Circular LISOL 1-1068: Minimum Capital for Financial Entities. Minimum Capital for Operational Risk. Adjustments.

"AÑO DE LA DEFENSA DE LA VIDA, LA LIBERTAD Y LA PROPIEDAD" COMUNICACIÓN “A” 8068 18/07/2024 TO FINANCIAL ENTITIES:
Ref.: Circular
LISOL 1-1068:
Minimum capital of financial entities.
Minimum capital for operational risk. Adjustments.
___________________________________________________________________________ We address you to inform you that this Institution has adopted the resolution that, in its pertinent part, establishes:

“- Substitute, with effect from 01/03/25, Section 7 of the regulations on “Minimum capital of financial entities” with the provisions referred to in the Annex to this communication.”

Likewise, we inform you that we will subsequently send you the sheets that, in replacement of those previously provided, will need to be incorporated into the aforementioned regulations.

We salute you attentively.
CENTRAL BANK OF THE ARGENTINE REPUBLIC
Enrique C. Martin
Manager of Emission of Regulations
Dario C. Stefanelli
Senior Manager of Emission and
Regulatory Applications

ANNEX

Section 7. Minimum capital for operational risk.
For the purposes of applying the provisions of this section, financial entities shall be classified into:
i) Group 1: financial entities rated by the BCRA as of local systemic importance (D-SIB) and branches or subsidiaries of foreign banks rated as of global systemic importance (G-SIB); ii) Group 2: financial entities not included in item i).

Financial entities whose rating is modified – in accordance with the preceding items – will have a period of 6 months to apply the specific provisions of the new group to which they belong.

7.1. Capital requirement for operational risk for Group 1 entities.
It will be determined monthly by the following expression:
CRO = BIC x ILM

Where:
CRO: capital requirement for operational risk.
BIC: business indicator component, which is the product of the business indicator (BI) by a series of marginal coefficients (αi), calculated as provided in point 1.2.
ILM: internal loss multiplier equal to 1.
Risk-weighted assets (RWA) for operational risk are equal to 12.5 times the CRO.

7.1.1. Business indicator (BI).
The BI is an approximation of operational risk based on financial statement information. It will be determined by the following expression:
BI = VA (ILDCProm + SCProm + FCProm + RMProm)

ILDCProm: Component of interest, leases, and dividends. It will be determined by the following expression:
Mín. [VA (interest income – interest expenses); 5 % x interest-bearing assets] + dividend income B.C.R.A. MINIMUM CAPITAL OF FINANCIAL ENTITIES
Annex to
Com. “A”

SCProm: Services component. It will be determined by the following expression:
Máx. [other operating income; other operating expenses] + Máx.
[fees and commissions income; fees and commissions expenses] FCProm: Financial component. It will be determined by the following expression:
VA (net result of trading portfolio) + VA (net result of investment portfolio) RMProm: Total monetary result VA: Absolute value.

Each term within the 3 components and the monetary result must be calculated as the average of the values of the 3 consecutive 12-month periods prior to the month in which the calculation is made, expressed in homogeneous currency at the close of the 36-month calculation period: t, t-1, and t-2. The value of the net items corresponding (for example, interest income minus interest expenses) must be determined first for each consecutive 12-month period, and then the average of the 3 periods.

7.1.1.1. Definition of the components of the business indicator (BI):
i) Interest, leases, and dividends component (ILDC). a) Interest income and index adjustments: is the total of interest and adjustments generated by financial assets and financial leases. Included, among others:

• Interest and adjustments generated by financial instruments measured at amortized cost – for example, loans and advances – and at fair value with changes in other comprehensive income (OCI), and income generated by financial leases.
• Interest on financial derivative instruments accounted for as hedges – provided they are identifiable.
• Any other interest and adjustment generated by an asset.
  b) Interest expenses: is the total of interest and adjustments generated by financial liabilities and interest and adjustments corresponding to financial leases when the entity is the lessee. Included, among others:
• Interest and adjustments generated by financial instruments measured at amortized cost – for example, deposits – and at fair value with changes in other comprehensive income (OCI), and expenses generated by financial leases.
• Interest on financial derivative instruments accounted for as hedges – provided they are identifiable.
• Any other interest and adjustment generated by a liability.
  c) Interest-bearing assets: gross amount at the close of the month prior to that in which the calculation is made for each of the 3 years of the total of assets at interest rate or assimilable adjustments – even if in default and the accrual of accessories had been suspended – and assets given in financial lease. Off-balance sheet items are not computed. d) Dividend income: is the total of dividends from the holding of shares and participations in funds that the entity does not consolidate, including those from non-consolidated subsidiaries, investments in associates, and joint arrangements.

