More than 15 years after one of the biggest financial crises in Argentina, the banking industry is still struggling to grow and achieve sustainable development in the context of a capital-raising economy. The Argentine financial system comprises 78 financial entities: 62 banks and 16 other financial entities. According to the Argentine Banks Association,2 currently the top five financial institutions are as follows:
Banco de la Nación Argentina
Banco Santander Rio SA
Banco de Galicia y Buenos Aires SA
Banco de la Provincia de Buenos Aires
BBVA Banco Francés SA
In spite of major efforts in the past few years to strengthen already existing controls over the banking industry, resulting in it becoming a considerably conservative system, and to reduce risk exposure, much work remains to be done, since there is a marked lack of confidence in the system. Proof of this is seen in the fact that Argentina still has below-average levels of banking inclusion in comparison with other countries in the region. In addition, to provide easier access to the financial system and a more accessible and effective service, work must be undertaken to overcome existing barriers, especially in the technological field.
Regarding Argentina’s political environment, it is worth mentioning that since a change in president in December 2015, the banking industry has witnessed events that have had a major impact on it, and that seem to have set out the grounds for ongoing expansion: foreign exchange controls have been softened, providing greater flexibility and easier access to foreign investments, and facilitating the performance of transactions in general.
Additionally, in the wake of such political transformation, the Argentine Central Bank (BCRA) has increased efforts to reduce monetary imbalances by taking actions such as raising interest rates to counterbalance inflationary pressure.
Another important event worth mentioning is the agreement reached with various creditors and bondholders who were engaged in litigation against Argentina. This represented not only the return of Argentina to the international capital markets, but also served as a clear message to investors, credit agencies and institutions to regain their confidence in the country and its ability to serve its commitments.
II THE REGULATORY REGIME APPLICABLE TO BANKS
The banking industry is highly regulated in Argentina. Since 1977, banking activities have been ruled by the Financial Institutions Law (FIL),3 which places the supervision and control of the Argentine banking system on the BCRA.
The BCRA is an autonomous organism in charge of enforcing all financial regulations. It is ruled internally by its Organic Chart,4 which determines its powers and functions as the lead regulator of the banking system.
The functions carried out by the BCRA can be grouped into two kinds: on one hand are all the concrete measures and actions taken to promote monetary and financial stability, which are the typical functions performed by central banks; and on the other are the regulatory faculties, which include the elaboration and enforcement of the regulations necessary to achieve its aims. Regarding its regulatory faculties, BCRA has vested, through its Organic Chart, its supervisory powers and the enforcement of regulations enacted by it to the Superintendency of Financial and Foreign Exchange Institutions (Superintendency).
The FIL has explicitly conferred to the BCRA the following powers:
- a granting and revoking bank licences;
- b authorising the establishment of banks branches abroad;
- c approving bank mergers, capital increases and certain transfers of stock;
- d setting minimum capital, liquidity and solvency requirements and lending limits;
- e granting credit facilities to financial institutions in cases of liquidity problems; and
- f promulgating all the regulations that are deemed necessary for such purposes.
Regulations enacted by the BCRA are known as communications, and play an essential role in the banking regulatory system.
Furthermore, the BCRA is the enforcement authority of the foreign exchange market, regulating all relevant aspects of it.
Finally, the BCRA also regulates regarding certain effects produced in the banking system by some specific regimes. Such regimes are those introduced by the following regulations:
- a the Capital Markets Act;5
- b the Anti-Money Laundering Act;6
- c the Credit Cards Act;7
- d the Data Protection Act;8
- e the Antitrust Act;9 and
- f the Consumer’s Defence Act.10
III PRUDENTIAL REGULATION
i Relationship with the prudential regulator
As the regulator of the Argentine financial system, the BCRA requires financial institutions to submit information on a daily, monthly, quarterly, semi-annual and annual basis. These reports, which include balance sheets and income statements, and information relating to reserve funds, deposits, portfolio quality and other matters, allow the BCRA to monitor the institutions’ financial conditions and business practices.
Accordingly, since 1994, the BCRA began to rate financial institutions based on the CAMEL quality rating system. Each letter of the CAMEL system corresponds to an area of the operations of each bank being rated, with ‘C’ standing for capital, ‘A’ for assets, ‘M’ for management, ‘E’ for earnings, and ‘L’ for liquidity. Each factor is evaluated and rated on a scale from one to five, being one the highest rating an entity can receive.
