Circular LISOL 1 - 182. Modification of liquidity position rules (Communication "A" 2374)

BANCO CENTRAL DE LA REPUBLICA ARGENTINA __________________________________________________________________ COMUNICACION " A " 2671 23/02/98 __________________________________________________________________ TO FINANCIAL ENTITIES:
Ref.: Circular
LISOL 1 - 182.
Modification of the rules on liquidity position (Communication "A" 2374) We address you to inform you that this Institution adopted the following resolution:
"- Replace, with effect from 1.4.98, the rules on liquidity position referred to in Communication "A" 2374 with those contained in the annex to this document." We salute you very respectfully. BANCO CENTRAL DE LA REPUBLICA ARGENTINA Juan Carlos Isi Andrew Powell Deputy Manager of Standards Manager of for Financial Entities Economy and Finance

ANNEX

+----------+---------------------------------------+-------------+ I B.C.R.A. I LIQUIDITY POSITION I Annex to the I ICom. "A" 2671I +----------+---------------------------------------+-------------+

1. Financial entities must adopt management and control policies that ensure the availability of reasonable levels of liquidity to efficiently meet, under different alternative scenarios, their deposits and other financial nature commitments.
   These policies must foresee the procedures that will 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, arbitrating the measures conducive to the elimination of liquidity gaps or adopting precautions to foresee the obtaining of resources at market cost -similar to that which their competitors must pay- and sufficient to prudently support the 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 securities 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 that will require daily monitoring. Necessarily, the participation and coordination of the highest managerial authority of the entity (e.g.: General Manager) will correspond. In addition, a member of the board of directors must be designated to whom information will be provided at least weekly, or with more frequency if circumstances so require, especially when changes in liquidity conditions force the definition of new courses of action to protect the entity.

2. For the analysis of the liquidity position, consolidated cash flows in pesos and foreign currency must be available, at a minimum, 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 individual illiquidity
   2.4. generalized illiquidity situation.

3. The liquidity position will be prepared monthly in accordance with the information regime established and taking into account the following concepts:
   3.1. Assets (capital) will be considered according to the following breakdown:
   3.1.1. liquid assets, which include:
   3.1.1.1. national public securities and private securities of the country, except those that
   correspond to be reported in points
   3.1.1.8. and 3.1.1.9, with daily quotation
   in national or foreign securities markets, referred to relevant transactions in which the amount the eventual liquidation of the holding cannot distort the indicated quotation. All holdings of titles under these conditions will be considered, declaring them at market value, according to the closing quotation at the last day of the previous month.

Titles that have a quotation that do not meet these conditions will be considered as non-quoting and, as such, included in point 3.1.2.
3.1.1.2. available credit lines upon simple
request, granted by local financial entities, reliably instrumented.
3.1.1.3. availability in foreign banks
not computable as integration of the minimum liquidity requirements. Only those that are maintained in banks with international rating "A" or higher granted by any of the evaluating companies listed in point
2.2. of Section 2.
of the rules on qualification of financial entities (Communication "A" 2521, T.O.).
3.1.1.4 foreign public securities, with
usual quotation on 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 international rating "A" or equivalent granted by any of the international evaluating agencies listed in the roster contained in point
2.2. of Section 2. of the

rules on qualification of financial entities (Communication "A" 2521, T.O.).
3.1.1.5. available credit lines upon
simple request, granted by foreign financial entities with the rating provided in point 3.1.1.3., reliably instrumen- ted.
3.1.1.6. other availability abroad of
unrestricted use, including the balances of the account "Liquidity Requirements - Com. "A" 2350" opened at Deutsche Bank, New York.
3.1.1.7. holding of public securities linked
to passive swaps for the Central Bank.
3.1.1.8. other securities not included in
the preceding sections, certificates of deposit issued by foreign banks and shares of common investment funds, provided that the holdings for these concepts are computable as integration of the minimum liquidity requirements.
3.1.1.9. other availability in the country of
unrestricted use.
3.1.1.10. the minimum liquidity requirements, with
negative sign.
3.1.1.11. cash availability in the
country to meet operational needs (technical reserve), with negative sign, according to the lowest monthly average of the last three months. When applicable, the amounts will be recorded in the first "maturity" period.
3.1.2. public and private securities, of the country or out-
side, except those that integrate the concept of "liquid assets", discriminated by national, provincial and municipal, and foreign. Provisions for devaluation will be reported separately and in aggregate form.
3.1.3. loans, separated by category according to the norms
on classification of debtors (Communication "A" 2216), discriminated in:

