Circular LISOL 1-103 and OPRAC 1-379: Classification and Provisioning of Certain Assets and Determination of Computable Equity Responsibility

BANCO CENTRAL DE LA REPUBLICA ARGENTINA __________________________________________________________________ COMUNICACION " A " 2287 22/12/94 __________________________________________________________________ TO FINANCIAL ENTITIES:
Ref.: Circular
LISOL 1 - 103.
OPRAC 1 - 379.
Classification and provisioning of certain assets. Determination of computable equity responsibility

We address you to bring to your knowledge that this Institution adopted the following resolution:

"1. To notify financial entities that this Institution estimates it is of fundamental importance that the accounting records made by the entities accurately reflect the economic and legal reality of the operations. In this regard, it is considered a serious violation of the regulations issued by the Central Bank, in exercise of the function granted by its Organic Charter and Law 21.526, any action that seeks to distort or conceal facts, especially regarding the effective nature of the risks and commitments assumed or the nature of the assets that, directly or indirectly, imply circumventing the compliance with prudential regulations. To this effect, it must be possible to verify at all times the actual existence of the accounted assets (cash balances - balances with correspondents - securities, loans and other financings, regardless of the depository, issuer or debtor), on which there are no doubts regarding their legitimacy or validity of the instruments that back them or the genuineness of the operation, or that are effectively owned by the entity and available for liquidation at maturity, that is, they are not assets that, ultimately, are used as collateral for transactions with other entities.

2. Establish, with effect for the balances from January 1995,
   that financial entities must classify as unrecoverable and provision 100% of the financings, including guarantees, sureties and other contingent liabilities, granted to:
   i) banks and other financial institutions abroad that are not subject to the supervision of the central bank or equivalent authority of the country of origin, that do not accept deposits from residents of the country in which they are domiciled and that are not adhered to systems of guarantee or deposit insurance, when such regimes exist.

When those entities have a rating included in the "investment grade" category granted by one of the rating agencies included in the list in point 6. of the consolidated text disseminated through Communication "A" 2269, this requirement will not apply. ii) other borrowers not domiciled in the country who do not have the rating referred to in the last paragraph of
section i).
To this end, the following may also be excluded:
2.1. the financings and balances in correspondent accounts
and other term placements, which are recorded with respect to:
2.1.1. the head office of the local branches of banks
from abroad or their subsidiaries and their subsidiaries in other countries to the extent that the head office is subject to supervision on a consolidated basis.
2.1.2. banks or other financial institutions from
abroad subject to supervision on a consolidated basis that exercise control over local financial entities constituted as joint-stock companies.
2.1.3. other banks from abroad authorized to participate
in the reciprocal payments and credit agreement regimes to which this Institution has adhered. The aforementioned items will also be excluded when registered with respect to the branches and subsidiaries of those banks, even if they are not included in those agreements, provided that the head office or controlling banking entity are subject to consolidated supervision regimes, to the satisfaction of the Superintendence of Financial and Exchange Entities.
2.1.4. branches and subsidiaries of local financial entities
subject to the consolidated supervision regime (Communication "A" 2227).
2.2. the financings that have a guarantee from a foreign
bank whose rating is included in the "investment grade" category granted by one of the rating agencies included in the list in point
6. of the consolidated text disseminated by Communication "A"
2269.

2.3. the financings linked to securities purchase-sale
operations conducted with residents abroad, which are channeled through the securities depositories referred to in paragraphs c) and d) of point 1. of the resolution disseminated through Communication "A" 2263 and which originate in the fulfillment, by the intervening financial entity, of the obligation incumbent on it (delivery of the traded asset or making the agreed payment) without the counterparty settling its commitment on the same day, due to usual settlement modalities in those markets.
2.4. the financings linked to foreign trade operations.
2.5. active repurchase agreements in US dollars and national
government securities, provided that:
2.5.1. the traded assets have a market of
usual and relevant operations.
2.5.2. the agreed prices respond to market conditions, and
2.5.3. the coverage margins are sufficient and are
deposited with the custodians or registrars referred to in point 1. of the resolution disseminated through Communication "A" 2263.
2.6. credit assistance granted to customers through
branches or subsidiaries abroad of local financial entities subject to the consolidated supervision regime (Communication "A" 2227), provided that it has been granted with resources that do not come from funds provided, directly or indirectly, by the local financial entities. The financings excluded according to the preceding list must be classified and provisioned in accordance with the dispositions made known through Communication "A" 2216 and complementary ones.

