Circular RUNOR 1-127: Asset Qualification for Investments with Pension and Retirement Funds

BANCO CENTRAL DE LA REPUBLICA ARGENTINA
__________________________________________________________________ COMMUNICATION " A " 2229 20/07/94 __________________________________________________________________ To FINANCIAL ENTITIES:
Ref.: Circular
RUNOR 1 - 127.
Asset Qualification for
Investments with Pension and Retirement Funds

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

"1. Establish that in order to comply with the qualification requirements referred to in the first paragraph of Article 79 of Law 24.241, the elements mentioned in each case shall be taken into account:

1.1. Fixed-term deposits and/or current accounts with resources from pension and retirement funds and reserves (subsection g) of Article 74, and Articles 77 and 89 of Law 24.241).

Financial entities wishing to be recipients of these resources, with a notice of no less than 10 calendar days prior to the date intended to start this function, must provide regarding each type of deposit to be received - fixed-term, discriminated by term: less than one year and more than one year, and current accounts -, the qualifications that, as a minimum, are established in the common provisions. To this effect, consideration will be given to the total amount that the set of administrators of pension and retirement funds will impose.

1.2. Securities included in subsection b) of Article 74 of Law 24.241.

Issuers of these securities, who wish to have the possibility of being acquired by pension and retirement funds, must supply regarding the securities the qualifications that, as a minimum, are established in the common provisions. To this effect, consideration will be given to the total of the issuances susceptible to being acquired with resources from pension and retirement funds.

• Common Provisions for points 1.1. and 1.2.
  a) Total of impositions (in current account and fixed-term) or security issuances not exceeding the equivalent of $ 10,000,000: one qualification. b) Total of impositions (in current account and fixed-term) or security issuances exceeding the equivalent of $ 10,000,000: two qualifications.

At least quarterly, the entities or issuers, as applicable, must have within the deadline established in point 3. of this resolution the updated qualifications that have been granted to them in order to continue receiving said deposits or for the securities to continue being maintained as investments of the funds, respectively. When the qualifications show discrepancies greater than one level, the Central Bank may require that a qualification from another company be provided.

1.3. Securities issued by foreign governments or international organizations (subsection k) of Article 74 of Law 24.241).

Qualifications formulated by at least two of the following risk-rating agencies: Duff & Phelps, Fitch Investors Service, Moody's Investors Service and Standard & Poor's Corporation.

2. Provide that for the purposes foreseen in points 1.1 and 1.2., the Central Bank will delegate the qualification function to risk-rating societies registered in the Registry enabled by the National Securities Commission that have been admitted by the Central Bank, to which effect they must present a request manifesting their interest in carrying out the qualifications of said instruments.
   The Central Bank reserves the faculty to exclude rating companies when, in its criterion, it considers it pertinent.
   In the case of qualification of deposits in financial entities, the evaluating companies must take into account the minimum guidelines contained in the annex to this communication.
   Local branches of foreign financial entities that wish to be recipients of current account and/or fixed-term deposits may provide, for the purpose of complying with the requirements of point 1.1. -subsections a) and b) of the common provisions- and in replacement of what is provided in the preceding paragraphs, at least two qualifications extended by some of the following international risk-rating agencies:

• Duff & Phelps
• Fitch Investors Service
• International Bank Credit Analysis (IBCA)
• Moody's Investors Service
• Standard & Poor's Corporation
• Thompson Bank Watch

3. Point out that rating societies will supply the corresponding qualification reports for the assets indicated in points 1.1., 1.2. and 1.3. of this resolution to the Superintendence of Administrators of Pension and Retirement Funds, with a copy to the Central Bank, within 5 calendar days of occurrence.

4. Establish that, until 30.9.94, the entities covered by the Law of Financial Entities are qualified to receive fixed-term deposits and/or current accounts from administrators of pension and retirement funds, with resources from the funds and their reserves, provided that - measured individually by each recipient entity - those impositions from the set of administrators do not exceed 5% of the total of deposits in current accounts, savings accounts and fixed-term.
   This limit must be observed upon receiving each new imposition, regarding the balance of the total of computable deposits of the immediate previous business day.

5. Consider that it corresponds to assign to the "Rural Mortgage Certificates" and to the "Special Mortgage Certificates" issued by the Banco de la Nación Argentina, the same treatment that is applicable to a national public title of equal characteristics."

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

ANNEX

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| B.C.R.A.| MINIMUM GUIDELINES FOR QUALIFICATION | Annex to the | OF FINANCIAL ENTITIES | Com. "A" 2229 |
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I. OBJECTIVE.
The objective of these guidelines is that the companies qualifying deposits in financial entities that wish to receive or receive impositions from the Administrators of Pension and Retirement Funds (AFJP), analyze a minimum set of characteristics of the entities and clearly express their opinion on each of those characteristics as well as on the capacity to pay the capital and interest of the debt, in the terms agreed. To this effect, the rating company must evaluate the payment capacity of the entity in the current macroeconomic scenario, as well as in those alternative scenarios that the company judges most probable. These minimum guidelines do not constitute a manual for the qualification of financial entities, since the rating company may give each of the elements mentioned in these guidelines the weighting it deems appropriate and may also consider all those other additional elements that, in its criterion, are necessary to define the qualification. In its qualification, it must analyze each of the chapters and points mentioned below, following the order in which they are presented -to facilitate reading- and adding in each chapter or section the additional factors it considers relevant.

