Resolution 180/97 - Legal Reserve Regulation for Financial System Institutions

RESOLUCION DE DIRECTORIO Nº 180/97
ASUNTO: ECONOMIC POLICY ADVISORY - LEGAL RESERVE REGULATION FOR FINANCIAL SYSTEM INSTITUTIONS.

VISTOS:
Law No. 1670 of the Central Bank of Bolivia (BCB) of October 31, 1995.
Law No. 1488 on Banks and Financial Entities of April 14, 1993.
Supreme Decree No. 23261 of September 15, 1992.
Report from the Economic Policy Advisory No. 89/97 of November 21, 1997.
Report from the Legal Advisory ALEG No. 249/97 of November 21, 1997.

CONSIDERING:
That Article 7 of Law 1670 of October 31, 1995, grants the Central Bank of Bolivia (BCB) full authority to establish the legal reserve mandatory for banks and financial intermediation entities. To this effect, it confers competence to the Institution's Board of Directors to fix, by absolute majority of votes, its composition, amount, calculation method, characteristics, and remuneration.

That the second part of the aforementioned Article, in conjunction with Article 84 of Law 1488, confers attributes to the Superintendence of Banks and Financial Entities (SBEF) for the control and supervision of the legal reserve, establishing a two-week period for the control of the required reserve.

That Article 36 of Law 1670 empowers the BCB to attend to the liquidity needs of the country's financial system.

That Article 37 of the aforementioned Law establishes that the BCB is the custodian of the liquid reserves intended to cover the legal reserve and may delegate the custody of these deposits to other financial entities, through the issuance of a regulation.

That Report from the Economic Policy Advisory No. 89/97 recommends the reform of the legal reserve structure, in accordance with the application of other monetary policy instruments.

That Report from the Legal Advisory ALEG No. 249/97 states that the draft Legal Reserve Regulation fits within the current legal framework in this matter.

Therefore,

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

Article 1.- Approve the Legal Reserve Regulation for Financial System Institutions, which, as an annex, forms part of this Resolution.

Article 2.- Repeal the Board of Directors Resolutions of the BCB 142/93 of November 23, 1993; 050/94 of April 26, 1994; 051/94 of April 26, 1994; 065/94 of May 17, 1994; 069/94 of May 31, 1994 in its Article 3, and 148/95 of November 23, 1995 in its Article 1, from the entry into force of this Resolution.

Article 3.- Modify Article 2 of the Board of Directors Resolution of the BCB No. 069/94 of May 31, 1994, in the following terms:
"Financial intermediation entities, banking and non-banking, shall maintain as a maximum in funds in custody, on behalf of the Central Bank of Bolivia, up to 5 percent of the legal reserve in cash. The remaining 95 percent of the legal reserve in cash must be constituted in the Central Bank of Bolivia (La Paz)".

Article 4.- The Legal Reserve Regulation will enter into force on March 23, 1998.

Article 5.- The Presidency and General Management are charged with the execution and compliance of this Resolution.

23.XII.97

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Juan Antonio Morales A.

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Armando Pinell S. Jaime Ponce G.

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Juan Pablo Zegarra A.

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LEGAL RESERVE REGULATION FOR FINANCIAL SYSTEM INSTITUTIONS

TITLE I
GENERALITIES

Article 1 (Scope of Application).
All entities of the financial intermediation system, authorized for operation by the Superintendence of Banks and Financial Entities, are subject to the legal reserve provisions of this Regulation.

Article 2 (Terms and Abbreviations).
For the purposes of this Regulation, the following terms and abbreviations are used.
BCB : Central Bank of Bolivia.
SBEF : Superintendence of Banks and Financial Entities.
DPF : Time Deposits.
MVDOL: National currency with value maintenance in relation to the United States dollar.
Required Legal Reserve : Amount that every financial entity must deposit in the BCB or in authorized entities, for legal reserve purposes.
Constituted Legal Reserve : Amount that financial entities effectively deposit in the BCB or in authorized entities, for legal reserve purposes.
Legal Reserve in Cash : Required and constituted legal reserve in cash by financial entities, which will be maintained in deposit in accounts enabled for this effect. Legal Reserve in Securities : Required and constituted legal reserve in cash by financial entities in the accounts enabled for this effect, to be invested by the Trustees of the RAL-MN and RAL-ME Funds in securities, values, or authorized instruments.

