Circular LISOL 1 - 120. Liquidity Position — BCRA — AR

BANCO CENTRAL DE LA REPUBLICA ARGENTINA
__________________________________________________________________ COMUNICACION " A " 2374 26/09/95 __________________________________________________________________ TO FINANCIAL ENTITIES:
Ref.: Circular
LISOL 1 - 120.
Liquidity Position

We address you to inform you that this Institution adopted the following resolution:

"1. Financial entities must adopt management and control policies that ensure the availability of reasonable liquidity levels to efficiently meet their deposits and other financial commitments under different alternative scenarios.

These policies must foresee the procedures to be used to evaluate the entity's liquidity conditions with sufficient advance notice in the context of the market, with the consequent review of estimates and their adjustment to new scenarios, taking the measures leading to the elimination of liquidity mismatches or adopting safeguards to foresee the obtaining of resources at market cost -similar to that which their competitors must pay- and sufficient to prudently support longer-term assets.

In this order, the degree to which their liabilities or assets are concentrated in certain clients, the general situation of the economy and the market and its probable evolution, its repercussion on the availability of credit lines and the capacity to obtain resources through the sale of public bonds and/or active portfolio, etc., must be taken into account.

The organizational structure of the entity must contemplate the areas and levels of responsibility of those who will be in charge of the task requiring daily monitoring. Necessarily, the participation and coordination of the highest managerial authority of the entity (e.g.: General Manager) will correspond. Additionally, a member of the board of directors must be designated to whom reports will be made at least weekly, or with more frequency if circumstances so require, especially when changes in liquidity conditions oblige defining new courses of action to protect the entity.

For the analysis of the liquidity position, consolidated cash flows in pesos and foreign currency must be available, which contemplate each of the following alternative scenarios to address specific liquidity situations, namely:
2.1. contractual situation.
2.2. current situation.
2.3. situation with signs of own illiquidity.
2.4. extended illiquidity situation:
2.4.1. scenario a).
2.4.2. scenario b).
Cash flows will be prepared monthly according to the basic model attached as an annex and taking into account the following guidelines:
3.1. Within assets, the following will be considered:
3.1.1. liquid assets, which include:
3.1.1. 1. national public bonds and private securities with daily quotation
in securities markets, national or foreign, referred to relevant transactions in whose amount the eventual liquidation of the holding cannot distort the indicated quotation. All holdings of bonds under these conditions will be considered, declaring them at market value, according to the last quotation at the close of the previous month. Holdings registered in investment accounts during the first year of imputation will be excluded.

3.1.1. 2. credit lines available upon simple request, granted by local financial entities, duly instrumented.
3.1.1. 3. margin of availability linked to the realization of repos -with the Central Bank and with other persons-
regarding national public bonds held in investment accounts, during the first year of imputation.
3.1.1 .4. margin of rediscounts and advances from the Central Bank for temporary illiquidity under the conditions of the first paragraph of subsection c) of article 17 of its Organic Charter.
3.1.1. 5. cash availability in the country, not computable as integration of reserve requirements.
3.1.1. 6. availability in banks abroad not computable as integration of reserve requirements. Only those maintained in banks with "investment grade" rating granted by any of the rating agencies listed in point 6. of Communication "A" 2269 will be considered.
3.1.1. 7. availability in the Central Bank and in cash in the country and in banks abroad computable as integration of reserve requirements.
3.1.1. 8. foreign public bonds, with usual quotation in exchanges or markets abroad, issued by central governments of countries members of the OECD (Organization for Economic Cooperation and Development) that have at least one "A" rating or equivalent granted by any of the international rating agencies listed in point 6.
of Communication "A" 2269.

3.1.1. 9. credit lines available upon simple request, granted by foreign financial entities with the rating provided in point 3.1.1.6, duly instrumented.
3.1.1.10. other availability abroad for unrestricted use, including balances of the account "Liquidity Requirements - Com. "A" 2350" opened at Deutsche Morgan Grenfell, Inc. - New York.
3.1.1.11. Bank Liquidity Letters of the National Government.
3.1.1.12. Holdings of public bonds linked to passive repos for the Central Bank.
3.1.1.13. other availability in the country for unrestricted use.
3.1.1.14. minimum cash requirements and minimum liquidity requirements, with a negative sign.
In all cases, the amounts will be recorded in the first column of "maturities" (first week).
3.1.2. public bonds, except those that integrate the concept of "liquid assets", discriminated into national, provincial and municipal, and foreign.
3.1.3. loans, separated by category according to the rules on classification of debtors (Communication "A" 2216), discriminated into:
i) self-liquidating, taking into account the concepts detailed in subsections a) to j) of section 1 of Annex I to Communication "A" 2216. ii) commercial portfolio,

