Minimum Capital Requirement for Operational Risk. Determination of Minimum Capital Requirements for Financial Entities. Adjustments

"2012 – Year of Homage to Dr. D. Manuel Belgrano" COMMUNICATION "A" 5272 27/01/2012 TO FINANCIAL ENTITIES:
Ref.: Circular
LISOL 1 - 545
CONAU 1 - 962
Minimum capital requirement for operational risk. Determination of the minimum capital requirement for financial entities.
Adjustments.
____________________________________________________________ We address you to inform you that this Institution adopted the following resolution:

“1. Replace, with effect from 1.2.12, point 1.1. of Section 1. of the rules on “Minimum capitals of financial entities” with the following:

“1.1. Requirement.
The minimum capital requirement that financial entities must have integrated by the last day of each month shall be equivalent to the highest value resulting from the comparison between the basic requirement and the sum of those determined by credit risk, interest rate risk, market risk -VaRp requirement for positions on the last day of the month for included assets- and operational.”

2. Incorporate, with effect from 1.2.12, into the rules on “Minimum capitals of financial entities” the following Section:

“Section .... Minimum capital for operational risk.
...1. Requirement.
It will be determined monthly applying the following expression:
CRO = IB * Σ (from t=1 to n) α^n

Where
CRO: capital requirement for operational risk.
α: 15%. n: number of periods of 12 consecutive months in which IB is positive, taking into account the last 36 months prior to the month in which the calculation is made. The maximum value of n is 3; overlap of months in the formation of periods is not permitted. When n is equal to zero (n=0), a requirement equivalent to 10% of the average of the last 36 months -prior to the month corresponding to the determination of the requirement- of the minimum capital requirement calculated according to what is provided in point 1.1. of Section 1. shall be observed. IBt: gross income of periods of 12 consecutive months -provided it is positive-, corresponding to the last 36 months prior to the month in which the calculation is made. IB is defined as the sum of:
i) financial and service revenues minus financial and service expenses, and ii) other profits minus other losses.
From the accounting items mentioned in i) and ii), the following concepts -included in those items- shall be excluded, as appropriate:

• charges arising from the establishment of provisions, derecognition of provisions established in previous years, and credits recovered in the year but charged off in previous years;
• the result arising from participations in financial entities and companies, to the extent that they are concepts deductible from the computable patrimonial responsibility;
• extraordinary or irregular concepts -that is, those arising from atypical and exceptional results occurring during the period, infrequent events in the past and not expected for the future-, including income arising from the collection of insurance (loss recoveries); and
• results arising from the sale of species included in Section 2. of the rules on “Valuation of debt instruments of the non-financial public sector and monetary regulation of the Central Bank of the Argentine Republic”.

…2. New entities.
The monthly minimum capital requirement for operational risk corresponding to the first month shall be equivalent to 10% of the sum of the requirements determined by credit risk, interest rate risk and market risk -in this case, for positions on the last day- of that month. From the second up to the thirty-sixth month, the monthly requirement shall be equivalent to 10% of the average of the requirements determined for the months elapsed until the calculation period -inclusive-, resulting from considering the risks mentioned in the preceding paragraph, according to the following expression:
CRO = (Σ (from t=1 to n) (Cert + VaRR,t + VaRp,t)) * 10% / n

Where for each month t:
Cert: capital requirement for credit risk.
VaRR,t: capital requirement for interest rate risk.
VaRp,t: capital requirement for market risk for positions on the last day of month t. n: number of months elapsed until the month of calculation -inclusive- (2 ≤ n ≤ 36).
From the thirty-seventh month onwards, the monthly requirement shall be calculated in accordance with what is provided in point …1.”

3. Replace, with effect from 1.2.12, points 6.6.1. and 6.6.3.1. of Section 6. and 8.2. of Section 8. of the rules on “Minimum capitals of financial entities” with the following:

“6.6.1. Capital requirement.
In each month, it will be determined daily considering:
6.6.1.1. the minimum capital requirement established at the end of the previous month (point 1.1. of Section 1., without computing the corresponding one for market risk -VaRp requirement for positions on the last day of the month for included assets-), which shall remain constant throughout the month, and
6.6.1.2. the VaRp requirement for daily positions of included assets.”

“6.6.3.1. Immediate classification.
In the event that a daily integration defect occurs regarding the capital requirement for market risk, except that corresponding to the last day of the month, originated in the computation of the requirement by the sum of the risk values of included assets (“VaRp”), the financial entity shall replenish the capital and/or reduce its financial asset positions until it manages to comply with the established requirement, for which it shall have a period of ten business days, counted from the first deficiency.”

“8.2. Consolidated basis.
Without prejudice to individual compliance, controlling financial entities subject to consolidated supervision shall observe the rules on minimum capital on a monthly consolidated basis and, additionally and independently, on a quarterly basis. In the case of minimum capital for market risk and operational risk, the rules shall be observed on a monthly consolidated basis.”

4. Replace, with effect from 1.2.12, point 5.2.2.1. of Section 5. of the rules on “Consolidated supervision” with the following:

“5.2.2.1. Minimum capital, except for market risk and operational risk.”

5. Replace, with effect from 1.2.12, the first paragraph of point 1.3.1. of Section 1. of the rules on “Non-compliance with minimum capitals and technical ratios. Applicable criteria” with the following:

“1.3.1. Immediate classification.
In the event that a daily integration defect occurs, except that corresponding to the last day of the month, regarding the capital requirement for market risk, originated in the computation of the requirement by the sum of the risk values of included assets (“VaRp”), the financial entity shall replenish the capital and/or reduce its financial asset positions until it manages to comply with the established requirement, for which it shall have a period of ten business days, counted from the first deficiency.”

6. Replace, with effect from 1.2.12, point 2.1. of Section 2. of the rules on “Cooperative credit unions (Law 26.173)”, with the following:

“2.1. Requirement.
The capital requirement that cooperative credit unions must have integrated by the last day of each month shall be equivalent to the highest value resulting from the comparison between the basic requirement (point 2.4.) and the sum of those determined by credit risk, interest rate risk and operational risk.”

7. Incorporate, with effect from 1.2.12, into Section 2. of the rules on “Cooperative credit unions (Law 26.173)” the following point:

“2.6.3. Operational.
The minimum capital requirement for operational risk corresponding to each month shall be equivalent to 10% of the sum of the requirements determined by credit risk and interest rate risk of the respective month.”

8. Provide that, for the purposes of implementing what is established in point 2. of this resolution, financial entities shall apply to the requirement resulting from using the expression provided in point …1. the coefficient corresponding according to the following schedule:

Period Coefficient
February 2012 / March 2012 0
April 2012 / July 2012 0.50
August 2012 / November 2012 0.75
December 2012 1

9. Provide that, for the purposes of verifying solvency referred to in point 2.2. of Section 2. of the rules on “Distribution of results”, financial entities shall compute in that recalculation the amount of the requirement that would have corresponded to them by application of points 1., 2. and 4. of this resolution. The coefficient to be applied to the requirement resulting from the expression provided in point …1., established in the cited point 2., shall be equal to 1.”

Subsequently, we will send you the sheets that, in replacement of those previously provided, correspond to replace in the ordered texts of the rules on “Minimum capitals of financial entities”, “Consolidated supervision”, “Non-compliance with minimum capitals and technical ratios. Applicable criteria”, “Cooperative credit unions (Law 26.173)” and “Distribution of results”.

We salute you attentively.
CENTRAL BANK OF THE ARGENTINE REPUBLIC
Darío C. Stefanelli Alfredo A. Besio
Chief Manager of Emission and Normative Queries General Sub-manager of Rules