II. QUALIFICATION SYSTEM.
The qualification must be issued for short-term deposits or debts (payment period less than one year: S) and long-term (payment period of one to five years: L). If deemed necessary based on alternative macroeconomic scenarios anticipated by the company, it may discriminate between qualification of instruments in national currency and in foreign currency. The short-term qualification does not necessarily coincide with the long-term one, nor the national currency with the foreign currency. The following symbols must be used to refer to payment capacity, which will carry the implication mentioned in each case. In case of discrimination between national and foreign currency, the letters P and D will be added, respectively, to each qualification.

When the qualification is equal to or lower than S8 or L8, as applicable, the rating agency must issue an opinion on the magnitude of the possible loss of capital to which the creditor would be exposed. S1, L1: Minimal probability of default of the agreed terms. Excellent payment capacity, even in the most unfavorable foreseeable economic scenario. S2, L2: Very low probability of default of the agreed terms. Excellent payment capacity. In the most unfavorable foreseeable economic scenario, the risk of default is very low. S3, L3: Very low probability of default of the agreed terms. Very good payment capacity. In the most unfavorable foreseeable economic scenario, the risk of default is low. S4, L4: Low probability of default of the agreed terms if the current economic scenario remains. Payment capacity is maintained even under more unfavorable economic and financial conditions, but is reduced in the most unfavorable scenario. S5, L5: Low probability of default of the agreed terms if the current economic scenario remains. Payment capacity is significantly reduced under more unfavorable economic and financial conditions, being low in the most unfavorable scenario. S6, L6: Low probability of default of the agreed terms if the current economic scenario remains. Payment capacity is significantly reduced under more unfavorable economic and financial conditions, being very low in the most unfavorable scenario. S7, L7: There are factors that can significantly increase the risk of default of the agreed terms, even in the current economic scenario. Payment capacity is low under more unfavorable economic and financial conditions, being extremely low in the most unfavorable scenario. S8, L8: There is a risk of default of the agreed terms, even in the current economic scenario. Payment capacity is very low under more unfavorable economic and financial conditions, being null in the most unfavorable scenario. S9, L9: There is clear risk of default of the agreed terms in the current economic scenario. This is a speculative investment, with low payment capacity, even without more unfavorable economic scenarios. S10, L10: Highly speculative, with high risk of default of the agreed terms. S11, L11: In a state of default. S12, L12: Entities that, having requested the qualification, do not supply the required information.

III. BASIC CHAPTERS OF THE QUALIFICATION.
The three fundamental elements to consider to formulate the qualification are:
1. ENTITY POSITIONING.
2. ENTITY SITUATION.
3. SENSITIVITY TO ALTERNATIVE SCENARIOS FOR THE ARGENTINE ECONOMY.

1. ENTITY POSITIONING.
In this chapter, the possible evolution of the Argentine financial system as well as the current and future positioning of the entity within the system as a whole must be analyzed. To this effect, among others, these factors must be considered:
1. Evolution of the national financial system as a whole; perspectives of banking concentration and competition from non-financial national entities and/or financial entities from abroad;
2. Evolution of the segment of the financial system in which the financial entity specializes;
3. Degree of competitiveness achieved by the entity in the products it offers;
4. Evolution of the different products and markets in which the entity operates; its impact on its competitiveness.
5. Difficulties experienced by the entity in its relationship with the B.C.R.A. during the last five years. Compliance with prudential norms. Rehabilitation plans; their compliance. Existence of summary proceedings; their possible economic impact. Assistance via rediscounts for illiquidity.

2. ENTITY SITUATION.
In this chapter, the fundamental qualitative and quantitative aspects that serve to determine the entity's repayment probability will be examined. Among them, the following will be analyzed:
A. Capitalization
B. Assets
C. Administration
D. Profits
E. Liquidity
In each case, it is necessary to analyze:
a. The evolution of each variable in the past, its current level and its probable evolution in the future, and b. The value of each variable in relation to the average value for financial entities of similar characteristics.

A. CAPITALIZATION.
In this section, factors that may be important to consider the level of backing that an entity provides with its capital to deposits must be analyzed, among others:

1. Relationship between capital and total assets, and between capital and risk assets;
2. Quality of capital: its composition; participation of the different components; participation of subordinated debt in the total;
3. Capacity of current shareholders to increase capital to meet potential requirements; in the case of companies listed on capital markets, the recent volatility of the quotation of the company's shares, in relation to the market average, as well as their history of share placements, must be analyzed, to evaluate their possibility of resorting to such markets to increase their capital;
4. Experience of the entity with subordinated debt issuances; possibilities of resorting to this instrument to expand capital;
5. Possibility of reducing without major losses the level of total assets, maintaining an adequate level of profitability, so as to meet capital requirements without having to increase capital;
6. Existence of explicit guarantees on operations in the case of public banking.

