Resolution 076/2002 Approving the Regulation on Portfolio Purchase and Sale of a Call Option to Financial Intermediation System Entities

BOARD RESOLUTION NO. 076/2002 SUBJECT: FINANCIAL ENTITIES MANAGEMENT - APPROVES REGULATION ON PORTFOLIO PURCHASE AND SALE OF A CALL OPTION TO ENTITIES OF THE FINANCIAL INTERMEDIATION SYSTEM

HAVING VIEWED: Law 1670 of October 31, 1995. Law 1488 of April 14, 1993. Law 2297 of December 20, 2001. Board Resolution No. 094/97 of March 25, 1997, which approves the Regulation for Operations to Support the Strengthening of Financial Entities, as well as for the Participation of the BCB in their Intervention. Board Resolution No. 180/97 of December 23, 1997, which approves the Legal Reserve Regulation, and its subsequent modifications. The Report from the Financial Entities Management GEF No. 197/2002 of July 16, 2002. The Report from the Legal Affairs Management SANO No. 136/2002 of July 10, 2002.

CONSIDERING: That subsection d) of Article 38 of Law 1670 authorizes the BCB to purchase, discount, or guarantee assets for the purpose of preserving a stable and competitive financial intermediation system.

That it is necessary to adapt the BCB's regulations to the changes introduced by Law 2297 in Law 1488 (Law of Banks and Financial Entities).

That the safety net available to the BCB to guarantee the stability of the financial system must be completed.

That greater security must be provided to the BCB in the financial assistance to financial intermediation entities.

That the Financial Entities Management, in its report GEF No. 197/2002, recommends the approval of a Portfolio Purchase Regulation.

That the Legal Affairs Management, in report SANO No. 136/2002, states that in accordance with Article 54 subsections a) and q), it corresponds to the BCB Board to consider the approval of the referenced project within the framework of preserving a stable and competitive financial intermediation system.

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

Article 1.- Approve the Regulation on Portfolio Purchase and Sale of a Call Option to entities of the financial intermediation system, which is attached and forms part of this Resolution.

Article 2.- The Regulation shall enter into force on July 16, 2002.

Article 3.- Board Resolution No. 094/97 of March 25, 1997, is hereby repealed effective July 16, 2002.

Article 4.- The Presidency and General Management are charged with the execution and compliance of this Resolution.

La Paz, July 16, 2002

---

Juan Antonio Morales A.

---

Juan Medinaceli V. Armando Méndez M.

---

Roberto Camacho S. Javier Comboni S. Enrique Ackermann A.

REGULATION ON PORTFOLIO PURCHASE AND SALE OF A CALL OPTION

Article 1.- (Object) This Regulation aims to establish the requirements and procedures for the purchase of credit portfolios as provided for in subsection d) of Article 38 of Law of the Central Bank of Bolivia No. 1670, with the purpose of facilitating the return of public deposits and the cancellation of liquidity credits with the Issuing Institute.

Article 2.- (Definitions) For the purposes of this Regulation, the following definitions are used:

Portfolio Purchase and Sale: Is the contract by which the BCB, through the assignment of credits, definitively acquires from the assigning financial intermediation entity the ownership of the credits along with privileges, personal and real guarantees, and all their other accessory rights.

Call Option: Is the contract by which, in exchange for the payment of a premium, the assigning financial intermediation entity acquires the right, but not the obligation, to purchase the assigned credit portfolio from the BCB at a pre-established price and until a specific future date. This contract may be transferred in favor of another financial intermediation entity.

Article 3.- (Scope of Application). It shall apply in favor of financial intermediation entities with a license to operate from the Superintendence of Banks and Financial Entities (SBEF) when the following circumstances arise:

i. In the last fifteen days, they have lost at least 5% of their obligations to the public.

ii. They are using the second tranche of liquidity credits guaranteed by the RAL Fund and do not own the assets indicated in Articles 13 and 18 of the Liquidity Credits Regulation approved by B.D. No. 033/2002.

iii. They are not in a regularization process due to actions established in subsections a), b), d), e), f), and g) of Article 112 of Law No. 1488 on Banks and Financial Entities, with modifications incorporated by Law No. 2297 on Strengthening Financial Norms and Supervision.

Article 4.- (Portfolio Purchase and Sale) The portfolio to be purchased shall be composed of credits classified 1 (normal according to the SBEF) from clients who have been with the entity for at least two years, whose amortizations and interest payments have not suffered more than two delays in the last year, and which at the time of the operation are registered as Active Portfolio.

