Resolution 094/97 Approving Regulations for Support Operations to Strengthen Financial Entities and BCB Participation in Their Intervention

BOARD RESOLUTION NO. 094/97
SUBJECT: FINANCIAL SYSTEM - APPROVES REGULATIONS FOR OPERATIONS TO SUPPORT THE STRENGTHENING OF FINANCIAL ENTITIES, AS WELL AS FOR THE PARTICIPATION OF THE BCB IN THE INTERVENTION OF SAID ENTITIES.

HAVING SEEN:

The Banking and Financial Entities Law No. 1488, of April 14, 1993.
The Law of the Central Bank of Bolivia (BCB) No. 1670, of October 31, 1995.
The Pension Law No. 1732, of November 29, 1996.
The reports S-RYC No. 082/97 from the Financial System Management and G-AL No. 072/97 from the Legal Affairs Management dated March 24, 1997.

CONSIDERING:

That it has been deemed convenient to provide the BCB with an instrument to regulate the support operations for the strengthening of financial entities provided for in Article 38, subsection d) of Law No. 1670.

That within the aforementioned legal framework, the process for regularizing financial entities with asset deficiencies provided for in Articles 112 to 115 of Law No. 1488 and in Article 67 of Law No. 1732 must be taken into account.

That the BCB's support for the strengthening of financial entities with solvency problems constitutes a resource of last resort for the purpose of preserving a stable and competitive system, available when no other public or private mechanisms exist for that purpose, actionable only after the owners of said entities have attempted by their own means to replenish capital, invited interested third parties or their creditors to do so, as well as exhausted other possibilities available to them to access resources from the financial market.

That in such virtue, the BCB's participation must have a conditional and limiting character, which effectively contributes to fostering the asset regularization of financial entities, but in no case to supplant the efforts corresponding to their owners.

That support operations for the strengthening of financial entities cannot put at risk the main objective of the BCB of maintaining price stability and, consequently, must not represent substantial deviations in its Monetary Program.

That such support may also be realized when the BCB and the Banking and Financial Entities Superintendence (SBEF) decide, through separate express resolutions and simultaneously, the intervention of financial entities.

That subsection a) of Article 54 of Law No. 1670 empowers the Board of Directors to issue norms and adopt decisions necessary for the BCB to fulfill the functions, competencies, and powers assigned by said legal provision.

Therefore,

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

Article 1.- Approve the Regulations for Operations to Support the Strengthening of Financial Entities, as well as for the Participation of the BCB in the Intervention of the same, which, as an Annex, forms part of this Resolution.

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

25.III.97

____________________ Juan Antonio Morales A.

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Armando Pinell S. Jaime Ponce G.

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Juan Medinacelli V. Edgar Millares A.

REGULATIONS FOR OPERATIONS TO SUPPORT THE STRENGTHENING OF FINANCIAL ENTITIES, AS WELL AS FOR THE PARTICIPATION AND SUPPORT OF THE BCB IN THE INTERVENTION OF THE SAME

CHAPTER I
GENERAL PROVISIONS

Article 1º (Object).- This instrument aims to regulate the operations provided for in Article 38, subsection d) of Law No. 1670 of October 31, 1995, as well as the participation of the BCB in the intervention and support of financial entities subject to the provisions of numeral II of Article 67 of Law No. 1732, of November 29, 1996.

Article 2º (Conditions).- Support operations for the strengthening of financial entities will only be carried out:
I. For the purpose of preserving a stable and competitive financial system, and
II. When they do not represent substantial deviations from the BCB's Monetary Program.

Article 3º (Application).- Requests for support for the strengthening of financial entities will be considered in the following cases:
I. When no other public or private mechanisms exist for these purposes.
II. When the owners of a financial entity in the process of asset regularization, established in Articles 113 to 114, numeral I. (modified by Article 67 of Law 1732) of Law 1488, have exhausted the possibilities of obtaining resources in the financial market, either through the express renunciation of the owners to capitalize the entity, through the disinterest of third parties to invest in it, through a negative response from their creditors to the invitation to capitalize claims, and through the impossibility of contracting subordinate credits from other financial entities.
III. When the BCB and the SBEF have resolved simultaneously, through separate express resolutions, the intervention of a financial entity, once the requirements established in Chapter VI of these Regulations have been met.

Article 4º (Scope of Application).- The provisions of these Regulations apply to financial entities legally authorized for operation by the SBEF.

