Circular LISOL 1 - 314. Regime for the Treatment of Minimum Capital Deficiencies and Excesses in Technical Ratios. Modifications

BANCO CENTRAL DE LA REPUBLICA ARGENTINA
COMUNICACION " A " 3171 I 11/10/00
TO FINANCIAL ENTITIES:
Ref.: Circular
LISOL 1 – 314
Regime for the Treatment of Minimum Capital Deficiencies and Excesses in Technical Ratios. Modifications.

We address you to inform you that this Institution has adopted, on the matter referenced, the following resolution:

“1. Substitute, with effect from 1.9.00, the second paragraph of point 1.1. of Section 1. of the norms on “Non-compliance with minimum capital and technical ratios. Applicable criteria”, with the following:

“The obligation to present plans shall determine, while the deficiency persists, that the total amount of deposits - in national and foreign currency - shall not exceed the level reached during the month in which the non-compliance originated, without prejudice to the other effects provided for in points 1.4.2.2., 1.4.2.3. iv) and 1.4.2.4. of Section 1. of the norms on “Minimum capital of financial entities”.

Such limit and its observance shall be calculated based on the balances recorded on the last day of each of the months included.”

2. Substitute, with effect from 1.9.00, point 2.1.2. of Section 2. of the norms on “Non-compliance with minimum capital and technical ratios. Applicable criteria”, with the following:

“2.1.2. Information submitted out of term.

Late submission shall result in an increase in the minimum capital requirement for credit risk by an amount equivalent to 100% of the excess in the ratio, starting from the month in which the information is submitted, while the non-compliance persists, and additionally, once regularized, for a number of months equal to the number of periods during which the excess was not reported timely by the entity.

The calculation of the deviation shall be performed considering the highest amount of excess recorded in the periods covered by the information submitted out of term and in subsequent periods, as long as the non-compliance persists, even if the information for subsequent periods is submitted on time and in due form.

In the case of credit relationships, such calculation shall be performed considering the highest daily amount of excess, regarding the clients that originated it, recorded in such periods.”

3. Substitute, with effect from 1.9.00, point 2.2.3. of Section 2. of the norms on “Non-compliance with minimum capital and technical ratios. Applicable criteria”, with the following:

“2.2.3. Treatment of determined non-compliance.

Determined non-compliance shall result in an increase in the minimum capital requirement for credit risk by an amount equivalent to 150% of the excess in the ratio, starting from the month in which it becomes final, while the non-compliance persists, and additionally, once regularized, for a number of months equal to the number of periods during which the non-compliance detected by the Superintendency was verified.

The calculation of the deviation shall be performed considering the highest amount of excess recorded in said periods and in subsequent periods, as long as the non-compliance persists, even if the information for subsequent periods is submitted on time and in due form.

In the case of credit relationships, such calculation shall be performed considering the highest daily amount of excess, regarding the clients that originated it, recorded in such periods.”

4. Substitute, with effect from 1.9.00, point 2.3. of Section 2. of the norms on “Non-compliance with minimum capital and technical ratios. Applicable criteria”, with the following:

“2.3. Limitations on deposit growth.

When the sum of the increases in the minimum capital requirement for credit risk resulting from the non-compliance with the technical ratios included in this Section exceeds the equivalent to 5% of said requirement - without considering the increases - and while this situation persists, the total amount of deposits - in national and foreign currency - shall not exceed the level reached during the month in which that fact is registered.

Such limit and its observance shall be calculated based on the balances recorded on the last day of each of the months included.”

We send you the grounds for the measure in the Annex and the sheets that, in replacement of those previously provided, should be incorporated into the ordered text of the reference.

We salute you very attentively.
BANCO CENTRAL DE LA REPUBLICA ARGENTINA
José Rutman Alejandro Henke
Principal Manager of Standards General Sub-manager of Regulation and Information Regime
ANNEX: 5 sheets

B.C.R.A.
GROUNDS FOR THE RESOLUTION ON THE
TREATMENT OF MINIMUM CAPITAL
DEFICIENCIES AND EXCESSES IN TECHNICAL RATIOS
Annex
To Com.
“A” 3171

1. By the resolution disseminated through Communication “A” 3161, a new regime was adopted to handle non-compliance with the prudential regulations referenced, with effect for situations configured from 1.9.00.