This system was replaced in 2000 by ‘CAMELBIG’. Even though the objective and basic methodology of this new system do not differ substantially from the previous CAMEL system, the components were redefined to evaluate business risks separately from management risks. Therefore, the components used to rate business risks are capital, assets, market, earnings, liquidity and business. The components to rate management risks are internal control and the quality of management. By combining the individual factors under evaluation, an index can be obtained that is representative of the final ratings for the financial institutions analysed.
ii Management of banks
Regarding financial entities’ management structures, directors and top-level managers of banks in Argentina must be appointed and must exercise their functions in accordance with specific dispositions given by the BCRA. The latter evaluates their capacity, experience, reputation and ability in the financial field, and is also in charge of approving their appointment for such appointment to be effective. The management personnel designated for the management of foreign financial entities branches set up in Argentina must be approved by the BCRA.
The current regulations also establish that banks must have an audit committee composed of at least two members of the board of directors and by the internal auditor. The internal auditor has to have functional independency.
In addition, BCRA policies have established that financial institutions must implement adequate internal control procedures for monitoring compliance with corporate governance, applicable laws and regulations, and for reporting any deviation to the managers or the board of directors. Therefore, the BCRA has established guidelines and methodology that the internal controls should follow. Under these, internal controls should focus on three different categories: measuring the effectiveness and efficiency of transactions, testing the reliability of accounting information and monitoring compliance with applicable laws and regulations.
The responsibility for non-compliance with the internal controls relies, according to the BCRA criteria, on all members of the financial entities. However, such responsibility is specially assigned by regulations to the board of directors, the managers, the audit committee and the internal auditor.
The BCRA has also elaborated a set of guidelines for financial entities good corporate governance (good practices).
With respect to financial entities’ management and employees’ bonus payments, there is a specific procedure and requirements to be met for their granting: payments must be previously authorised by the Superintendency, and the approval will be subject to financial entities’ compliance with minimum cash and capital requirements, among other conditions. These requirements are revised periodically, mainly in consideration of the volume of financial entities’ operations.
Furthermore, it is stated that bonus payments may be allowed provided that:
- a financial entities are not found to be in a regularisation or restructuration process;
- b they do not register for financial assistance from the BCRA;
- c they do not present delays or non-compliance with BCRA informative regimes, or deficiencies of integration of capital or minimum cash requirements; and
- d they do not register certain significant sanctions.
iii Regulatory capital and liquidity
Minimum capital requirements
In recent years, the BCRA has also worked on the implementation of policies aiming to comply with the Basel III guidelines. For such purpose, it has designed a roadmap to complete the implementation programme by 2019. On the same note, it has established regulations regarding the liquidity coverage ratio (LCR), LCR monitoring tools and introducing Basel principles for liquidity risk management and supervision.
In that sense, the BCRA has stated that the minimum legal capital requirement should be equal to the greater value resulting from a comparison between the applicable basic requirement (corresponding to the type of entity) and the sum of those requirements determined by credit and market risk, as well as operational risk.
The minimum legal capital requirement may be increased by 1 per cent in relation to certain assets if the financial institution is considered systemically important. Furthermore, when banks act as a custody or registry agent, exigencies are higher.
To verify compliance with the minimum capital requirements, the paid-in capital to be considered shall be the computable regulatory capital (RPC).
Any financial institution operating with an RPC under the minimum legal capital requirement shall pay in the correspondent amount within a certain period as of which it was determined to have failed to comply with the requirement, or submit to the Superintendency a regularisation and reorganisation plan. The Superintendency may appoint a supervisor and impose restrictions on distribution of dividends, among other actions.
Moreover, any financial institution operating under the minimum capital requirement related to market risk, when such failure is caused by the requirements established to prevent interest rate risk, foreign exchange risk or equity prices risk, shall pay in the corresponding amount or reduce its asset position, or both, until the applicable requirement is complied with. In cases where the non-compliance situation remains after the given term has elapsed, the entity must submit a regularisation and reorganisation plan to the Superintendency within the following five days.
The BCRA requires that every year banks allocate to a legal reserve 20 per cent of their net profits. Such reserve may only be used during periods of bank losses and after using up every allowance and other reserves. Distribution of dividends will not be allowed if the legal reserve has been impaired.
Minimum cash requirements
Financial institutions are also required to observe ‘minimum cash requirements’. These are established as a percentage of the balances of the different types of bank deposits. For term deposits, the percentage varies depending on the time remaining until maturity. The deposit amount minus the minimum cash requirement is such deposit’s ‘lending capacity’.
