Financial Education - Adequacy of capital or shareholders' equity quality of assets and reasonable Management

When speaking of Capital or Resource Adequacy, companies must have good capital that allows them to be highly leveraged, so they are expected to maintain sufficient capital in accordance with: 1) the nature and degree of the risks they assume, and 2) management's ability to identify, measure, monitor and control risks.

Equity should be able to cover unexpected losses and, therefore, all risks incurred by the entities should be analyzed, as well as the quality (composition) of such equity.

In relation to asset quality, it is mainly associated with the current and potential volume of credit risk related to the loan and investment portfolio, real estate foreclosures, other assets and off-balance sheet transactions.

In this regard, the credit risk must be correctly assessed and the diversification, quality and concentration of assets, as well as the provisioning and lending policy, must be taken into account. However, any risk that may affect the market price of assets must also be taken into account.

Finally, in terms of Reasonable Management, the ability of the board and directors, in their respective roles, to identify, measure, monitor and control the risks incurred by financial institutions in their activity, to ensure their viability and efficiency in operating in accordance with laws and regulations, is analyzed. This is a component that is difficult to characterize through quantitative indicators based on the financial information provided by the entities, which is why the FSIs, in their current version, do not include it.