This implied replacing the charge of fees for such deviations with a mechanism of framing within a peremptory term or the presentation of a regularization plan in cases of capital deficiency, while increasing the minimum capital requirement in cases of excesses in technical ratios, with a different requirement depending on whether they are spontaneous departures declared by the entities or the eventual determination by way of inspections, considering also situations of repeated excesses.

This is based on the fact that the non-compliance with the aforementioned regulations, due to their prudential nature, necessarily gives rise to the presumption that one is dealing with a case of greater risk that must be covered in that way, that is, through a requirement of greater solvency.

Likewise, the new regime provides for a limitation on the growth of liabilities (deposits and other obligations by financial intermediation) for cases where the obligation to present a regularization and health plan is verified in accordance with article 34 of the Financial Entities Law or when the effect of the increases in the minimum capital requirement due to non-compliance with technical ratios is significant - exceeding 5% of that requirement.

According to point 1.4. of the norms on “Minimum capital of financial entities” - with the modifications introduced by point 2. of the resolution disseminated through Communication “A” 3100 - currently in force regarding the presentation of the aforementioned framing programs, such restriction must be observed at all times and does not apply to access to financial assistance lines for temporary illiquidity and the execution of exchange and open market operations by this Institution.

However, the application of the aforementioned limitation in the new regime with a broader scope, that is, not necessarily limited to the presentation of such plans as well as additional aspects that can be improved, makes it advisable to redefine the terms for its observance.

In effect, it is understood that the objectives of the regulation in this aspect would not be violated if a definition were adopted that makes the limitation effective exclusively with respect to total deposits, obligations that enjoy the privileges established in the Financial Entities Law and given the lower availability of information and analysis capacity on the part of depositors compared to qualified investors.

Additionally, the inclusion of the remaining obligations by financial intermediation covers commitments for the financial assistance of this Institution (rediscounts and advances for temporary illiquidity and active pass operations), whose limitation would not be congruent with the objectives pursued of restricting the growth of liabilities.

In the same plane, the reformulation of the limit by including only deposits leaves aside, among other concepts, bondholders and financial entities who, for different reasons, such as the significant transactional volumes with which they operate - e.g. in the case of the first, the minimum investment of $ 100,000 -, etc., normally have the appropriate information to assume their exposure to risk.

On the other hand, it is convenient that its observance covers a broader time horizon, that is, monthly at the close of each period, rather than being performed daily. Additionally, this will contribute to facilitating the control of its compliance by the Supervision and Monitoring Area, without the need to introduce modifications in the existing information regime.

2. In another order, it is appropriate to incorporate a specific provision to handle excesses in the ratio for immobilized assets and other concepts when entities omit to declare them to this Institution or are detected by the Superintendency based on the highest amount registered in the periods included, since according to the recently adopted regulation, this form of calculation is only applicable to credit relationships.

B.C.R.A. ORDERED TEXT OF THE NORMS ON NON-COMPLIANCE WITH MINIMUM CAPITAL AND TECHNICAL RATIOS. APPLICABLE CRITERIA

• Index -
  Section 1. Minimum capital deficiencies.
  1.1. Non-compliance reported by entities.
  1.2. Non-compliance detected by the Superintendency of Financial and Exchange Entities.
  1.3. Daily capital deficiency.
  1.4. Application of article 41 of the Financial Entities Law.
  Section 2. Excesses in the ratio of immobilized assets and other concepts and to the limits of credit risk fragmentation, financing to related clients and credit grading.
  2.1. Non-compliance reported by entities.
  2.2. Non-compliance detected by the Superintendency of Financial and Exchange Entities.
  2.3. Limitations on deposit growth.
  2.4. Accounting exposure.
  2.5. Application of article 41 of the Financial Entities Law.
  Section 3. Special cases of inapplicability of the increased minimum capital requirement.
  3.1. Suspension.
  3.2. Elimination.
  Version: 2a. Communication "A" 3171 Validity:
  01.09.00

