Resolution 027/98 Approving the Regulations for the Constitution and Activities of Second-Tier Financial Entities

BOARD RESOLUTION NO. 027/98
SUBJECT: ECONOMIC POLICY ADVISORY - APPROVES
REGULATIONS FOR THE CONSTITUTION AND ACTIVITIES OF SECOND-TIER FINANCIAL ENTITIES (SECOND-TIER FINANCIAL ENTITIES - EFSP).

HAVING SEEN:
The Banking and Financial Entities Law No. 1488 of April 14, 1993.
The Central Bank of Bolivia Law No. 1670 of October 31, 1995.
The Pension Law No. 1732 of November 29, 1996.
The Commercial Code No. 14379 of February 25, 1977.
The Report from the Legal Advisory Office ALEG No. 005/98 of January 6, 1998.
The Report from the Economic Policy Advisory APEC - ARNOR No. 034/98 of March 3, 1998.

CONSIDERING:
That Article 31 of Law 1670 establishes that the Central Bank of Bolivia will issue general application norms regarding the activities of Second-Tier Financial Entities, whose sole purpose will be the intermediation of funds exclusively towards private financial entities that are legally established in the country.

That in the opinion of the Legal Advisory, it corresponds to the Board of Directors of the BCB to issue the regulatory norms that will allow the constitution and operations of Second-Tier Financial Entities. That according to the report from the Economic Policy Advisory, the purpose of Second-Tier Financial Entities is to channel short, medium, and long-term financial resources to finance working capital and investments, fulfilling their role of support for the economic and social development of the country.

THEREFORE,
THE BOARD OF DIRECTORS OF THE CENTRAL BANK OF BOLIVIA RESOLVES:

Article 1.- Approve the Regulations for the Constitution and Activities of Second-Tier Financial Entities, the text of which forms part of this Resolution, which will enter into force on May 4, 1998.

Article 2.- The Presidency and the General Management are charged with the execution and compliance of this Resolution.

La Paz, March 17, 1998

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Juan Antonio Morales A.

______________ _______________ _________________ Armando Pinell S. Jaime Ponce G. Juan Medinacelli V.

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Fernando Campero P. Juan Pablo Zegarra A.

REGULATIONS FOR THE CONSTITUTION AND ACTIVITIES OF SECOND-TIER FINANCIAL ENTITIES (EFSP)

Article 1 (Object).
Within the scope of Article 31 of Law No. 1670, these Regulations aim to regulate the constitution and activities of Second-Tier Financial Entities (EFSP). These may conduct operations with private financial entities legally authorized by the Superintendence of Banks and Financial Entities (SBEF). EFSPs cannot capture resources from the public.

Article 2 (Constitution and administration).
For their constitution and administration, EFSPs must strictly comply with the provisions established for banking financial entities in Title Two, Chapters I and III, of Law 1488.

Article 3 (Capital, reserves, and dividend distribution).
The minimum paid-in capital amount for the constitution of an EFSP will be equivalent to eighty percent (80%) of the minimum capital required for the constitution of banking entities, in accordance with what is provided by the Board Resolution of the Central Bank of Bolivia (BCB) No. 116/97 of June 10, 1997. Capital contributions must be made in cash. In other aspects regarding capital, reserves, and dividend distribution, EFSPs must also comply with Articles 22 to 27 of Title Two, Chapter II, of Law No. 1488.

Article 4 (Prohibitions for partners and administrators).
Without prejudice to the prohibitions expressly established in Articles 32 and 33 of Law No. 1488, the directors, trustees, managers, officials, employees, or permanent advisors of EFSPs may not incur obligations through the financial system with resources originating from the EFSP itself. Nor may they be partners or serve as directors, executives, or permanent advisors of an EFSP if they hold similar positions in financial entities that are debtors of the EFSP itself or other societies linked to the debtor entity.

Article 5 (Permitted operations).
EFSPs may conduct the following active, passive, and contingent operations:

i. Active Operations:
a) Granting short, medium, and long-term credits, in accordance with Article 36 of Law No. 1488. b) Buying, holding, and selling for their own account, securities and other documents representing obligations quoted on the stock exchange, issued by financial entities, except shares. c) Acquiring assets for use by the entity in activities inherent to its business, up to 30% of its net equity. d) Conducting repo operations for their own account, exclusively with financial entities. e) Maintaining balances in first-tier banks (defined via Board Resolution of the BCB No. 143/97). f) Buying, holding, and selling for their own account, deposit certificates issued by the BCB, the General Treasury of the Nation, and negotiable titles of the Treasury of countries with a country risk rating of Aaa. g) Buying portfolios with rating 1 according to Circular 196/94 of the SBEF, or accepting them in payment under the credit assignment modality, with the guarantee of the entity selling or assigning them, with this entity or another remaining as trustee of that portfolio. Likewise, the selling entity will commit to replacing it with a portfolio similar to the original in case of deterioration.

ii. Passive Operations:
a) Capturing medium and long-term resources from: Governments, international organizations, national or foreign private or public financial entities, in the form of loans or other modalities. b) Issuing, discounting, or negotiating securities and other documents representing their own obligations. c) Issuing and placing, with the due approval of their Board, new issuance shares for capital increase; convertible or non-convertible bonds into ordinary shares; and incurring subordinated debt. d) Performing commissions and administration mandates that do not imply direct risk for the EFSP.