iii) consumer portfolio:
a) personal b) mortgage (for housing), c) other iv) to the financial sector, v) to the public sector, and vi) other.
3.1.4. other credits for financial intermediation, except purchase and sale operations of securities and foreign currency -cash to settle and forward, but including settlement mismatches-, separated by category according to the rules on classification of debtors (Communication "A" 2216).
Credits will be considered net of provisions for uncollectible risk attributable to them. Entities may opt to perform the opening by maturities regarding clients in categories 1 and 2 or 1, 2 and 3, and report the eventual and projected recovery of the remaining in the last column, considering credits by capitals with a global adjustment in concept of provisions for uncollectible risk in each maturity column, based on minimum provisioning values, and attributing the excess of constituted provisions to the last column.
3.2. Within liabilities, the following will be detailed:
3.2.1. deposits by type:
i) checking account, ii) savings account, iii) fixed term for securities, iv) fixed term (others), and

v) other.
Within each type of deposit, amounts will be discriminated based on:
a) balances or deposits in accounts of holders resident in the country, with the following breakdown:
a) 1. balances or deposits up to $ 10,000 or $ 20,000, as applicable, to the extent that they are covered by the deposit guarantee (Com. "A" 2337). a) 2. balances or deposits on account of up to $ 100,000 or its equivalent, excluding those included in the previous section. a) 3. balances or deposits on account higher than $ 100,000 or its equivalent, excluding those included in section a) 1. The breakdown according to section a) 1. will be optional. b) balances or deposits in accounts of holders non-resident in the country, regardless of the balance or amount of the deposit.
3.2.2. other obligations for financial intermediation -except purchase and sale operations of securities and foreign currency, cash to settle and forward, but including settlement mismatches-, discriminating:
i) negotiable obligations, ii) credits from local financial entities, iii) credits from banks abroad, and v) other commitments in the item.

Additionally, commitments linked to credit lines granted to local entities, duly instrumented (counterparty of point 3.1.1.2.) will be recorded.
3.3. Commitments will be reported for:
3.3.1. unused balances of current account advances granted, to the extent that their use cannot be restricted by the entity and
3.3.2. guarantees, sureties and other eventual responsibilities assumed by the entity on behalf of third parties for its clients, registered in off-balance sheet accounts, net of operations that have "self-liquidating" counter-guarantees. They will be computed at 35% of their value or higher percentage resulting from historical experience in the materialization of commitments, considering at least the last year.
3.4. Other income (e.g. commissions) and expenses (e.g.: salaries, taxes) will be detailed.
4. For the flows to be built, as required in point 2., the following hypotheses will be taken into account:
4.1. contractual situation:
In each column of "maturities", amounts whose recovery or payment must be made -according to contractual or issuance clauses- within the indicated periods, counted from the last day of the previous month, excluding what was declared in the previous column/s.
4.2. current situation:
The recovery of assets, the renewal of liabilities and/or eventual increases in the concepts are similar to those observed -on average- in the last three months (the total of collections or renewals and/or increases of the period will be calculated with respect to the sum of the pertinent maturities. The ratio obtained, as a percentage, will be applied to the contractually provided maturities).

However, in the case that there is information that allows defining a different behavior than the cited average -either in terms higher or lower-, taking into account especially significant operations -active or passive-, the amounts resulting from considering that information will be recorded.
4.3. situation with signs of own illiquidity:
The recovery of assets and the renewal of liabilities is equivalent to 75% of the result obtained according to point 4.2.
What is stated in the second paragraph of point 4.2. will be applicable.
4.4. extended illiquidity situation:
The recovery of assets and the renewal of liabilities is equivalent to 50% of the result obtained according to point 4.2.
What is stated in the second paragraph of point 4.2. will be applicable.
In all hypotheses, in the cash flows, amounts for capital will be considered.
5. In the determination of the liquidity positions of the cash flows of each of the mentioned scenarios, the following elements of liquid assets will be taken into account:
5.1. current situation:
All.
5.2. situation with signs of own illiquidity:
All.