B.C.R.A. APPLICABLE CRITERIA
Section 1. Minimum capital deficiencies.
1.1. Non-compliance reported by entities.
The entity must frame itself in the requirement at the latest in the second month following that in which the non-compliance is registered, or present a regularization and health plan within 30 calendar days following the last day of the month to which the non-compliance corresponds. The obligation to present plans shall determine, while the deficiency persists, that the amount of deposits - in national and foreign currency – shall not exceed the level reached during the month in which the non-compliance originated, without prejudice to the other effects provided for in points 1.4.2.2., 1.4.2.3. iv) and 1.4.2.4. of Section 1. of the norms on “Minimum capital of financial entities”. Such limit and its observance shall be calculated based on the balances recorded on the last day of each of the months included.
1.2. Non-compliance detected by the Superintendency of Financial and Exchange Entities.
1.2.1. Defense.
The entity will have 30 calendar days counted from the notification of the determination made by the Superintendency of Financial and Exchange Entities to formulate its defense, on which it must issue a ruling within 30 calendar days following the presentation.
1.2.2. Final determination.
1.2.2.1. When the entity does not present its defense within the period indicated in point 1.2.1., the non-compliance will be considered final, applying the procedure established in point 1.1. in the case that non-compliance persists. The periods will be calculated from the month in which the non-compliance has become final as provided above.
1.2.2.2. If the defense formulated is dismissed - totally or partially - by the Superintendency of Financial and Exchange Entities, the entity will adjust to the procedure established in point 1.1., in the case that non-compliance persists. The periods will be calculated from the month in which the notification of the adopted decision is made.
Version: 2a. Communication "A" 3171 Validity:
01.09.00

APPLICABLE CRITERIA
B.C.R.A. Section 2. Excesses in the ratio of immobilized assets and other concepts and to the limits of credit risk fragmentation, financing to related clients and credit grading.
2.1. Non-compliance reported by entities.
2.1.1. Information submitted on time.
Late submission shall result in an increase in the minimum capital requirement for credit risk by an amount equivalent to 100% of the excess in the ratio, starting from the month in which the non-compliance is registered and while it remains.
In the case of credit relationships, the calculation of the deviation shall be performed based on the monthly average of daily excesses.
2.1.2. Information submitted out of term.
Late submission shall result in an increase in the minimum capital requirement for credit risk by an amount equivalent to 100% of the excess in the ratio, starting from the month in which the information is submitted, while the non-compliance persists, and additionally, once regularized, for a number of months equal to the number of periods during which the excess was not reported timely by the entity. The calculation of the deviation shall be performed considering the highest amount of excess recorded in the periods covered by the information submitted out of term and in subsequent periods, as long as the non-compliance persists, even if the information for subsequent periods is submitted on time and in due form. In the case of credit relationships, such calculation shall be performed considering the highest daily amount of excess, regarding the clients that originated it, recorded in such periods.
2.1.3. Repeated non-compliance.
2.1.3.1. Definition.
This refers to the non-observance of the ratios - considering each of them separately - in successive periods or with an interval of less than 3 months, resulting from voluntary acts (for example: granting financing to a client whose assistance already exceeds the limits, distribution of profits that decrease the computable patrimonial responsibility, excesses of assistance to different clients in different periods).
2.1.3.2. Consequences.
It will determine that the increase in the minimum capital requirement for credit risk shall be equivalent to 130% of the excess registered in the respective ratio.
Version: 2a. Communication "A" 3171 Validity:
01.09.00