i) with self-liquidating guarantee, taking into account the concepts detailed in the subsections a) to j) of section 1 of Annex I to Communication "A" 2216 and complementary. ii) commercial portfolio. iii) consumer portfolio (total), including the credits of commercial nature regarding those for which the option has been exercised to classify them within the consumer portfolio. The following will also be reported:
a) pledged b) mortgage (for housing) iv) to the financial sector. v) to the public sector. vi) others.
3.1.4. other credits for financial intermediation, ex-
cept -with the exceptions established, according to the scenario- operations of purchase and sale of securities and foreign currency -spot to settle and forward linked or not with swaps-, but including settlement gaps and goods in financial leasing, separated by category according to the norms on classification of debtors (Communication "A" 2216 and complementary). The assets referred to in points 3.1.2. to 3.1.4. will be reported in the respective period according to their maturity. Provisions for uncollectibility risk that are attributable to the financing referred to in sections 3.1.3. and 3.1.4. will be reported separately and in aggregate form. On the other hand, provisions on normal portfolio also will be reported separately.
3.2. Liabilities (capital) will be considered according to the following
breakdown:
3.2.1. deposits by type and investment certificates:
i) current account, ii) savings account and special accounts, iii) fixed-term securities,

iv) fixed-term in pesos and in foreign currency, v) qualified investment certificates, vi) term investments with variable remuneration, vii) other deposits and term investments, viii) others. Within each type of deposit -only when it concerns current accounts, savings accounts, a fixed-term and term investments-, the amounts will be discriminated based on:
a) balances or deposits in accounts of holders residents 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 and complementary). 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 supe- rior to $ 100,000 or its equivalent. The breakdown according to section a) 1. will be optional. b) balances or deposits in accounts of holders not resident in the country, regardless of the balance or amount of the deposit. Deposits and other obligations at sight will be considered in the first period of maturities, while the remaining liabilities will be reported in the respective period according to their maturity -taking into account, in the case of term investments with option of early cancellation or automatic renewal, the one that arises from according to the date on which the investor can exercise their right-.

3.2.2. other obligations for financial intermediation,
except -with the exceptions established, according to the scenario- by operations of purchase and sale of securities and foreign currency -spot to settle and forward linked or not with swaps-, but including settlement gaps, with discrimination of:
i) bonds, ii) credits from local financial entities, iii) credits from foreign banks, iv) balances owed to the Central Bank for the use of advances and rediscounts for illiquidity and v) other commitments in the item.
3.2.3. commitments linked to credit lines grant-
ed to local entities, reliably instrumented (counterpart of point 3.1.1.2.).
3.3. Contingent commitments for:
3.3.1. unused balances of advances in current ac-
count granted, to the extent that their use cannot be restricted by the entity and
3.3.2. guarantees, sureties and other eventual liabilities
assumed by the entity in favor of third parties for account of its clients, registered in off-balance accounts, net of operations that have "self-liquidating" counter-guarantees. They will be computed at 25%, 30% and 35% of their value, when it concerns debtors classified in categories 1., 2. and others, respectively, according to the regime of the Communication "A" 2216 and complementary. Their allocation in the various periods will be carried out based on the entity's experience.
3.4. Income and expenses for financial intermediation, for
services and administrative expenses.
The net result accrued by forward purchase and sale operations -linked or not with swaps- of securities and foreign currency will also be taken into account, considering the effect of the hedges arranged through options contracts and other derivatives.

4. In the preparation of the cash flows of the liquidity positions for each of the scenarios, as required in
   point 2., the following criteria will be taken into account:

4.1. contractual situation:
4.1.1. In each "maturity" period, the
amounts whose recovery or payment must be made -according to contractual clauses (taking into account the options of cancellation or automatic renewal in the case of investments, when appropriate) or of issuance- within the deadlines indicated, counted from the last day of the month previous, excluding what is declared in the column/s preceding/s. The difference between the initial balance of the assets and computable liabilities and the sum of the amounts of the flows reported in each column must be equal to zero, except in the case of the minimum liquidity requirements and availability for "technical reserve".
4.1.2. All assets and liabilities, compro-
mises contingents and results will be computed, as provided in point 3. The available margins of local financial entities and from abroad will be recorded in the first week and their maturity as provided in the contracts.
4.2. current situation:
4.2.1. The recovery of assets, the renewal of the liabili-
ties and/or eventual increases or decreases in the assets and liabilities computable are equal to those observed -on average- in the last three immediate months prior to the one corresponding to the information. The total of collections or renewals and/or increases or decreases of the observed quarter will be calculated and compared with respect to the pertinent maturities of the situation contractual of that same period. This average will be calculated based on the comparison between the balances at the last day of each one of the months and of the respective immediate previous month, starting from the situation corresponding to the last month included in that observation. The ratio obtained, as a percentage, will be applied to the contractually provided maturities, unless the average variation rate for the observed quarter is greater than 100 (increase), in which case the resulting rate will be used under the following conditions:

• with 100% of the growth, up to the third month
  of maturities, inclusive.
• with 50% of the growth, between the fourth and the
  sixth month of maturities.
• with 25% of the growth, between the seventh and the
  twelfth month of maturities.
• without growth (0%), from the thirteenth month of maturities.
  The percentage relationships computable on the behavior with respect to the contractual situation that the assets and liabilities experience as provided in this point, will be applied to determine the amounts of the renewals, increases, decreases and/or recoveries to be reported in each period, separately from the maturities.
  4.2.2. The concepts indicated in point 3. will be comput-
  ed according to the following guidelines:
  a) liquid assets.
  Taking into account the contractual situation (point 4.1.), with the following exception:
• available margins upon simple request
  by lines of local financial entities and foreign banks reliably instrumented:
  It will be considered that they are used in their entirety in the first week and that their cancellation will occur after 24 months. In the case that a part of those margins has been used with prior, their cancellation will be reported in the first week and simultaneously integrated as available margin until reaching the agreed quota. b) non-quoting securities. According to the contractual situation (point 4.1.). c) loans and other credits for financial intermediation financial. According to the contractual situation (point 4.1.) and what is provided in point 4.2.1. d) deposits and investment certificates.

According to the contractual situation (point 4.1.) and what is provided in point 4.2.1. e) other obligations for financial intermediation financia- ry. According to the contractual situation (point 4.1.), except for the following concepts regarding those that what is indicated for each case will be observed:

• bonds: according to the schedu-
  les that arise from agreements or plans of renewal.
• credits received from financial entities
  local and from foreign banks:
  i) reliably instrumented: what was indicated previously in the subsection "liquid assets" (point 4.2.2. a). ii) not reliably instrumented (those that as such should not be included in the contractual situation, point 4.1.): the initial balance and its cancellation will be reported according to what results from considering the average of renewal of the last three months immediate prior to the one corresponding to the information. f) contingent commitments. According to the contractual situation, taking into account in the case of unused balances of advances in current account what is provided in point 4.2.1. g) income and expenses for financial intermediation financia- ry, for services and administrative expenses. According to entity estimates, computing them according to the criterion of what is received. h) result from forward purchase and sale operations. According to the contractual situation.

4.3. situation with signs of individual illiquidity:
The concepts indicated in point 3. will be computed of according to the following guidelines:
a) liquid assets.
According to the contractual situation (point 4.1.), with the si- g following exception:

• available margins upon simple request by li-
  nes of local financial entities and banks of the exterior reliably instrumented:
  It will be considered that they are used in their entirety and that they are cancelled at their maturity without renewal. b) non-quoting securities. According to the contractual situation (point 4.1.). c) loans. It will be considered that the recoveries of the credits of the commercial and consumer or housing portfolios to borrowers of the non-financial private sector classified in the categories "in normal situation" or of "normal compliance" and "with potential risk" or "inadequate compliance" are equivalent to 20% and 10%, respectively, of the amount of the maturities reported according to the contractual situation for the first week, renewing or granting new financing for the rest, with a structure similar to that of the last three months. In the case of the maturities in the subsequent periods, it will be considered equal recovery scheme, taking into account additionally the effect of the renewals or financing of the preceding periods.

The funds that are recovered according to what is provided previously cannot be destined to new financing and, in no way, can there be an increase in the balance of loans. In the case of loans of both portfolios classified in the remaining categories, it will be considered that, at their maturity according to the contractual situation (point 4.1.), they are renewed in their entirety (no recoveries are recorded). On the other hand, loans to the financial sector and non-financial public sector will be recorded according to what is reported in the current situation (point 4.2.). d) other credits for financial intermediation.

The criterion exposed previously (loans) will be applied. e) deposits.

• in current account and others at sight:
  99% of the variation rate calculated according to what is provided in point 4.2.1. will be applied, without exceeding 100%, that is to say that as maximum it will be taken into account that they are renewed in their entirety but that they do not register growth.

• deposits in savings accounts and in special accounts:
  95% of the variation rate calculated according to what is provided in point 4.2.1. will be applied, without exceeding 100%, that is to say that as maximum it will be taken into account that they are renewed in their entirety but that they do not register growth.