3. Incorporate, with effect for the determination of the computable
   equity responsibility applicable from 31.1.95, among the items referred to in point 3.2. of Chapter VI of Circular LISOL - 1 and complementary norms that correspond to be deducted for that purpose ("Cd") according to the expression contained in point 3.1. of that chapter (text according to Communication "A" 2279), the following items:
   3.1. the balances in correspondent accounts and other
   placements at sight in banks and other financial institutions abroad that are not subject to the supervision of the central bank or equivalent authority of the country of origin, that do not accept deposits from residents of the country in which they are domiciled and that are not adhered to systems of guarantee or deposit insurance,

when such regimes exist.
When those entities have a rating included in the "investment grade" category granted by one of the rating agencies included in the list in point 6. of the consolidated text disseminated through Communication "A" 2269, this requirement will not apply.
3.2. the securities issued by governments of foreign countries,
whose rating is lower than that assigned to national government securities of the Argentine Republic, and that do not have markets where they are traded in a usual manner for relevant values. To this end, mandatory investments that must be made by the branches or subsidiaries - subject to the consolidated supervision regime, according to Communication "A" 2227 - of local financial entities due to requirements imposed by the monetary or supervisory authority of the country where they operate will not be considered. These deductions will be made for the highest balance in each bank that is registered during the month to which the determination of the computable equity responsibility corresponds. To this end, the following may also not be deducted:
3.3. the balances in correspondent accounts and other
placements at sight, which are recorded with respect to:
3.3.1. the head office of the local branches of banks
from abroad or their subsidiaries and their subsidiaries in other countries to the extent that the head office is subject to supervision on a consolidated basis.
3.3.2. banks or other financial institutions from
abroad subject to supervision on a consolidated basis that exercise control over local financial entities constituted as joint-stock companies.
3.3.3. other banks from abroad authorized to participate
in the reciprocal payments and credit agreement regimes to which this Institution has adhered. The aforementioned items will also be excluded when registered with respect to the branches and subsidiaries of those banks, even if they are not included in those agreements, provided that the head office or controlling banking entity are subject to consolidated supervision regimes, to the satisfaction of the

Superintendence of Financial and Exchange Entities.
3.3.4. branches and subsidiaries of local financial entities
subject to the consolidated supervision regime (Communication "A" 2227).
3.3.5. the balances that, on a temporary and
circumstantial basis, originate from client operations, such as those linked to foreign trade operations or other types of credit arrangements ordered by third parties that do not imply equity responsibility for the entity. Without prejudice to what is provided in this point, financial entities must open for each of their foreign correspondents a file containing the information and other elements of judgment that allow knowing their identification, rating, credit margins and any other data linked to that relationship.

4. To recall that, upon request made by the Superintendence
   of Financial and Exchange Entities and with effect from the date indicated in each case, financial entities must constitute provisions for credit risk in the percentages that are established when:
   4.1. from the analysis of the credit portfolio at the end to verify
   the correct application of the provisions disseminated by Communication "A" 2216, it arises, in the opinion of that Superintendence, that the constituted provisions are insufficient, or
   4.2. from the elements made available to the acting inspectors
   some of the situations referred to in point 1 of the present resolution arise. In such case, the deduction of the amounts of the assets included for the purposes of the determination of the computable equity responsibility may be required. The allocation of the computable equity responsibility by application of the above will determine the obligation to verify the classification of the different norms that use the cited responsibility as a base, from the month in which the request has effect, and, if applicable, the resulting charges must be deposited within the term of 10 business days, counted from the date of notification of the request. In the event of deposit outside the fixed term, the pertinent interest for delay must be paid that arise from the application of each infringed norm.

5. To clarify that the assets that must be deducted for the purposes of the
   calculation of the computable equity responsibility in accordance with the provisions established in this matter by this Institution will not be considered for determining:

• the minimum capital requirement (Communication "A" 2136 and
  complementary).
• the credit assistance limits (Annexes I and II to Co-
  munication "A" 2140).
• classification of debtors and minimum provisions for credit
  risk (Communication "A" 2216 and complementary).
• global net foreign currency position, when the act-
  ives are denominated in that currency.

6. Repeal, with effect from the date of its issuance, the resolu-
   tion disseminated by Communication "A" 2274."

The terms of the preceding resolution clearly reflect the purpose of the measure adopted, which has been understood and shared by representatives of the associations that group financial entities in meetings held for that purpose. In this regard, cases that offer entities difficulties of interpretation must be submitted for prior consultation to the Superintendence of Financial and Exchange Entities.

We salute you very respectfully.
BANCO CENTRAL DE LA REPUBLICA ARGENTINA Juan Carlos Isi Alfredo A. Besio Submanager of Standards Manager of Standards for for Financial Entities Financial Entities