APPLICABLE CRITERIA
B.C.R.A. Section 2. Excesses in the ratio of immobilized assets and other concepts and to the limits of credit risk fragmentation, financing to related clients and credit grading.
2.2. Non-compliance detected by the Superintendency of Financial and Exchange Entities.
2.2.1. Defense.
The entity will have 30 calendar days counted from the notification of the determination made by the Superintendency of Financial and Exchange Entities to formulate its defense, on which it must issue a ruling within 30 calendar days following the presentation.
2.2.2. Final determination.
2.2.2.1. When the entity does not present its defense within the period indicated in point 2.2.1., the determination will be considered final on the day the deadline for formulating the defense expires.
2.2.2.2. If the defense formulated is dismissed - totally or partially - by the Superintendency of Financial and Exchange Entities, the non-compliance will be considered final on the date of notification of the adopted decision.
2.2.3. Treatment of determined non-compliance.
Determined non-compliance shall result in an increase in the minimum capital requirement for credit risk by an amount equivalent to 150% of the excess in the ratio starting from the month in which it becomes final, while the non-compliance persists, and additionally, once regularized, for a number of months equal to the number of periods during which the non-compliance detected by the Superintendency was verified. The calculation of the deviation shall be performed considering the highest amount of excess recorded in said periods and in subsequent periods, as long as the non-compliance persists, even if the information for subsequent periods is submitted on time and in due form. In the case of credit relationships, such calculation shall be performed considering the highest daily amount of excess, regarding the clients that originated it, recorded in such.
2.3. Limitations on deposit growth.
When the sum of the increases in the minimum capital requirement for credit risk resulting from the non-compliance with the technical ratios included in this Section exceeds the equivalent to 5% of said requirement - without considering the increases - and Version: 2a. Communication "A" 3171 Validity:
01.09.00

APPLICABLE CRITERIA
B.C.R.A. Section 2. Excesses in the ratio of immobilized assets and other concepts and to the limits of credit risk fragmentation, financing to related clients and credit grading. and while this situation persists, the total amount of deposits - in national and foreign currency - shall not exceed the level reached during the month in which that fact is registered. Such limit and its observance shall be calculated based on the balances recorded on the last day of each of the months included.
2.4. Accounting exposure.
Non-compliance must be reported in notes to the financial statements according to the criteria established by the Superintendency of Financial and Exchange Entities.
2.5. Application of article 41 of the Financial Entities Law.
Summary proceedings will be initiated according to the guidelines defined by the Superintendency of Financial and Exchange Entities.
Version: 2a. Communication "A" 3171 Validity:
01.09.00

B.C.R.A.
ORIGIN OF THE PROVISIONS INCLUDED IN THE ORDERED TEXT OF THE NORMS ON APPLICABLE CRITERIA ORDERED TEXT SOURCE REGULATION
Section Point Paragraph Com. Cap. Point Paragraph Observations
1° “A” 3161 1.1.
2° “A” 3161 1.1. According to Com. “A” 3171 (point 1.)
1.1.
3° “A” 3171 1.
1.2. “A” 3161 1.2.
1.2.1. “A” 3161 1.2.1.
1.2.2. “A” 3161 1.2.2.
1.2.2.1. “A” 3161 1.2.2.1.
1.2.2.2. “A” 3161 1.2.2.2.
1.3. “A” 3161 1.3.
1.3.1. “A” 3161 1.3.1.
1.3.2. “A” 3161 1.3.2.
1.3.2.1. “A” 3161 1.3.2.1.
1.3.2.2. “A” 3161 1.3.2.2.
1.
1.4. “A” 3161 1.4.
2.1.1. “A” 3161 2.1.1.
2.1.2. “A” 3161 2.1.2. According to Com. “A” 3171 (point 2.)
2.2. “A” 3161 2.2.
2.2.1. “A” 3161 2.2.1.
2.2.2. “A” 3161 2.2.2.
2.2.2.1. “A” 3161 2.2.2.1.
2.2.2.2. “A” 3161 2.2.2.2.
2.2.3. “A” 3161 2.2.3. According to Com. “A” 3171 (point 3.)
2.3. “A” 3161 2.3. According to Com. “A” 3171 (point 4.)
2.4. “A” 3161 2.4.
2.
2.5. “A” 3161 2.5.
3. 3.1. “A” 3161 3.1.
3.2. “A” 3161 3.2.