• fixed-term deposits and other concepts referred to the
  point 3.2.1., subsections v) to vii):
  90% of the variation rate calculated according to what is provided in point 4.2.1. will be applied. f) other obligations for financial intermediation. According to the contractual situation (point 4.1.), except in the case of bonds, for which the renewal agreements instrumented with which the entity has will be taken into account. g) contingent commitments. According to the contractual situation. h) income and expenses for financial intermediation, for services and administrative expenses. According to entity estimates, without exceeding what is calculated in the current situation. i) result from forward purchase and sale operations. According to the contractual situation.
  4.4. generalized illiquidity situation:
  a) liquid assets.
  According to the contractual situation (point 4.1.), with the following exceptions:

• public and private securities:
  They will be valued at 60% and 40% of their respective prices of market, except the part of the holding regarding which the entity had carried out a sale at spot to settle or forward -linked or not with swaps- or is holder of the right to exercise an option of sale to a foreign bank -or its local branch or subsidiary- with international rating "A" or higher granted by any of the risk evaluating agencies according to the roster contained in point 2.2., Section 2. of the text ordered of the rules on qualification of financial entities (Communication "A" 2521). In these cases, the exercise value stipulated in the contract will be considered.

• available margins upon simple request by li-
  nes of local financial entities reliably instrumented:
  0% utilization will be considered.

• available margins upon simple request by li-
  nes of foreign banks reliably instrumented:
  It will be considered that they are used in entirety in the first week and that they are cancelled at their maturity, without renewal.

• 50% of the minimum liquidity requirements will be computed.
  b) non-quoting securities.
  According to the contractual situation (point 4.1.). c) loans. It will be considered that the recoveries of the credits of the commercial and consumer or housing portfolios to borrowers of the non-financial private sector classified in the categories "in normal situation" or of "normal compliance" and "with potential risk" or "inadequate compliance" are equivalent to 10% and 5%, respectively, of the amount of the maturities reported according to the contractual situation for the first week renewing or granting new financing for the rest, with a structure similar to that of the last three months. In the case of the maturities in the subsequent periods, it will be considered equal recovery scheme, taking into account additionally the effect of the renewals or financing of the preceding periods.

The funds recovered as previously provided cannot be allocated to new financing, and under no circumstances may an increase be recorded in the loan balance.

In the case of loans from both portfolios classified in the remaining categories, it shall be taken into account that, upon their maturity according to the contractual situation (point 4.1.), they are renewed in their entirety (no recoveries are recorded).

For its part, it shall be taken into account that loans to the financial sector are renewed in their entirety upon maturity, whereas credits to the non-financial public sector shall be recorded as reported in the contractual situation (point 4.1.).

d) other credits from financial intermediation.

The criterion previously exposed (loans) shall be applied, with the following exception.

The claim for cash sales to be settled and term sales in overdraft (without the respective asset) made to foreign banks - or their local branch or subsidiary - with an international rating of "A" or higher, granted by one of the risk rating agencies according to the list contained in point 2.2., Section 2. of the text of the rules on qualification of financial entities (Communication "A" 2521), or put options arranged with them, shall be considered at the net exercise value of the amount resulting from applying 60% or 40% of the market price, depending on whether they are public or private securities, respectively, and provided the conditions set forth in point 3.1.1.1 are met.

e) deposits.

They shall be recorded according to the individual illiquidity situation (point 4.3. e).

f) other obligations from financial intermediation.

According to the contractual situation (point 4.1.), except for the following items with respect to which what is indicated for each case shall be observed:

• negotiable obligations:

The renewal agreements instrumented by the entity shall be taken into account.

• commitments for cash sales to be settled or term transactions, linked or not to repos, and for put options launched on securities:

It shall be considered that they are cancelled upon maturity as agreed in the contracts, net of the amount resulting from applying 60% or 40% of the market price, depending on whether they are public or private securities, respectively, and provided the conditions set forth in point 3.1.1.1 are met.

g) contingent commitments.

According to the contractual situation.

h) income and expenses from financial intermediation, for services and administrative expenses (for amounts received).

According to the entity's estimates, without exceeding what was calculated in the current situation.

i) result from forward purchase and sale operations.

They shall not be considered.

In determining the values of the technical reserve and minimum liquidity requirements (points 3.1.1.11. and 3.1.1.12.), the projected effect of increases or decreases in the included liabilities, according to the assumed scenarios, must be taken into account in the different periods.

5. Liquidity indicators.

The global accumulated mismatch 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 4., 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 the ratio between the global accumulated mismatch and the accumulated liabilities maturing in each period:

5.1. current situation: equal to or greater than coefficient k1.

5.2. situation with signs of individual illiquidity: equal to or greater than coefficient k2.

5.3. situation of generalized illiquidity: equal to or greater than coefficient k3.

The values of the "k" coefficients shall be fixed based on the experience recorded in the period April/August 1998 and shall be valid from October 1998. They may eventually be differential by type of entity, taking into account their specialization and size.

6. The financial entities included in the supervisory provisions on consolidated bases (Communication "A" 2227 and its complementary ones), shall present the information regarding:

6.1. the entity in the country.

6.2. the entity in consolidated form.

The liquidity indicators established - point 5. above - shall be observed individually and on a consolidated basis.