legislation in force. Agreement No. 229 of November 23, 1998, adopted by the Board of Directors of Banco Central de Cuba is repealed. The present agreement shall enter into force as from April 1 st, The Superintendent of Banco Central de Cuba is empowered to dictate the instructions complementing this regulation. And for sending copies to Vice-Presidents, the Superintendent and the Auditor, all from Banco Central de Cuba, and to the Presidents of Banks and Non-Banking Financial Institutions, the present resolution is` issued at Banco Central de Cuba, on March 21, Michelle Abdo Cuza Secretary

5 Risk weighting by asset categories for balances 0% 20% 50% ANNEX 1 a) Cash in domestic currency as well as in foreign currency hold in the bank or in transit and bullion kept in the bank vaults or in other bank's vaults. b) Rights over Banco Central de Cuba. a) Rights over domestic banks and non-banking financial institutions and loans granted by them. b) Rights over foreign banks and non-banking financial institutions and loans granted by them, provided they have a residual maturity of less than a year. c) Cash to be collected. a) Rights over Cuban state entities and mercantile societies and loans granted by such entities. 100% a) Rights over foreign banks and non-banking financial institutions and loans granted by them, when they have a residual maturity superior to one year. b) Rights over other entities not included in previous clauses. c) Premises, plants and equipments and other fix assets. d) Real estate and other investments (including shares in non-consolidated investments in other companies). e) Any other asset.

6 ANNEX 2 Factors of credit conversion for items out of the balance Items out of the balance Factors of credit conversion 1. Direct substitutes of credit, for example: general debt guarantees (comprising standby letters of credit used as financial guarantees of loans and securities) and acceptances (endorsements with an acceptance character). 100 / 2. Certain contingent items related to transactions (for instance, performance bond, bid bond, warranties and standby letters of credit related to particular 50% transactions). 3. Contingency instruments related to trade, short-term self-settling (such as documentary credits guaranteed by shipment object of the credit). 20% 4. Sale and repurchase agreements and sale of assets with resource, when the credit risk is maintained in the bank. 100% 5. Purchase of forward assets, forward deposits and partially paid shares and values, representing commitments with a real decrease. 100% 6. Other commitments (for example, formal standby facilities and credit lines), with an original maturity term superior to one year. 50% 7. Similar commitments with an original maturity term of up to one year, or that can be unconditionally cancelled at any time. Letters of credit with 0% collateral shall be included.