Article 6 (Prohibited operations).
EFSPs may not conduct the following operations:
a) Any type of operation directly with the public, whether active, passive, contingent, or services. b) Receiving deposits. c) Opening, advising, confirming, and negotiating letters of credit, at sight or term. d) Renting out safety deposit boxes. e) Managing mutual funds to perform investments on behalf of third parties. f) Performing financial, auxiliary, and/or complementary services, such as general warehouses, factoring, and financial leasing. g) Syndicating with other national financial entities to grant credits to non-financial entities. h) Issuing drafts and payment orders payable in the country or abroad. i) Conducting exchange operations, buying and selling currencies, and buying and selling precious metals, except those necessary to cover obligations in foreign currency and exchange rate risks. j) Issuing and placing mortgage certificates, operating with traveler's checks, and credit cards. k) Investing in the capital of financial service and insurance companies. l) Performing temporary investments abroad for an amount exceeding twenty percent (20%) of the net equity of the EFSP.

Article 7 (Limitations in credit granting).
In addition to the limitations indicated in Article 31, item i) of Law No. 1670, the following are established:
a) An EFSP may grant credits to a financial entity only up to once the net equity of the debtor entity. b) EFSPs, collectively, may only grant loans to a private financial entity up to three (3) times the net equity of the debtor entity.

Article 8 (Credit risk).
EFSPs will be responsible for the credit risk they assume with each of the debtor financial entities. The credit risk of operations carried out by debtor financial entities with the public (final recipient), using resources from an EFSP, must be assumed entirely by the debtor entities.

Article 9 (Asset and contingent weighting).
EFSPs will be subject to what is stipulated in the Regulation for the Equity Adequacy of Financial Intermediation Entities and the Weighting of Risks of their Assets and Contingents, issued via Board Resolution of the BCB No. 143/97 and its modifications established by Board Resolution of the BCB No. 169/97. Additionally, long-term active operations (greater than five years) will have a weighting of 100%, regardless of the rating of the borrowing financial entities.

Article 10 (Legal reserve).
The short-term liabilities of EFSPs with financial entities abroad will be subject to what is established in the Board Resolution of the BCB No. 180/97 of December 23, 1997, regarding legal reserve.

Article 11 (Merger, transformation, intervention, and liquidation).
EFSPs may merge with other EFSPs, as well as transform into another type of financial entity, with prior authorization from the SBEF. To this effect, they must comply with the provisions established in Law No. 1488, in the Commercial Code where applicable, and in the provisions on these matters issued by the BCB. The intervention of an EFSP will be carried out according to what is established in numeral II of Article 67 of Law 1732. The liquidation of an EFSP will be subject to Law No. 1488, the Commercial Code where applicable, as well as specific norms issued by the BCB in the exercise of its competencies and attributes.

Article 12 (Norms for the selection of ICIs).
EFSPs will establish the norms to select and authorize their Intermediary Credit Institutions (ICIs) that have a license to operate from the SBEF.
To this effect, within a period not exceeding ninety (90) days from the entry into force of these Regulations, they will remit to the BCB and the SBEF the selection and authorization norms for ICIs approved by their Board. New EFSPs must comply with what is established in this Article within ninety (90) days of obtaining their license to operate.

Article 13 (Second-Tier Banks).
A banking financial entity may convert into a Second-Tier Bank (STB), with prior authorization from the SBEF. To this end, it must modify its statutes and readjust its operations exclusively to those permitted in these Regulations. This conversion will allow it to benefit from the expansion of the loan limit to a private financial entity up to 0.75 times the net equity of the creditor entity.

Article 14 (Adjustment of statutes and operations).
EFSPs that on the date of entry into force of these Regulations are conducting second-tier financial activities will present to the SBEF within a period of 30 days an adjustment plan to the provisions of these Regulations. In no case shall such adjustment exceed two (2) years. EFSPs in operation must adjust their statutes to these Regulations until their entry into force. Existing entities may integrate the minimum paid-in capital, with the capitalization of reserves and donations granted for that effect. --o--