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Prudential regulation

i Relationship with the prudential regulator

As the regulator of the Argentine financial system, the BCRA requires financial institutions to submit information on a daily, monthly, quarterly, semi-annual and annual basis. These reports, which include balance sheets and income statements, and information relating to reserve funds, deposits, portfolio quality and other matters, allow the BCRA to monitor institutions' financial conditions and business practices.

Accordingly, since 1994, the BCRA began to rate financial institutions based on the CAMEL quality rating system. Each letter of the CAMEL system corresponds to an area of the operations of each bank being rated, with 'C' standing for capital, 'A' for assets, 'M' for management, 'E' for earnings and 'L' for liquidity. Each factor is evaluated and rated on a scale from one to five, being one the highest rating an entity can receive.

This system was replaced in 2000 by CAMELBIG. Even though the objective and basic methodology of this new system do not differ substantially from the previous CAMEL system, the components were redefined to evaluate business risks separately from management risks. Therefore, the components used to rate business risks are capital, assets, market, earnings, liquidity and business. The components to rate management risks are internal control and the quality of management. By combining the individual factors under evaluation, an index can be obtained that is representative of the final ratings for the financial institutions analysed.

ii Management of banks

Regarding financial entities' management structures, directors and top-level managers of banks in Argentina must be appointed, and must exercise their functions in accordance with specific dispositions given by the BCRA. The latter evaluates their capacity, experience, reputation and ability in the financial field, and is also in charge of approving their appointment for such appointment to be effective. The management personnel designated for the management of foreign financial entities branches set up in Argentina must be approved by the BCRA.

The current regulations also establish that banks must have an audit committee composed of at least two members of the board of directors and by the internal audit. Whenever the internal audit function is conducted by independent professionals, the tasks of the internal audit designated responsible may be conducted by any of the designated directors (members of the committee).

In addition, BCRA policies have established that financial institutions must implement adequate internal control procedures for monitoring compliance with corporate governance requirements, and the applicable laws and regulations, and for reporting any deviation to the managers or the board of directors. Therefore, the BCRA has established guidelines and methodologies that firms' internal controls should follow. Under these, the internal controls should focus on three different categories: measuring the effectiveness and efficiency of transactions, testing the reliability of accounting information, and monitoring compliance with the applicable laws and regulations.

The responsibility for compliance with the internal controls lies, according to the BCRA criteria, on all members of financial entities. However, such responsibility is especially assigned by the regulations to the board of directors, the managers, the audit committee and the internal auditor. The BCRA has also elaborated a set of guidelines for financial entities' good corporate governance (good practices).

With respect to financial entities' management and employees' bonus payments, a specific procedure and requirements must be met for their granting, mostly related to financial entities' compliance with minimum cash and capital requirements, among other conditions. These requirements are revised periodically, mainly in consideration of the volume of financial entities' operations.

In this sense, the regulations establish that bonus payments may be carried out provided that financial entities are not found to be undergoing a regularisation or restructuration process; they do not register for financial assistance from the BCRA; and they do not present delays or non-compliance with the BCRA informative regimes, or deficiencies of integration of capital or minimum cash requirements.

iii Regulatory capital and liquidityMinimum capital requirements

The BCRA has also worked during the past few years on the implementation of policies aiming to comply with the Basel III guidelines, designing a roadmap for this purpose. On the same note, it has established regulations regarding the liquidity coverage ratio (LCR), LCR monitoring tools, and introducing Basel principles for liquidity risk management and supervision.

In that sense, the BCRA has stated that the minimum legal capital requirement should be equal to the greater value resulting from a comparison between the applicable basic requirement (corresponding to the type of entity) and the sum of those requirements determined by credit and market risk, as well as the operational risk.

The minimum legal capital requirement may be increased by 1 per cent in relation to certain assets if the financial institution is considered systemically important. Furthermore, when banks act as a custody or registry agent, exigencies are higher.

To verify compliance with the minimum capital requirements, the paid-in capital to be considered shall be the computable regulatory capital (RPC).

Any financial institution operating with an RPC under the minimum legal capital requirement shall pay in the correspondent amount within a certain period as of when it was determined to have failed to comply with the requirement, or submit to the Superintendency a regularisation and reorganisation plan. The Superintendency may appoint a supervisor and impose restrictions on distribution of dividends, among other actions.

Moreover, any financial institution operating under the minimum daily capital requirement related to market risk, when such failure is caused by the requirements established to prevent interest rate risk, foreign exchange risk or equity prices risk, shall pay in the corresponding amount or reduce its asset position, or both, until the applicable requirement is complied with. In cases where the non-compliance situation remains after the given term has elapsed, the entity must submit a regularisation and reorganisation plan to the Superintendency within the following five days.

Legal reserves

The BCRA requires that every year banks allocate to a legal reserve that is not higher than 20 per cent or lower than 10 per cent of their yearly net profits. Such reserve may only be used during periods of bank losses and after using up every allowance and other reserves. Distribution of dividends will not be allowed if the legal reserve has been impaired.