ii) Services component (SC). a) Fees and commissions income: are income from advisory and service provision, even through third parties.
Included, among others, income from:

• Services on behalf of clients related to the issuance of financial instruments, their receipt and transmission, and, in general, the execution of third-party orders.
• Compensation and payment, asset management, custody, fiduciary trusts, payment services, structured financings, services linked to securitizations, credit lines and guarantees granted, and transactions with abroad.
  b) Fees and commissions expenses: are expenses for advisory or services received, only when they are of a financial nature. Expenses for the external contracting of non-financial services (such as logistical, IT, or human resources services) are excluded. Included are expenses for compensation and payment, custody, services linked to securitizations, credit lines and guarantees received, and transactions with abroad, among others. c) Other operating income: income from ordinary banking operations not included in other BI items, but of a similar nature. Included, among other income, are gains from non-current assets and disposal groups held for sale that do not qualify as discontinued operations. d) Other operating expenses: expenses and losses from ordinary banking operations not included in other BI items, but of a similar nature, and losses arising from operational events. Included, among other expenses:
• Losses from non-current assets and disposal groups held for sale that do not qualify as discontinued operations.
• Losses generated by operational events, such as fines, sanctions, out-of-court settlements, and the cost of replacing damaged assets, to the extent that they had not been provisioned in previous years.

iii) Financial component (FC). a) Net result of the trading portfolio – defined in accordance with point 6.1.2 of the regulations on “Minimum capital of financial entities” – which is composed, among others, of the net result of:

• Assets and liabilities held for trading (debt securities, shares, derivatives, and short positions, among others).
• Accounting registration of hedges.
• Exchange differences.
  b) Net result of the investment portfolio – defined as the portfolio that is not trading – which is composed, among others, of the net result of:
• Financial assets and liabilities measured at fair value with changes in profit or loss.
• Realized gains and losses on financial assets and liabilities not measured at fair value with changes in profit or loss.
• Accounting registration of hedges.
• Exchange differences.

iv) Total monetary result (RM) – not measured in absolute values –. v) The following items do not contribute to any of the BI items:
a) Income and expenses from insurance or reinsurance business, conducted as an institutional agent or through subsidiaries. b) Payment of policies and collection of indemnities for insurance or reinsurance coverage. c) Administrative expenses, including personnel expenses, commissions paid for the external contracting of non-financial services (such as logistical, IT, or human resources services), and other administrative expenses (such as IT expenses, utilities, telephone, travel, office supplies, postage). d) Recovery of administrative expenses, including the recovery of payments made on behalf of clients (such as taxes paid and subsequently debited from client accounts). e) Expenses on real estate and other fixed assets (except those arising from loss events due to operational risk). f) Depreciation or amortization of tangible and intangible assets. g) Provisions for assumed commitments or their reversals, except provisions related to loss events due to operational risk. h) Impairment of the value of financial and non-financial assets or their reversals, investments in subsidiaries, “joint ventures,” or associates. i) Changes in business key recognized in profit or loss. j) Current and deferred income tax.

7.1.1.2. Level of aggregation of the business indicator.
At the consolidated level, the BI is calculated based on the consolidated values of the income and expenses of the entire banking group. Calculations at the sub-consolidated level must be performed using the BI figures of the consolidated entities at each specific sub-level. At the individual level, the BI figures of each subsidiary must be used.

7.1.1.3. Exclusion of discontinued operations from the business indicator (BI).
Financial entities may request authorization from the SEFyC to exclude discontinued operations from the BI calculation. Such exclusions must be disclosed in accordance with the requirements established. Once the request is approved, the entity may exclude BI items immediately. If the exclusion is approved during an intermediate calculation period, it will be computed for the determination of the BI at the close of the month in which the authorization was granted.

7.1.1.4. Inclusion of BI items related to business combinations (mergers and acquisitions).
The average used to calculate the BI must cover the last 3 consecutive 12-month periods (36 months in total) of businesses acquired within this period.
Information on the business indicator for previous periods must be computed from the acquisition date, which is when the acquirer obtains control of the acquiree. This information must be included at the time of the first determination of the minimum capital requirement for operational risk and reported in the first update of total risk-weighted assets following the acquisition.

7.1.2. Business indicator component (BIC).
It will be determined by the following expression:
BIC = ∑ BIi x αi

where the marginal coefficients (αi) will be determined based on the BI band:

• In line with international standards. The equivalent amount in pesos must be calculated at the selling exchange rate of the Bank of the Argentine Nation at the close of operations on the last business day of the previous month in question.