5.3. extended illiquidity situation:
5.3.1. scenario a): all, except that corresponding to point 3.1.1.14.
5.3.2. scenario b): 3.1.1.5. to 3.1.1.12;
capital services of national public bonds; public or private bonds regarding which the entity is the holder of the right to exercise a sale option under the conditions contained in point 1.3.1.5. of Communication "A" 2350 (text according to Communication "A" 2359).
6. Liquidity indicators.
The accumulated global gap of the cash flows prepared for each of the alternative scenarios referred to in point 2., considering the effects of the calculations as indicated in point 5., must be positive and reflect in each of the periods from the first week to the third month of maturities the following values, measured as a ratio between the accumulated global gap and the accumulated liabilities maturing in each period:
6.1. current situation: equal to or greater than coefficient k1.
6.2. situation with signs of own illiquidity: equal to or greater than coefficient k2.
6.3. extended illiquidity situation:
6.3.1. scenario a): equal to or greater than coefficient k3.
6.3.2. scenario b): greater than coefficient k4.
The values of the "k" coefficients will be fixed based on the experience recorded in the period April/August 1996 and will be valid from October 1996. They may eventually be differential by type of entity, taking into account their specialization and size.

The prepared tables must be sent to the Central Bank no later than the 16th or 20th of each month, according to the deadline the entity must observe to present the monthly balance. Entities included in the consolidated supervision regime (Communication "A" 2227) may present the cash flows until the 25th.
The presentation of the first information will be due in April 1996 and will correspond to data prepared on balances registered at the close of March 1996.
In the column "balances at end of month", balances registered at the close of the month prior to the presentation deadline will be recorded.
In each column of "maturities", accumulated amounts for the course of each period, counted from the close of the previous month, will be recorded, except as specifically provided for liquid assets. For the concept "week", the "statistical week" criterion will be used (from 1 to 7; from 8 to 15; from 16 to 23, and from 24 to the last day of each month). Therefore, in the column "1st week", amounts corresponding to the first seven days will be registered; in the column "2nd week", amounts corresponding to the next 8 days, and so on. In the column "2 months", amounts corresponding to the second month will be recorded; in the column "3 months" amounts corresponding to the third month, and so on. In the column "12 months", amounts corresponding to months 7 to 12, both inclusive, will be registered; in the "24 months" column, amounts from the second year, and in the "more" column, amounts corresponding to subsequent periods. In the determination of the values of the reserve requirement and minimum liquidity requirements (point 3.1.1.14.), the projected effects of increases or decreases in deposits, according to the assumed scenarios, must be taken into account in the different periods. The "accumulated global gap" of each column will arise from the sum of the amount registered in this row in the previous period and the amounts of "primary gap" and eventual commitments of the period.
Financial entities included in the provisions disseminated by Communication "A" 2227 on supervision on consolidated bases, must present the information regarding:

8.1. the entity in the country.
8.2. the entity abroad.
8.3. subsidiaries in the country.
8.4. subsidiaries abroad.
8.5. the entity in consolidated form.
The liquidity indicators established -point 6. preceding- must be observed in consolidated form."

We salute you very attentively.
BANCO CENTRAL DE LA REPUBLICA ARGENTINA
Alfredo A. Besio Miguel A. Kiguel
Manager of Standards for General Manager
Financial Entities Area of Economics and Finance

ANNEXES

ASSETS
a. Liquid assets.
National public bonds
Private securities
Securities with sale option
Bank Liquidity Letters
Public bonds linked to passive repo operations for the B.C.R.A.
Lines from local entities
Margin of repos with bonds in investment accounts
Margin of rediscounts from the B.C.R.A.
Cash in the country
Availability in banks abroad
Availability computable as integration of reserves
Foreign public bonds
Lines from banks abroad
Other availability abroad unrestricted
Other availability in the country unrestricted
Reserve requirements and liquidity requirements (-)
b. Public bonds.
I. National
II. Provincial and municipal
III. Foreign
c. Loans.
A) Self-liquidating
B) Commercial portfolio
Category 1.
Category 2.
Category 3.
Category 4.
Category 5.
C) Consumer portfolio
Category 1.
I. Personal
II. Mortgage (for housing)
III. Other
Category 2.
I. Personal
II. Mortgage (for housing)
III. Other
Category 3.
I. Personal
II. Mortgage (for housing)
III. Other
Category 4.
I. Personal
II. Mortgage (for housing)
III. Other
Category 5.
I. Personal
II. Mortgage (for housing)
III. Other
D) To the financial sector
Category 1.
Category 2.
Category 3.
Category 4.
Category 5.
E) To the public sector
F) Other
Category 1.
Category 2.
Category 3.
Category 4.
Category 5.
d. Other credits for financial intermediation.
Category 1.
Category 2.
Category 3.
Category 4.
Category 5.
LIABILITIES.
a. Deposits.
I. Checking Account.
a) from residents in the country
guaranteed (Com. "A" 2337)
balances up to $ 100,000
balances higher than $ 100,000
b) from non-residents in country
II. Savings Account.
a) from residents in the country
guaranteed (Com. "A" 2337)
balances up to $ 100,000
balances higher than $ 100,000
b) from non-residents in country
III. Fixed term for securities
a) from residents in the country
up to $ 100,000
higher than $ 100,000
b) from non-residents in the country
IV. Fixed term in money.
a) from residents in the country
up to $ 100,000
higher than $ 100,000
b) from non-residents in the country