//5. R.D. Nº 180/97
RAL Fund : Liquid Asset Requirement Fund that will have a component in national currency (RAL-MN Fund) and another in foreign currency (RAL-ME Fund).
RAL Fund in National Currency (RAL-MN) : Fund administered by the Trustee and constituted by national sovereign bonds in bolivianos, acquired with the funds from the legal reserve in securities. RAL Fund in Foreign Currency (RAL-ME) : Fund administered by a Trustee and constituted by securities, values, or authorized instruments, acquired with the funds from the legal reserve in securities in foreign currency. Trustee of RAL-MN : The BCB acts as Trustee in the administration of the RAL-MN Fund investments. Trustee of RAL-ME : Foreign private bank with a rating for long-term issuances of at least Aa2 according to Moody's, selected based on competitive mechanisms approved by the BCB, and that acts as Trustee in the administration of the RAL-ME Fund. Legal Reserve Requirement Period : Period of 14 consecutive days, determined by the SBEF for the calculation of the required legal reserve. Legal Reserve Constitution Period : Period of 14 consecutive days, lagging by 4 days in relation to the legal reserve requirement period. TAAs : "AA" type fixed-income securities, issued at par and bearer in public offer by the BCB.

TITLE II
LEGAL RESERVE ON DEMAND DEPOSITS, SAVINGS, AND TIME DEPOSITS

Article 3 (Legal Reserve Requirements for Demand Deposits, and Savings).
The entities mentioned in Article 1 must constitute legal reserve in cash and in securities on their liabilities in the accounts detailed below, in national currency, MVDOL, and foreign currency, separately for each of the currencies in which they contracted the aforementioned liabilities.

Demand Deposits

• Checking account deposits
• Inactive checking account deposits
• Demand deposits
• Certified checks with the public
• Drafts and transfers payable
• Collections for reimbursement
• Securities and matured deposits with the public
• Closed checking account deposits
• Checking account deposits of financial entities subject to reserve
• Other demand liabilities with financial entities subject to reserve
• Manager's checks
• Financing from foreign entities on demand
• Head office and branches on demand
• Banks and foreign correspondents on demand

Savings

• Savings account deposits
• Inactive savings account deposits
• Savings account deposits pledged as collateral
• Savings account deposits of domestic financial entities subject to reserve

Article 4 (Legal Reserve Requirement for DPFs).
The financial entities mentioned in Article 1 must constitute legal reserve on their liabilities regarding the following time deposit (DPFs) accounts:
Time Deposits (DPF)

• Other liabilities to the public at term
• Time deposits pledged as collateral
• Time deposits of domestic financial entities subject to reserve
• Short-term financing from foreign entities
• Head office and branches short-term

The terms of the legal reserve for DPFs, according to the terms and currencies of the deposits, are established in the following table:

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Legal Reserve for DPFs according to Maturity Term and Currency

Original Term of DPF | National Currency | Foreign Currency and MVDOL --- | --- | --- Up to 180 days | Securities Reserve | Cash Reserve More than 180 days, up to 360 days | Cash Reserve | Securities Reserve More than 360 days, up to 720 days | Cash Reserve | Cash Reserve More than 720 days | No Reserve* | No Reserve*

*Only if the DPF has been previously registered in the BCB.

