Circular LISOL 1-209, OPRAC 1-435, CONAU 1-276: Minimum Capital Requirement for Interest Rate and Credit Risk and Holdings in Investment Accounts

"1998 - Year of the Municipalities"
CENTRAL BANK OF THE ARGENTINE REPUBLIC
COMMUNICATION "A" 2793 27/10/98
TO FINANCIAL ENTITIES:
Ref.: Circular
LISOL 1 – 209
OPRAC 1 – 435
CONAU 1 – 276
Minimum capital requirement. Risk from variations in interest rates and credit. Holdings of securities in investment accounts.

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

"1. Establish that, from March 1999 and with monthly periodicity, the minimum capital requirement referred to in Section 3 of the rules on minimum capital of financial entities, shall be increased by the amount resulting from the following expression:

VaRR = Máx {(VANp rp - VANp rp’) * σp + (VANd rd - VANd rd’) * σd ;0} *100 * VANp rp + VANd rd + Σ (Ā – P)

where

VaRR: Requirement based on risk from variations in interest rate.
VANp/d r/r’: Present value of net assets of liabilities for financial intermediation, in pesos (p) or foreign currency (d), discounted at the discount rate r or r'.
σp: Interest rate risk in pesos as a proportion, to be set by the Central Bank.
σd: Interest rate risk in dollars as a proportion, to be set by the Central Bank.
VANp rp = Σi (FFANp i / (1 + rp/12) mi)
VANd rd = Σi (FFANd i / (1 + rd/12) mi)
VANp rp’ = Σi (FFANp i / (1 + rp’/12) mi)
VANd rd’ = Σi (FFANd i / (1 + rd’/12) mi) i: subscript indicating the time bands for the grouping of cash flows as indicated in section A, last paragraph.
FFANp/d i: Cash flow of net assets in pesos (p) or foreign currency (d) corresponding to time band i.

rp/d: Average of the month to which the assets and liabilities covered by the requirement correspond, from the BCRA daily survey of the 30 to 59 days deposit rate, in pesos or dollars, as a proportion. rp/d’: rp/d plus 0.01. mi: Midpoint of the time band, expressed in months. C: Net equity at the end of the month to which the assets and liabilities covered by the requirement correspond. Ā and P: Assets and liabilities at the end of said month not included in the calculation of the requirement.

A - Concepts included.
Net assets and liabilities from financial intermediation operations, including holdings of securities in investment accounts, of the same month to which those considered for determining the minimum capital requirement for credit risk correspond, shall be taken into account, for which effect the criteria established in the following sections will be considered.

i). Fixed rate operations.
The capital, interest, and other accessories flows originated in these operations will be imputed to the time bands according to their contractual situation.
50% of the average of the current account and savings account deposit balances of the month to which the calculation of the value of "VaRR" corresponds will have a treatment different from the contractual situation in financial entities that have a CAMEL 1 or 2 rating assigned by the Superintendency of Financial and Exchange Entities. Only in those cases, said amount will be imputed in the longest time band by an amount that does not exceed, in absolute value, the cash flow of the net assets - without taking into account the amount of those balances - of said band, provided that this net flow is positive. If that imputation does not absorb the total to be imputed, the remainder will be applied to the immediately preceding time band following the same rules and until its total absorption.

ii). Variable rate operations.
When the variable rate is based on external origin indicators (for example, LIBOR), they will be given the same treatment as fixed rate operations.
In the case of liabilities where the variable rate is referred to a local origin indicator (for example, passive rate surveys), only the cash flows that extend until the period in which, according to contract forecasts, the first interest rate adjustment is to be made, adding in said period the remaining amounts to mature from that moment on, will be taken into account. On the other hand, in the case of variable rate assets referred to a local indicator, they will be decomposed into two parts: a percentage that will be treated as if the rate were fixed, as established in the table below, while the remainder will receive the same treatment as liabilities with a variable rate based on a local origin indicator.

t = residual term in months percentage pesos dollars 0 t= up to 12 t= up to 30 25 t= more than 12 to 18 t= more than 30 to 48 50 t= more than 18 to 36 t= more than 48 to 96 75 t= more than 36 t= more than 96