B. ASSETS.
In this section, all factors that make up the quality of the bank's assets must be taken into account, among others:

1. Composition of assets: immobilized assets, public securities, private securities, loans, sureties, others;
2. Concentration by clients and economic groups;
3. Sectoral concentration;
4. Regional concentration;
5. Currency mismatch: currency in which assets are expressed versus the currency in which the cash flow backing them is expressed;
6. Guarantees backing risk assets; percentage of the portfolio covered by preferred guarantees; quality and valuation of guarantees;
7. Sensitivity of the cash flows backing loans to modifications in the level of activity, and to changes in relative prices;
8. Loans to companies and linked economic groups;
9. Operations recorded in off-balance sheet accounts, and particularly derivative products; risk introduced;
10. Maturity mismatch between active and passive portfolios, at fixed and floating rates: interest rate risk;
11. Risk indicator of the Central Bank for loans in national and foreign currency; average implicit rate; its relationship with the average implicit rate for the system;
12. Quality of assets. Analysis of credit files of main debtors. Weighted risk of the portfolio, based on the different factors enumerated above;
13. Irregular portfolio over total portfolio; percentage of irregular portfolio covered with guarantees;
14. Level of provisions; portfolio written off; relationship between provisions and portfolio written off; relationship provisions/profit; relationship provisions constituted with provisions required by Central Bank regulations;
15. Relationship of net irregular portfolio minus provisions/average annual profit of the last exercises; idem over net equity;
16. Growth rate of risk assets: absolute and relative to the risk portfolio of the financial system as a whole.

C. ADMINISTRATION.
In this section, some aspects capable of informing about the organization and decision-making processes of the entity will be analyzed. Among them:

1. Suitability of general management and the administrative body; shareholding control: harmony in decisions;
2. Decision-making process: granting of loans; qualification of agreed loans; systems for measuring global portfolio risk. Frequency and characteristics of review of decisions. Delegation of functions by activity and by branches;
3. Personnel policy: methods of personnel incorporation; training system; qualification and promotion system; evaluation of current staffing; professional background and in the financial system of main managers; rotation of managerial personnel;
4. Internal audit: implemented control mechanisms; level of execution of such controls;
5. External audit: review of audit reports; implemented control mechanisms and level of execution of such controls; relationship with the Board of Directors and Management;
6. Information: information system for decision-making; quality, horizon and relevance of information used for decision-making;
7. Level of tolerance to risk in operations assumed by the bank, control systems or limits for risk assumed by operation, product, business units, etc.;
8. Capacity to maintain consolidated control of the financial entity and its subsidiaries;
9. Capacity of Management to understand precisely the risks associated with derivative products;
10. Participation of the bank in other financial or non-financial societies; role played by such companies in the strategy and results of the entity;
11. Shareholder participations in other companies; credit assistance policy to linked companies; compliance with Central Bank rules;
12. Compliance with Central Bank regulations, especially prudential ones; mechanisms developed for compliance with such regulations.

D. PROFITS.
In this section, some factors capable of informing about the evolution of the entity's profits will be examined. Among them:

1. Level of profits in relation to net equity, irregular portfolio -net of provisions-, and total assets;
2. Evolution of profits: variability of quarterly profits.
3. Composition of profits: by financial intermediation, by services, by other concepts;
4. Entity costs: main cost items.

E. LIQUIDITY.
In this section, some factors capable of informing about the liquidity position of the financial entity will be examined. Among them:
1. Availability in relation to total deposits: legal requirements, technical requirements, surplus;
2. Securities, private and public, that trade in institutional markets, in relation to total liabilities;
3. Access to credit lines from other financial entities, local and from abroad;
4. Maturity structure of liabilities; relationship with the three previous concepts;
5. Maturity mismatch between assets and liabilities; its impact on liquidity;
6. Concentration of deposits; participation of AFJPs in the total deposits of the entity;
7. Analysis of alternative scenarios and their impact on liquidity: run on the entity and run on the financial system.

3. SENSITIVITY TO ALTERNATIVE SCENARIOS FOR THE ARGENTINE ECONOMY.
The projection of the entity's cash flow will be carried out in, at least, the context of three alternative economic scenarios:
a. The current one; b. A negative scenario that, in the opinion of the rating company, has a probability of occurring greater than one third, and
c. An even more negative scenario that, for the rating company, has a very low probability of occurring.
In all three cases, the economic and financial conditions characterizing each scenario must be described and how this impacts the projected cash flow and the payment capacity of the analyzed entity.