Article 5 (Exemptions).
Time deposits for more than one year, which have been constituted prior to the entry into force of this Regulation, will remain exempt from the requirement to constitute legal reserve until their maturity. Liabilities contracted with the exterior, for a term of less than one year, on a date prior to the entry into force of this Regulation, will remain exempt from the requirement to constitute legal reserve until their maturity. Short-term liabilities with the exterior, contracted exclusively for foreign trade operations with exact matching between asset and liability for each operation, will be exempt from the requirement to constitute legal reserve. The following exemptions are reiterated:
Time deposits in national currency, with an original maturity term of more than six months and up to one year, registered in the BCB, will be exempt from the legal reserve in cash. Time deposits in national currency, with an original maturity term of more than one year, registered in the BCB, will be exempt from the legal reserve. Time deposits in MVDOL and in foreign currency, with an original maturity term of more than 360 days and up to two years, registered in the BCB, will be exempt from the legal reserve in cash. Time deposits in national currency with value maintenance and in foreign currency, with an original maturity term of more than two years, registered in the BCB, will be exempt from the legal reserve.

Article 6 (Need for Registration).
Financial entities must register in detail, with the BCB's Financial System Management, all their time deposits for more than one year (in foreign currency) and superior to six months (in national currency). Only deposits constituted in those terms, which have been previously registered in the BCB, may qualify for the exemptions mentioned in Article 5.

Article 7 (Schedule).
The banking financial entities mentioned in Article 1 must observe the following schedule for the legal reserve rates in cash and in securities, on the liabilities detailed in Articles 3 and 4:

From | Cash Reserve Rate | Securities Reserve Rate --- | --- | --- March 23, 1998 | 5% | 7% May 18, 1998 | 4% | 8% July 13, 1998 | 3% | 9% September 7, 1998 | 2% | 10%

The non-banking financial entities mentioned in Article 1 must observe the following schedule for the legal reserve rates in cash and in securities, on the liabilities detailed in Articles 3 and 4:

From | Cash Reserve Rate | Securities Reserve Rate --- | --- | --- March 23, 1998 | 5% | 1.5% April 20, 1998 | 4% | 3.0% May 18, 1998 | 3% | 4.5% June 15, 1998 | 2% | 6.0% June 13, 1998 | 2% | 6.5% August 10, 1998 | 2% | 7.0% September 7, 1998 | 2% | 7.5% October 5, 1998 | 2% | 8.0% November 2, 1998 | 2% | 8.5% November 30, 1998 | 2% | 9.0% December 28, 1998 | 2% | 10.0%

TITLE III
LEGAL RESERVE FOR OTHER DEPOSITS

Article 8 (Legal Reserve Requirement for Other Deposits).
The entities mentioned in Article 1 must constitute the legal reserve in cash, equivalent to a rate of 100% on their liabilities, in the accounts detailed below:
Other Deposits

• Judicial Deposits
• Third-party funds for operations in the Bolsín
• Third-party funds for authorized operations
• Funds to be delivered to third parties by the placement of securities
• Other demand liabilities to the Public
• Judicial Retentions
• Prepaid letter of credit guarantee deposits
• Other guarantee deposits
• Other restricted liabilities to the Public
• Advance collections from credit card clients
• Transfer Current Accounts for Non-Banking Financial Entities

Article 9 (Guarantee Deposits).
Guarantee deposits (prepaid letters of credit) will be subject to a reserve of one hundred percent (100%) on the part corresponding to amounts not transferred on the day of their receipt to the BCB, or to bankers from abroad who open and confirm the letters of credit. In the latter case, the order to pledge deposits constituted in banks abroad, specifically intended for the opening and confirmation of import letters of credit, will be considered as a transfer.

Article 10 (Interbank Operations).
The amounts that financial institutions of the system deposit at term in other financial institutions, will be considered as interbank loans and will be subject to the legal reserve norms established in this Regulation, in case legal reserve had not been constituted previously.

TITLE IV
CONSTITUTION OF LEGAL RESERVE IN CASH AND IN SECURITIES

Article 11 (Legal Reserve Accounts).
Financial entities must constitute the legal reserve in cash, in the accounts enabled for this effect in the BCB, or in authorized entities in the currency in which the deposits were captured.