Article 5.- (Call Option) Financial intermediation entities that have carried out a portfolio purchase and sale operation with the BCB shall also sign a call option contract for the same portfolio, which may be exercised within a period of 90 calendar days, renewable for similar periods, up to one year from the date of the sale.

The premium shall be determined by the Committee for the Analysis of the Financial System (COASIF), based on the implicit rate earned by the credit portfolio and the prevailing market interest rates on the date of signing the contract.

Article 6.- (Value of the portfolio purchase contract) The purchase value of the credit portfolio by the BCB shall correspond to 96% of the book value that these assets register in the financial statements of the financial intermediation entity on the date of signing the respective contract.

Article 7.- (Exercise of the call option) The financial intermediation entity may exercise its option at any time during the validity of the contract. The exercise price shall correspond to the equivalent value of the purchase minus the capital recoveries of said portfolio.

Article 8.- (Requirements) Financial intermediation entities must submit their portfolio sale request to the General Management of the BCB, justifying their liquidity needs. The request must be accompanied by the documentation detailed below, duly signed by their legal representatives:

a) Information regarding compliance with Article 3 of this Regulation. b) The policies and strategies proposed to overcome their temporary illiquidity situation, including capture policies, interest rates, capitalization projects, planned securitizations, and projected asset sales. c) Specification on the use of resources, including schedule and compliance conditions, as well as the policy on the allocation of asset recoveries. d) Policies for the rationalization of expenses, including personnel policies and branch network management. e) Contingency plans of the entity for an eventual fortuitous case of non-compliance with the conditions that served as the basis for the elaboration of their policies and strategies to overcome their illiquidity situation. f) Financial Statements corresponding to the month prior to the date of the credit request. g) Detail of the credit portfolio offered for sale. h) Tentative date for the exercise of the call option.

Once the request is received, it will be forwarded to the Financial Entities Management (GEF) for presentation to COASIF, which will issue a recommendation for the request to be considered by the Board.

The GEF may request additional information it deems convenient to verify the financial situation of the requesting financial intermediation entity.

Article 9.- (Documentation and additional information for the credit portfolio).- The requesting bank entity, in addition to the respective documents of the assets offered for sale, must deliver the following documentation to the BCB:

a) Sworn declaration by the Legal Representative(s) and the Internal Auditor of the entity, attesting to the truthfulness and authenticity of the credit documents and guarantees delivered, under penalty of incurring civil and/or criminal liability, attaching the latest report on portfolio classification reviews performed by the SBEF. b) External Audit Opinion on the management prior to the portfolio sale request.

c) Opinion of the External Auditor of banking and non-banking entities that maintain obligations with the public greater than $us 80 million, regarding the suitability of the classification of the transferred credit portfolio, which shall be issued within a period not exceeding 10 (ten) calendar days from the signing of the corresponding portfolio purchase and sale contract. d) Certified copy of the reports signed by the members of the Management or Risk Area of the financial institution regarding the evaluation and classification of the transferred credit portfolio.

Article 10.- (Approval) By absolute majority of votes, the BCB Board may approve portfolio purchase and sale operations, as well as the sale of the call option for these same assets, based on the recommendation of COASIF and the report of the Economic Policy Advisory regarding the stability of the financial system and the availability of the monetary program.

The President of the BCB will inform the Superintendent of Banks and Financial Entities about the request and the execution of the operation.

Article 11.- (Disbursement of funds) The disbursement of the portfolio purchase and sale price will be made into a restricted account that the entity will open at the Central Bank of Bolivia, from which, upon justification, the beneficiary entity will withdraw resources for the return of public deposits. The information presented by the entity to the BCB on this matter will be verified weekly by an external auditor hired by the beneficiary entity, under the responsibility of its Board, President, and General Manager.

Additionally, the President of the BCB may request the Superintendent of Banks and Financial Entities to verify the proper use of said resources.

Article 12.- (Cancellation of liquidity credits with RAL Fund Guarantee) The second tranche liquidity credits that the financial entity maintains with the BCB will be automatically canceled at the moment of the disbursement of funds.

Article 13.- (Obligations of the financial intermediation entity) Within thirty days computable from the signing of the portfolio purchase and sale contract, upon simple request by the BCB, the selling bank entity shall have the obligation to remedy the observations made to the assigned credits or to substitute the credits with others of equal classification. Likewise, it shall have the obligation to notify all assigned debtors.

Article 14.- (Portfolio Administration) The BCB will hire the services of a financial entity, which may be the same selling entity and/or holder of the call option, for the administration of the credit portfolio. The expenses for these services will be honored by the BCB according to what is agreed in the respective contract.

Cash recoveries made by the administrator must be transferred to the BCB by the next business day after receiving the payments.

---ooo---