Assets and liabilities denominated in foreign currency will be converted to United States dollars according to the exchange rate of the last business day of the month to which they correspond.
In the case of credits, the flow to mature of capital and Interest -considering with respect to the latter the suspension of their accrual with respect to credits in which it has been opted for this- net of the application of the percentages for provisioning for uncollectible risk, including that corresponding to clients in normal situation, will be taken. To discount the cash flows and establish the present value, the relevant income and outflows of funds will be grouped by time bands defined as follows:

• monthly, for the first 24 months,
• annual for the following 27 years and
• a last band for flows that mature from the thirtieth year on.

B - Exclusions i) securities and derivatives on said assets subject to minimum capital requirement for market risk. ii) acceptances. iii) subordinated debt computable as integration of supplementary net equity. iv) assets exposed to interest rate risk, to the extent that they are covered by derivative contracts entered into with banks abroad that have an International risk rating of "A" or higher granted by any of the rating agencies admitted by the rules on evaluation of financial entities. The contracting of such contracts must be reported to the Superintendency of Financial and Exchange Entities under the conditions established. v) other concepts suggested by financial entities that the Board of Directors of the Central Bank of the Argentine Republic establishes at the proposal of the Superintendency of Financial and Exchange Entities, provided that this is consistent with the general definition of computable assets and liabilities for the purposes of determining the minimum capital requirement based on interest rate risk.

C - Calculation of value loss for a critical scenario.
The calculation of "VaRR" must be carried out for a hypothetical critical scenario, considering "σd" equal to 0.0303 and "σp" equal to 0.0774 in the formula usable for it.

Information on the calculations carried out for this purpose must be sent to the Analysis Area of the Superintendency of Financial and Exchange Entities, as established in the information regime that is adopted.

2. Establish, with effect from 1.3.99, that financial entities may maintain in investment accounts national public securities and debentures and other debt securities issued by companies in the country, under the conditions established in the annex to this communication.

3. Substitute, with effect from 1.3.99, sections 2., 3.1.1.5., 3.1.1.6., 3.2., 3.3., 4.14., 6. and 7.3. of the risk value weighting table for non-immobilized assets (Section 4 of the rules on minimum capital of financial entities), with the following:

"2. Public securities.
2.1. Subject to minimum capital requirement for market risk. 0%
2.2. Others from the country.
2.2.1. From the national government.
i) "md" zones 1 and 3. 40% ii) "md" zones 2 and 4. 60%
2.2.2. From provincial, municipal governments and the City of Buenos Aires, with guarantee of federal tax sharing through the assignment (direct or indirect) of the corresponding rights.
i) "md" zones 1 and 3. 40% ii) "md" zones 2 and 4. 60%
2.2.3. From state companies and societies, except mixed economy or with state participation:
2.2.3.1. from the national government or with its express guarantee
i) "md" zones 1 and 3. 40% ii) "md" zones 2 and 4. 60%
2.2.3.2. From provincial, municipal governments and the City of Buenos Aires, whose issuance does not count with the express guarantee of the national government 100%"

"3.1.1.5. provincial guarantee funds, provided that these have the special allocation of resources from federal tax sharing 60%"

"3.1.1.6. in national public securities, not subject to minimum capital requirement for market risk. i) "md" zones 1 and 3. 40% ii) "md" zones 2 and 4. 60%"

"3.2. To the non-financial public sector.
3.2.1. National Government.
i) "md" zones 1 and 3. 40% ii) "md" zones 2 and 4. 60%
3.2.2. Provincial, municipal governments and the City of Buenos Aires and their companies -whatever the legal nature-, with guarantee of federal tax sharing through the direct or indirect assignment of the corresponding rights and that count with the pertinent intervention of the Ministry of Economy and Public Works and Services of the Nation.
i) "md" zones 1 and 3. 40% ii) "md" zones 2 and 4. 60%
3.2.3. Companies of the national, provincial, municipal governments and the City of Buenos Aires, with express guarantee of the National Government or of federal tax sharing through the assignment (direct or indirect) of the corresponding rights and that count with the pertinent intervention of the Ministry of Economy and Public Works and Services.
i) "md" zones 1 and 3. 40% ii) "md" zones 2 and 4. 60%"