Article 12 (Compensation between Securities and Cash).
Excesses of legal reserve in cash may compensate for deficiencies of legal reserve in securities. Excesses of legal reserve in securities may not compensate for deficiencies of legal reserve in cash.

Article 13 (Calculation of Legal Reserve).
All entities of the financial intermediation system of the country mentioned in Article 1 of this Regulation, with the exception of the BCB, will maintain daily a legal reserve of their liabilities to the public, deposited in the accounts enabled for this effect. The required legal reserve will be calculated from the average of the liability balances that each financial entity maintains at the end of each day, in the legal reserve requirement period. The constituted legal reserve will be calculated from the average of the daily balances credited in the respective accounts, in the legal reserve constitution period.

Article 14 (Reporting of Liabilities Subject to Legal Reserve).
Financial entities must report daily until 15:00 hours, to the BCB's Financial System Management and to the SBEF, all their liabilities subject to legal reserve, by currency and by type of deposit, corresponding to the previous business day.

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Cash deposits in the BCB or its correspondents for the purpose of constituting legal reserve, must be made until 18:00 hours of each day. Transfers of accounts for the purpose of constituting legal reserve will be admitted until 19:30 hours of each day.

Article 15 (Compensation by Currencies).
The legal reserve in cash must be constituted in the currency in which the deposits were captured. Compensations between currencies for the legal reserve in cash are not permitted. The legal reserve in securities must be constituted according to Article 22 of this Regulation. Regarding the legal reserve constituted in MVDOL, the BCB will recognize in favor of financial entities the differential by exchange rate only up to the limit of the required legal reserve.

Article 16 (Sanctions for Early Withdrawals of DPFs).
Time deposits for more than one year in foreign currency and six months in national currency, that are redeemed by the issuing entity in a term inferior to the original term, will be subject to the sanctions established by the Superintendence of Banks and Financial Entities. When the issuing entity acquires its own time deposit certificates, these must be cancelled and withdrawn from the accounts, and such withdrawal must be communicated to the BCB in a term no greater than 48 hours after it occurs.

Article 17 (Funds in Custody).
From the entry into force of this Regulation, financial entities of the system may maintain up to 5% of their legal reserve requirement in Cash Funds in any location. Any excess that financial entities maintain above that 5% will not be recognized for reserve purposes.

Article 18 (Cash Movements of Funds in the BCB).
The BCB will charge the commission established in the Table of Terms and Conditions for the Collection of Commissions and Other Income, for cash movements of entry or exit of funds that financial entities make more than once a day, in the accounts enabled for legal reserve purposes in the BCB or its correspondents.

Article 19 (Deposits in Other Currencies).
For deposits captured in other currencies, distinct from the boliviano and the American dollar, the reserve must be constituted in its equivalent in American dollars, at the daily reference buy exchange rate issued by the BCB.

Article 20 (Transfer Current Accounts for Non-Banking Financial Entities).
Non-banking financial entities that do not have a reserve account in the BCB, must constitute the total of their legal reserve in an account opened for this purpose (transfer current account) in a banking financial entity that has a legal reserve account in the BCB, as established in the last paragraph of Article 8 and Article 11. The banking financial entity receiving those funds must deposit them, daily and in full, in the legal reserve accounts it maintains in the BCB. Likewise, it must send daily to the BCB, within the same terms mentioned in Article 14, information on the deposits captured by the non-banking financial entity and the amounts deposited in the transfer current accounts. The Monetary and Exchange Policy Committee will define the minimum amount of legal reserve applicable to maintain a legal reserve account in the BCB. Non-banking financial entities that have maintained during the last six months an average required legal reserve above the minimum amount, will continue to maintain their legal reserve accounts in the BCB. Non-banking financial entities that have not maintained that minimum average level in the last six months, must close their legal reserve accounts in the BCB within 30 days following their notification by the BCB's Financial System Management, and will fulfill their reserve obligation in a transfer current account. The BCB's Currency and Credit Management will include in the bidding for banking services correspondents, the corresponding commission for the administration of services of the transfer current accounts, which must be

//13. R.D. Nº 180/97 homologated to other financial entities that provide this service. The banking financial entity receiving transfer accounts may not charge additional commissions for this concept to the non-banking financial entities.