CHAPTER II
REQUIREMENTS TO REQUEST SUPPORT OPERATIONS

Article 5º (Requirements).- Financial entities requesting support from the BCB for their strengthening must submit a written request to the Financial System Management (FSM) accompanied by the following documentation:
I. Pro-forma financial statements reflecting the situation of the requesting entity, after making necessary adjustments to constitute provisions and reserves to cover the uncollectability of assets, regularization of liabilities, and recognition of pending losses to be absorbed, instructed by the SBEF or detected by the entity. These statements must be certified by the Board of Directors, the Trustee, the main executives, and the Audit Manager or their equivalent, or in their case, by the Inspector of the requesting entity.
II. An institutional strengthening plan, with the opinion of the SBEF, demonstrating the feasibility, on the part of the requesting entity, to honor the commitments assumed. The plan must set quarterly goals for the first two years and annual goals for the remaining period.
III. If it concerns joint-stock companies, a copy of the publication of the call for an Extraordinary Shareholders' Meeting in accordance with the Law, for:
i. Consideration of the adjustments to the financial statements mentioned in numeral I. of this article.
ii. Consideration of the Institutional Strengthening Plan mentioned in numeral II. above.
iii. Modification of statutes, if necessary.
iv. Approval of the contracting terms established by the BCB.
IV. If it concerns another type of company, a copy of the publication of the call for the General Assembly or equivalent body, to consider items i. to iv. of the preceding numeral.

The BCB's participation in support for a financial entity must be conditioned on the current shareholders, or new partners in the case of asset renewal, sale, or merger, making financial efforts of proportions similar to those made by the BCB.

CHAPTER III
PROCESSING OF INFORMATION AND APPROVAL OF THE REQUEST

Article 6º (Evaluation).
I. The FSM, attaching background information, will request the Economic Policy Advisory to prepare a report for the BCB Presidency regarding the impact of the requesting entity on the stability and maintenance of competition in the financial system, as well as on the costs and risks implicit in the different alternatives that might arise to maintain system stability.
II. The FSM will evaluate and verify compliance, by the requesting entity, with the requirements set forth in the previous Article 5 and will submit a written, reasoned report to the BCB Presidency regarding the adjustments made to its equity, as well as regarding the feasibility of the Strengthening Plan.
III. The FSM must request a written opinion from the Legal Advisory regarding the legal implications of the requested operations.

Article 7º (Approval).
I. The Presidency, once the reports referred to in the previous Article 6 have been analyzed, with the corresponding recommendation, will submit them for consideration by the BCB Board of Directors.
II. The Board of Directors, through an express resolution that counts with the affirmative vote of the absolute majority of its total members, will approve the support operations for the strengthening of the requesting entity, except for those involving the capitalization of claims and assignment of credits, which will require the favorable vote of at least five of its members.

CHAPTER IV
PERMITTED OPERATIONS

Article 8º (Purchase of assets, with or without repurchase agreement).- Purchase of assets operations will only be made under the following conditions:
I. Purchase of portfolio at the value of the outstanding balance of the credits comprising it, through assignment of credits with a repurchase agreement, irrevocable, not subject to the contingency of the effective recoveries of the assigned portfolio, with a maximum term for repurchase of fifteen (15) years.
II. Purchase of net portfolio of provisions, without repurchase agreement, under the following terms:
i. With all privileges, personal and real guarantees, and all other accessory rights, including fruits.
ii. The portfolio purchased by the BCB will be administered in trust by another financial entity or by the same entity, only if the latter has changed owners. It may also be sold for value.
III. In the two preceding cases, the BCB may pay the agreed price in cash or with public bonds.

Article 9º (Discounting of assets).- Discounting operations will be authorized on time deposits issued by financial entities authorized as ICIs by the BCB, which have a maturity date later than the date of discounting, under the following conditions and modalities:
I. That the requesting entity is the owner of the Time Deposit.
II. That the BCB, through the FSM, has verified in writing with the issuing entity the authenticity of the Time Deposit and that it is free of all encumbrances and liens.
III. That the maturity of the Time Deposit is not later than ninety (90) days computable from the date the discounting is effected.
IV. At a price no greater than the equivalent of the present value of the instrument, calculated on the day of discounting. For this purpose, the discount rate for the purchase of public bonds in MN (national currency), ME (foreign currency), and MVDOL (national currency with value maintenance) determined for that date in the BCB money market will be used, plus two percentage points in the case of MN, and one percentage point in ME and MVDOL.
V. Subject to good collection.

Article 10º (Asset Guarantee).- Asset guarantee operations constitute an alternative to the asset purchase operations described in the previous Article 8. The BCB will act as guarantor or surety for the credit portfolio assignment operations carried out by the requesting entity in favor of other financial entities, under the following conditions and modalities:
I. On the net portfolio of provisions, owned by the entity previously qualified and authorized by the BCB.
II. That the assignee is a financial entity authorized as an ICI by the BCB.
III. For terms not greater than two (2) years.
IV. The BCB may request additional guarantees from the entity or from the debtors of the credits comprising the portfolio subject to assignment.

Article 11º (Capitalization of claims).- The capitalization of claims that the BCB carries out in the requesting entity will confer upon it the temporary right to participate in its management, without modifying its legal nature. The capitalization of claims will be carried out under the following conditions:
I. At the proportional equity value of the shares existing at the time of capitalization, once the adjustments provided for in numeral I. of Article 5 of these Regulations have been certified by an external audit opinion, and additionally, following the same procedure, when such adjustments have been updated.
II. That the amount of the claims being capitalized, whether of the BCB or other public entities, represents a participation in the capital of the entity of more than 50% of the shares.