Minimum cash requirements

Financial institutions are also required to observe minimum cash requirements. These are established as a percentage of the balances of the different types of bank deposits. For term deposits, the percentage varies depending on the time remaining until maturity. The deposit amount minus the minimum cash requirement is such deposit's lending capacity.

Compliance with the minimum cash requirements is determined in averages, for monthly periods. The BCRA modifies from time to time the percentages of the minimum cash requirements depending on monetary policy considerations. Compliance must be accomplished with certain assets, and completed in the same currency as the deposit that triggers such requirement.

Supervision of banking groups

Financial entities must require each shareholder in Argentina or abroad to prepare consolidated financial statements of the group to be presented semi-annually to the Superintendency. Consolidated financial statements of foreign groups will also be required to be audited by a firm of recognised prestige.

Entities that own or acquire shares in foreign subsidiaries must give their consent to provide the information required by the Superintendency for the purpose of exercising supervision based on the consolidated financial situation. For the determination of the information requirements, the Superintendency shall take into account the legislation of the country where the subsidiary is located and the agreements that are made with the local supervisory body.

In cases in which the Superintendency does not have the information that it deems necessary to evaluate the situation of a consolidated financial institution, local financial entities will not be allowed to hold shares in banks or foreign companies subject to consolidation as significant subsidiaries. Given this, the Superintendency will suggest to the BCRA the appropriate time frame for the sale of such shares.

iv Recovery and resolutionFinancial entities' regularisation

The FIL establishes that financial institutions that evidence a deficiency in their cash reserves or have not complied with certain technical standards that are required, including minimum capital requirements, or whose solvency or liquidity is deemed to be impaired by the BCRA, must submit a restructuring plan to the BCRA.

In relation to the restructuring plans, the BCRA may require a financial institution involved to provide guarantees or to limit the distribution of profits, and appoint a supervisor to oversee such financial institution's management with the power to veto decisions taken by the financial institution's corporate authorities.

Revocation of authorisation to function

If a restructuring plan is not filed, approved or fulfilled by the financial entity, the BCRA may revoke its authorisation to function. The BCRA board may also resolve the revocation of an authorisation to operate a financial institution in the following situations: at the request of the authorities of the entity; in cases of dissolution established in the codes and laws that regulate its existence as a legal entity; and in other cases established in the FIL (e.g., sanctions or a fundamental change to the basic conditions taken into account at the time of authorisation).

Restructuring and dissolution of financial entities

Argentina's legal system has a specific procedure to deal with banking insolvency – which differs from the ordinary procedure established by the Bankruptcy Law – that involves the intervention of the BCRA to protect customers and creditors. Such procedure is regulated in Section 35-bis of the FIL and establishes that if, in the judgment of the BCRA, a financial institution is in a situation that the FIL would authorise the BCRA to revoke the financial institution's licence to operate as such, the latter may, prior to considering such revocation, order a variety of measures, including:

  1. taking steps to reduce, increase or sell the financial institution's capital;
  2. revoking the approval granted to the shareholders of the financial institution to own an interest therein, giving a term for the transfer of such shares;
  3. excluding and transferring assets and liabilities;
  4. constituting trusts with part or all of the financial institution's assets;
  5. granting temporary exemptions to comply with technical regulations, or paying charges and fines arising from such defective compliance, or both; and
  6. appointing a bankruptcy trustee and removing statutory authorities.

It is important to note that any actions authorised, commissioned or decided by the BCRA under the FIL involving the transfer of assets and liabilities, or such deemed necessary to execute the restructuring of a financial institution, as well as those related to the reduction, increase or sale of their equity, are not subject to any court's authorisation, and cannot be deemed inefficient in respect of the financial institution's creditors.

Regarding the dissolution of financial entities, the BCRA must be notified of any decision to dissolve a financial institution pursuant to the FIL. The BCRA must then notify a court of competent jurisdiction, which will determine who will liquidate the entity (either the corporate authorities or an appointed independent liquidator). This determination is based on the ability of the corporate authorities and the existent assurances to carry out the liquidation properly.

Moreover, the bankruptcy of a financial institution cannot be adjudicated until the licence is revoked. No creditor, with the exception of the BCRA, may request the bankruptcy of a former financial institution before 60 days have elapsed since the revocation of its licence.

Finally, it is worth noting that financial entities' branches are responsible for their own assets: parent companies do not respond for them.

Suspension of functions

The BCRA Organic Chart authorises the Superintendency, subject to the prior approval of the President of the BCRA, to suspend for up to 30 days, in whole or in part, the operations of a financial institution if its liquidity or solvency has been adversely affected. Notice of this decision must be given to the BCRA's board of directors.

If at the end of such suspension period the Superintendency considers it is necessary to renew it, it can only be authorised by the board of directors for an additional period of up to 90 days. During the suspension period, there is an automatic stay of claims, enforcement actions and precautionary measures; any commitment increasing the financial institution's liabilities is void; and the acceleration of indebtedness and interest accrual is suspended.

Deposit insurance system

Argentina also has an insurance deposit system called SEDESA that protects the rights of depositors under crisis scenarios. This system is funded with periodic mandatory contributions from banks and guarantees, which has currently risen up to 450,000 Argentine pesos per person, account and deposit.