V. Other.
b. Other obligations.
I. Credits from local entities
II. Credits from banks abroad
III. Negotiable obligations
IV. Others
3. PRIMARY GAP: (1-2)
4. EVENTUAL COMMITMENTS
5. OTHER INCOME
6. OTHER EXPENSES
5. ACCUMULATED GLOBAL GAP (3-4+5-6)
The preceding concepts will be reported disaggregated in the following columns:
MATURITIES
BALANCES AT WEEK MONTH
END OF MONTH 1 2 3 4 2 3 4 5 6 12 24 more

One of the risks that the financial activity must face is the one linked to liquidity to meet assumed commitments, related to the natural mismatch of terms with which it normally operates.
In general, it is a risk that has an individual character but that, in certain global crisis situations, can compromise the liquidity of the financial system. To address these situations, the main instrument that has been used has been the reserve policy, given the limitations that the Central Bank has to act as lender of last instance, due to the margins imposed by the Convertibility Law.
Dealing, in general terms, with an individual situation, it would seem that the definition of the liquidity policy should be left to the decision of each entity,
for which it would take into account its way of operating and specialization.
However, it is deemed necessary to define, at the level of the supervisory authority, prudential guidelines or parameters that must be complied with in this matter and that contemplate not only the situation of an eventual individual liquidity crisis but also the possibility that a systemic crisis presents itself. In that definition, the differences between the two cases will be taken into account. Indeed, in the first case, illiquidity does not inherently entail a solvency problem since the economy's interest rate is not affected and, therefore, the price or value of the assets of the compromised entity. In this way, facing a decrease in the renewal of liabilities, it will be sufficient to ensure or maintain an adequate level of holding of liquid assets, to which it should resort to restore its liquidity, such as the sale of loan portfolio, public bonds, without prejudice to obtaining credits from other entities and rediscounts or advances from the Central Bank, always within a framework of compliance with regulatory regulations. The situation is different when the problem of the fall in deposits or liabilities does not affect a particular entity but the entire financial system. In this case, in addition to an increase in the interest rate with the consequent repercussion on solvency, there are certain assets or credit margins with which it cannot con-

tarse. Thus, public titles of the country would see their prices affected and their liquidity limited, interbank operations would be cancelled, recourse to financing from the Central Bank would not be as easy as in the case of individual illiquidity, due to the restrictions imposed by convertibility. Obviously, as a counterpart, in these situations there is the possibility of resorting to the mechanisms implemented to favor the existence of liquid funds, such as a potential reduction in liquidity requirements, constituted to cover those cases, similar to the approach recently applied regarding compliance with minimum cash regulations.

The importance this topic holds in the development of financial activity warrants that entities be required to have specific areas in their functional structures responsible for monitoring the liquidity position, prior to the definition of policies to be followed to ensure a reasonable margin of availability to meet commitments.
It is then on the basis of these arguments that entities will be required to formulate liquidity policies covering various alternative scenarios, without prejudice to preparing fund flows for each of those normatively foreseen, which, as noted, will include the elements exposed.

The definition of liquidity coefficients, which entities must maintain on a prudential basis in the scenarios presented (ratio of accumulated global mismatch to accumulated liabilities up to the third month of maturities), will be left for a later stage, for which it is expected to have the results of the evaluation of the information provided by entities in the coming months and/or any proposals formulated by the associations grouping them.

Circular LISOL 1 - 120. Liquidity Position

Lineage: In force

Similar documents from other regulators