Article 21 (TAAS Securities).
From the entry into force of this Regulation, "AA" type securities (TAAs) will cease to be instruments accepted to constitute legal reserve.

Article 22 (Legal Reserve in Securities).
The legal reserve in securities must be constituted: (i) for deposits in national currency, deposits in the same currency that will be invested by the Trustee of the RAL-MN Fund in fixed-income national sovereign securities and public offer, denominated in national currency; (ii) for deposits in foreign currency and MVDOL, deposits in American dollars that will be invested by the Trustee of the RAL-ME Fund in the following securities, values, or instruments: Treasury Bills, Treasury Notes, Securities of Agencies of the Government of the United States of North America, deposits and money market instruments, or Government Securities issued by governments with a minimum rating of Aa1 for long term, according to Moody's. The minimum rating of all these instruments must be P-1 for short term and Aa3 for long term. Investments in instruments with issuances different from the dollar must be covered in full ("completely hedged"). Open positions or "short" purchases or sales will not be accepted.

Article 23 (Frequency of Transfers to/from Securities Reserve).
Every seven days, the BCB will credit or debit the cash reserve account of each financial entity, the amounts necessary to make the corresponding credits or debits to the legal reserve in securities. The movement in reserve accounts will be automatic based on the reserve and deposit reports sent by financial entities to the BCB's Financial System Management. At the end of the required legal reserve period, the movement of funds will be attended based on requests from financial entities, only on the next business day and subsequent, and before 12:00 noon on the last day. All these transfer operations to the securities reserve will be accounted for on that last day, provided it is not a holiday in the country of the Trustee of the RAL-ME Fund, in which case it will be done on the first subsequent business day. No financial entity may make withdrawals from its RAL Fund, when the preliminary calculations of the BCB's Financial System Management, at the end of the required reserve period, show deficiencies in the legal reserve in securities.

TITLE V
OF THE LIQUID ASSET REQUIREMENT FUND (RAL FUND)

Article 24 (Object).
The RAL Fund has as its object the investment of the resources constituted in compliance with the legal reserve in securities.

Article 25 (Constitution of the RAL Fund).
The RAL Fund will be constituted with the resources deposited for the fulfillment of the legal reserve in securities, according to the fund movements made by the

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financial entities in accordance with Article 22 preceding. The RAL Fund will be accounted for in restricted accounts within the balance sheet of the BCB. The participating financial entities will be the beneficiaries of all rights, as well as answer for all obligations resulting from the administration of the RAL Fund, in accordance with the rules established in this Regulation and in accordance with what is agreed in the administration mandate contract that each financial entity will sign with the BCB.
Article 26 (Responsibilities and Risks).

• The responsibilities, losses, risks and other
  contingencies arising from the administration of the investment portfolio of the RAL Fund will be guaranteed with the resources constituted by the concept of the legal reserve in securities, in accordance with the principle of risk distribution, in proportion to the deposits of //15. R.D. Nº 180/97 legal reserve in securities that each of the financial entities constitutes. Under no circumstances will the BCB assume any responsibility or risk, nor will it guarantee the results of the investments of the portfolio of the RAL Fund. In the case of the RAL-ME Fund, the BCB will not assume any responsibility for the quality of its administration. To this effect, within the restricted accounts opened at the BCB, the financial entities for themselves and on behalf of non-banking financial entities that they represent, will maintain individualized and independent participation sub-accounts for the following purposes:
  -Registration and control of compliance with the requirement of legal reserve in securities.
  -Perception of returns or absorption of losses on a pro-rata basis, according to the net results of the investment of the portfolio.
  -Variation of the legal reserve constituted in securities on a pro-rata basis, in the event of any loss, risk, contingency or gain arising from the investment of the portfolio.
• Payment of obligations due to the BCB.