Article 12º (Assignment of Credits).- The assignment of credits, for cash or on terms, constitutes transfers of claims owned by the BCB in favor of third parties with the purpose that the assignees capitalize them in the debtor entity. They will be carried out under the following conditions and modalities:
I. Only in favor of new shareholders of the requesting entity.
II. Subordinated to the condition that the assigned claims are capitalized in the same entity.
III. If on terms, payable at most in three (3) years through semi-annual amortizations, and at a variable interest rate calculated based on the weighted average effective passive rate of the banking system, in United States dollars, corresponding to the previous semester, plus 1% per year.
IV. With share guarantees as appropriate in each case.

Article 13º (Merger and sale).- In cases of merger or sale to new shareholders, the BCB Board of Directors may consider that the terms and conditions established in these Regulations regarding terms are extended by up to 50% and the applicable interest rates are decreased by 1% in foreign currency and by 2% in national currency, respectively.

Article 14º (Application of Resources).- The resources granted by the BCB for the strengthening of a financial entity must be used primarily to cancel liquidity credits that it maintained with the Issuing Entity, and secondarily to replenish deficiencies in the legal reserve. The BCB may make disbursements in cash or through public bonds.

Article 15° (Other terms and conditions).- The BCB Board of Directors, through an Express Resolution, may require additional guarantees to those described in the previous articles, as well as the rescheduling of credit portfolios and, in each concrete case, establish other terms and conditions in addition to those provided for in these Regulations.

CHAPTER V
CONTROL OF OPERATIONS

Article 16º (Control).- During the validity of any of the support operations for strengthening, entities must comply with:
I. The monthly submission of financial statements to the BCB. Additionally, the submission of financial statements audited by an external audit firm hired by the entity and approved by the BCB, semi-annually in the first two years and annually in subsequent years.
II. If, in the judgment of the BCB Board of Directors, significant deviations occur with respect to the goals of the Strengthening Plan, that governing body may request the Shareholders' Meeting, the General Assembly, or another equivalent body, to designate a new Board of Directors, Council, or what is appropriate. The new Board of Directors of the entity will designate the general manager and the main executives of the credit, operations, and finance areas, regardless of the denomination they receive. Both the new Board of Directors and the designated executives must not be included in the impediments established in Article 10 of Law 1488.

CHAPTER VI
PARTICIPATION AND SUPPORT OF THE BCB IN THE INTERVENTION OF FINANCIAL ENTITIES

Article 17° (Requirements for the Intervention of Financial Entities).- The BCB Board of Directors will consider the intervention of a financial entity when the following conditions are fully met:
I. That, by instruction of the SBEF, the financial entity is in the process of asset regularization.
II. That the financial entity subject to asset regularization does not incur in any of the causes of Article 120 of Law 1488.
III. That the Superintendent of Banking and Financial Entities has informed the BCB, in detail, about the results of the asset regularization of the entity.
IV. That the resources to finance the intervention, in accordance with Article 67, numeral III of Law No. 1732, come from the instruments available for that purpose by the Executive Power.

Article 18° (Conditions for Support in Intervention).- Subject to Law 1732, the support that the BCB provides to intervention processes will be subject to the following conditions:
I. The SBEF and the BCB, through separate resolutions, but simultaneously, will determine the intervention of a financial entity.
II. The request for support from the BCB by the intervener designated by the SBEF must be submitted within a maximum term of 90 days from the start of the intervention, with the documents referred to in numerales I and II of Article 5 of these Regulations, with the favorable opinion of the Superintendent of Banking and Financial Entities, for consideration by the BCB Board of Directors of the support operations corresponding to the Issuing Entity in the Strengthening Plan.
III. The BCB can only support the strengthening of an intervened entity, through the partial or total capitalization of the claims it holds in said entity, in the manner established in Article 11 of these Regulations.

Article 19º (Qualified Vote).- The BCB Resolution on the intervention of a financial entity will require the favorable vote of at least five members of its Board of Directors, meeting in Extraordinary Session convened by the President to treat exclusively this topic.

CHAPTER VII
DISPOSITION OF RESULTING SHARES

Article 20º (Sale of shares).- The shares, resulting from the operations carried out by the BCB, subject to Article 38, subsection d) of Law 1670, will be alienated with due speed within a maximum term of one year, for value and through competitive mechanisms. The shares resulting from the operations carried out by the BCB in intervention processes will be transferred following the procedure established in numeral IV. of Article 67 of Law 1732.

CHAPTER VIII
FINAL PROVISIONS

Article 21º (Specific Decisions and Modifications to the Regulations).- The BCB Board of Directors, with the affirmative vote of at least five of its members, will adopt specific decisions on situations not foreseen in these Regulations that have direct relation with the support operations for the strengthening of financial entities, or approve modifications to these Regulations.

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