"3.3. To the financial sector.
3.3.1. Bank of the Argentine Nation.
i) "md" zones 1 and 3. 40% ii) "md" zones 2 and 4. 60%
3.3.2. Official banks of provinces and of the Government of the City of Buenos Aires with guarantee of federal tax sharing.
i) "md" zones 1 and 3. 40% ii) "md" zones 2 and 4. 60%"

"4.14. With the financial sector.
4.14.1. Bank of the Argentine Nation
i) "md" zones 1 and 3. 40% ii) "md" zones 2 and 4. 60%

4.14.2. Official banks of provinces and of the Government of the City of Buenos Aires, with guarantee of federal tax sharing.
i) "md" zones 1 and 3. 40% ii) "md" zones 2 and 4. 60%"

"6. Other non-immobilized assets, except those deductible for the determination of computable net worth.
6.1. Subject to minimum capital requirement for market risk. 0%
6.2. Others.
6.2.1. Shareholdings in the capital of companies in the country and abroad. 100%
6.2.2. Shares of common investment funds whose assets are constituted by:
6.2.2.1. National public securities.
i) "md" zones 1 and 3. 40% ii) "md" zones 2 and 4. 60%
6.3. Not included in the preceding sections 100%"

"7.3. To the non-financial public sector.
7.3.1. National Government. 60%
7.3.2. Provincial, municipal governments and the City of Buenos Aires and their companies -whatever the legal nature-, with guarantee of federal tax sharing through the direct or indirect assignment of the corresponding rights and that count with the pertinent intervention of the Ministry of Economy and Public Works and Services of the Nation. 60%
7.3.3. Companies of the national, provincial, municipal governments and the City of Buenos Aires, with express guarantee of the National Government or of federal tax sharing through the assignment (direct or indirect) of the corresponding rights and that count with the pertinent intervention of the Ministry of Economy and Public Works and Services of the Nation 60%"

4. Leave without effect, with effect from 1.3.99, the regime of holdings in investment and available for sale referred to in Communications "A" 2266, 2321 and complementary.

Consequently, financial entities may opt to transfer to the regime established, according to the annex to this communication, the national public securities that are registered as of 28.2.99 in accordance with the provisions that are repealed."

We salute you very attentively.
CENTRAL BANK OF THE ARGENTINE REPUBLIC
Alfredo A. Besio Susana Olgiati
Manager of Rules for Manager General
Financial Entities

ANNEX

B.C.R.A. Regime of holdings of securities in investment accounts
Annex to
Comm. "A" 2793

1. Affected securities.
   National public and private debt securities of the country susceptible to observing minimum capital requirement for market risk.

2. Notification of the decision to affect securities to investment accounts.
   The decision to maintain holdings in investment accounts must be adopted with the intervention of the highest responsible person designated by the entity in relation to the observance of the rules on minimum capital requirement for market risk (Section 6., point 6.7. of the rules on minimum capital of financial entities) and communicated by note to the Superintendency of Financial and Exchange Entities and to the external auditor within the 2 days following that in which it has been adopted by the entity.

3. Application of the regime on consolidated and individual basis.
   Controlling financial entities subject to supervision on a consolidated basis will observe this regime on that basis and individually as provided in the resolutions disseminated through Communications "A" 2227 and 2649.

4. Accounting registration.
   Holdings in investment accounts will be registered accounting-wise by their cost value -taking into account what is provided in the following paragraph- increased, until the maturity of each service based on the interest arising from the current coupon. For the purposes indicated above, when it concerns pre-existing holdings registered in accounts for intermediation, the cost value will be considered the market quotation of the securities comprised at the close of operations of the day prior to the date of their incorporation to the investment accounts. The valuation criterion employed with respect to those holdings and the quantification of the difference in relation to their valuation at market prices will be exposed in a note to the quarterly and annual financial statements. In aspects not expressly contemplated (premiums, usable quotations, etc.), the criteria contained in the currently valid accounting rules with general character will be applied subsidiarily.