-Payment of administration costs and other expenses, on a pro-rata basis.
Article 27 (Administration of the Fund).

• The resources of the RAL Fund will be administered by two
  Trustees, one for the RAL-MN Fund and the other for the RAL-ME Fund.
  The RAL-MN Fund will be administered by the Currency and Credit Management of the BCB, in accordance with a contract signed with the financial entities. The administration of the RAL-ME Fund will be entrusted to a specialized trust entity, with recognized technical capacity and international solvency, in accordance with the rules approved by the BCB and used for the hiring of the BCB's reserve advisory services, given the exceptional characteristics of this service and at the expense of the resources of the RAL-ME Fund. //16. R.D. Nº 180/97
  Article 28 (Exemption of Commission for Transfers to the
  RAL Fund).
• The operations of transfer of funds between the accounts
  that financial entities maintain at the BCB and the RAL Fund will not be subject to any commission.
  Article 29 (Tranches of Liquidity Loans).
• The resources constituted by each financial entity in the
  reserve in securities will serve as collateral for the liquidity credit requests that they present to the BCB, under the following conditions:
  The BCB may lend for a term not exceeding seven days, an amount equivalent to up to the first 30% of the deposited value in the Fund for each financial entity, to finance: (i) automatic overdraft coverage operations, without prior communication, and/or (ii) free availability resources, requested through written instruction to the Currency and Credit Management of the BCB. The BCB may grant an amount equivalent to up to the additional 40% in free availability resources for a term not exceeding seven days, upon written request to

the Financial System Management of the BCB, justifying the reasons motivating this requirement.
No financial entity may use the second tranche for more than seven consecutive days or ten discontinuous days during two consecutive reserve periods. If this situation arises, the financial entity must request from the Financial System Management of the BCB a liquidity credit, in accordance with Article 36 of Law 1670 and its regulations. At the maturity of the loans granted in both the first tranche and the second, the BCB will debit automatically the amount lent and its interest from the cash accounts that the financial entity maintains at the BCB. The BCB will use its own resources to cover automatic overdrafts and pay the requirements of free availability resources, provided that the total required by the financial system does not exceed 10% of the RAL Fund constituted. If the requirement exceeds this percentage, the BCB may obtain these resources from the Trustee, within the options stipulated in the contract to be signed with the latter. In this case, it will be the responsibility of the Monetary and Exchange Policy Committee //17. R.D. Nº 180/97 of the BCB to determine the origin of the resources.
Article 30 (Non-Participation in the RAL Fund).

• In the event that any financial entity decides not
  to participate in the RAL Fund in accordance with the terms mentioned in Article 24 and subsequent, the portion corresponding to its legal reserve in securities will remain in a restricted account within the BCB, without earning returns or costs for the aforementioned entity. This account will be subject to all the conditions stipulated for the legal reserve in securities.
  Article 31 (Interest Rates of Liquidity Loans).
• The BCB's Open Market Operations Committee will
  determine biweekly the interest rates to be charged for the granting of resources in each of the tranches.
  Article 32 (Financial Statements of the Fund).
• The accounting and preparation of the Financial Statements
  of the RAL-MN and RAL-ME Funds will be the responsibility of the respective Trustees. The Trustees will present this information daily to the Financial System Management of the BCB. The financial intermediation entities may request information from the BCB regarding the results of the administration of the Fund.
  Article 33 (Dissolution).
• The RAL Fund may be dissolved only by
  express resolution of the Board of Directors of the BCB.
  Article 34 (Return).
• Upon dissolution of the RAL Fund, the portfolios will
  be liquidated at market value and the proceeds will be returned to the financial intermediation entities, in proportion to the legal reserve in securities deposits of each financial entity, and according to the value obtained by the Trustee.
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