The marginal coefficients increase as the size of the BI increases. For entities included in category 1 (BI equal to or less than the peso equivalent of € 1,000 million), the BIC is equivalent to BI x 12 %. The marginal increase of the BIC derived from the increase of one unit of BI is 12 % in category 1, 15 % in category 2, and 18 % in category 3.

7.1.3. Disclosure.
Financial entities must make public, regularly, through their Internet pages or reports – in accordance with the requirements established for this purpose – the following:

7.1.3.1. Data on their annual losses for the last 10 years. Losses must be disclosed net of recoveries – effectively received – and before and after exclusions not relevant to their risk profile – the latter, prior to authorization from the SEFyC –.
Financial entities that do not have data on their annual losses for the last 10 years must accumulate and disclose such data from the moment they are covered by these provisions.

7.1.3.2. The BI items for each of the 3 consecutive 12-month periods of the BI calculation.

7.2. Capital requirement for operational risk for Group 2 entities.
It will be determined monthly by applying the following expression:

Category BI Band
(in billions of euros*)
BI Marginal Coefficients
(αi)
1 ≤ 1 12 %
2 1 < BI ≤ 30 15 %
3 > 30 18 %

Where:
CRO: capital requirement for operational risk.
α: 15 %. n: number of 12-month consecutive periods in which the BI is positive, taking into account the last 36 months prior to the month in which the calculation is made. The maximum value of n is 3, with no overlap of months allowed in the formation of periods. When n is equal to zero (n=0), a requirement equivalent to the limit provided in point 7.3 must be observed. To this effect, financial entities in group “A” will receive the treatment established for financial entities in group “B”. IBt: gross income from consecutive 12-month periods – provided it is positive – corresponding to the last 36 months prior to the month in which the calculation is made, expressed in homogeneous currency of the month prior to that in which the calculation is made. The IB is defined as the sum of:
i) financial and service income minus financial and service expenses, ii) other profits minus other losses, and iii) total monetary result.
From the accounting items mentioned in i) and ii), the following concepts – included in those items – will be excluded, as applicable:

• charges from the constitution of provisions, derecognition of provisions constituted in previous years, and credits recovered in the year charged in previous years;
• the result from participations in financial entities and companies, to the extent that they are concepts deductible from the computable equity responsibility;
• results from the sale of classified and measured assets at amortized cost or fair value with changes in OCI.

7.3. Limit for Group 2 entities belonging to groups “B” or “C”.
The requirement determined through the application of the expression described in point 7.2. may not exceed 17 % in the case of Group “B” entities and 14 % in the case of Group “C” entities, of the average of the last 36 months – prior to the month for which the requirement determination corresponds – of the minimum capital requirement for credit risk calculated as provided in Section 2., expressed in homogeneous currency of the month prior to that in which the calculation is made. The maximum limits established above will be reduced to 11 % and 8 %, respectively, when the financial entity has rating 1, 2, or 3 according to the valuation granted by the SEFyC, at the time of the last inspection carried out, regarding all of the following aspects: the entity as a whole, its IT systems, and the work of those responsible for the evaluation of their internal control systems. In cases where the financial entity has rating 1 or 2 in all the aforementioned aspects, the maximum limit will decrease to 7 % or 5 %, depending on whether it belongs to group “B” or “C”, respectively. To this effect, the last rating reported for the calculation of the requirement that corresponds to integrate into the third month following that in which the notification takes place will be considered. The applicable limit will always apply provided that the financial entity is not a branch or subsidiary of a foreign bank rated as systemically important (G-SIB); otherwise, the operational risk requirement will be computed at 100 % as provided in point 7.1.

7.4. New entities.
The monthly minimum capital requirement for operational risk for financial entities of groups 1 and 2 corresponding to the first month will be equivalent to 10 % of the sum of the requirements determined by credit and market risks – in this case, for positions on the last day – of that month. From the second to the thirty-sixth month, the monthly requirement will be equivalent to 10 % of the average of the requirements determined for the months elapsed until the calculation period – inclusive – resulting from considering the risks mentioned in the preceding paragraph, according to the following expression:

where for each month “t”:
CRCt: capital requirement for credit risk, expressed in homogeneous currency of the month prior to that in which the calculation is made.
RMp,t: capital requirement for market risk for positions on the last day of month “t”, expressed in homogeneous currency of the month prior to that in which the calculation is made. n: number of months elapsed until the month of calculation – inclusive – (2 ≤ n ≤ 36). From the thirty-seventh month, the monthly requirement will be calculated in accordance with the methodology established for group 1 or group 2, as applicable.