Compliance with the minimum cash requirements is determined in averages, for monthly periods. The BCRA modifies from time to time the percentages of the minimum cash requirements depending on monetary policy considerations. Compliance must be accomplished with certain assets, and completed in the same currency as the deposit that triggers such requirement.
Supervision of banking groups
Financial entities must require each of shareholder in Brazil or abroad to prepare consolidated financial statements of the group to be presented to the Superintendency within 120 calendar days of the end of the semester. Consolidated financial statements of foreign groups will also be required to be audited by a firm of recognised prestige.
Entities that own or acquire shares in foreign subsidiaries must give their consent to provide the information required by the Superintendency for the purpose of exercising supervision based on the consolidated financial situation. For the determination of the information requirements, the Superintendency shall take into account the legislation of the country where the subsidiary is located and the agreements that are made with the local supervisory body.
In cases in which the Superintendency does not have the information that it deems necessary to evaluate the situation of a consolidated financial institution, local financial entities will not be allowed to hold shares in banks or foreign companies subject to consolidation as significant subsidiaries. Given this, the Superintendency will suggest to the BCRA the appropriate time frame for the sale of such shares.
iv Recovery and resolution
Financial entities’ regularisation
The FIL establishes that financial institutions that evidence a deficiency in their cash reserves or have not complied with certain technical standards required, including minimum capital requirements, or whose solvency or liquidity is deemed to be impaired by the BCRA, must submit a restructuring plan to the BCRA.
In relation to the restructuring plans, the BCRA may require a financial institution involved to provide guarantees or to limit the distribution of profits, and appoint a supervisor to oversee such financial institution’s management with the power to veto decisions taken by the financial institution’s corporate authorities.
Revocation of authorisation to function
If a restructuring plan is not filed, approved or fulfilled by the financial entity, the BCRA may revoke its authorisation to function. The BCRA board may also resolve the revocation of an authorisation to operate financial institutions in the following situations: at the request of the authorities of the entity; in cases of dissolution established in the codes and laws that regulate its existence as a legal entity; and in other cases established in the FIL (e.g., sanctions or a fundamental change to the basic conditions taken into account at the time of authorisation).
Restructuring and dissolution of financial entities
Brazil’s legal system has a specific procedure to deal with banking insolvency – which differs from the ordinary procedure established by Bankruptcy Law – that involves the intervention of the BCRA to protect customers and creditors. Such procedure is regulated in Section 35-bis of the FIL and establishes that if, in the judgment of the BCRA, a financial institution is in a situation that the FIL would authorise the BCRA to revoke the financial institution’s licence to operate as such, the latter may, prior to considering such revocation, order a variety of measures, including:
- a taking steps to reduce, increase or sell the financial institution’s capital;
- b revoking the approval granted to the shareholders of the financial institution to own an interest therein, giving a term for the transfer of such shares;
- c excluding and transferring assets and liabilities;
- d constituting trusts with part or all of the financial institution’s assets;
- e granting temporary exemptions to comply with technical regulations, or paying charges and fines arising from such defective compliance, or both; and
- f appointing a bankruptcy trustee and removing statutory authorities.
It is important to note that any actions authorised, commissioned or decided by the BCRA under the FIL involving the transfer of assets and liabilities, or such deemed necessary to execute the restructuring of a financial institution, as well as those related to the reduction, increase or sale of their equity, are not subject to any court’s authorisation, and cannot be deemed inefficient in respect of the financial institution’s creditors.
Regarding the dissolution of financial entities, the BCRA must be notified of any decision to dissolve a financial institution pursuant to the FIL. The BCRA must then notify a court of competent jurisdiction, which will determine who will liquidate the entity (either the corporate authorities or an appointed independent liquidator). This determination is based on the ability of the corporate authorities and the existent assurances to carry out the liquidation properly.
Moreover, the bankruptcy of a financial institution cannot be adjudicated until the licence is revoked. No creditor, with the exception of the BCRA, may request the bankruptcy of a former financial institution before 60 days have elapsed since the revocation of its licence.
Finally, it is worth noting that financial entities’ branches are responsible for their own assets: parent companies do not respond for them.
Suspension of functions
The BCRA Organic Chart authorises the Superintendency, subject to prior approval of the President of the BCRA, to suspend for up to 30 days, in whole or in part, the operations of a financial institution if its liquidity or solvency has been adversely affected. Notice of this decision must be given to the BCRA’s board of directors.
If at the end of such suspension period the Superintendency considers it is necessary to renew it, it can only be authorised by the board of directors for an additional period of up to 90 days. During the suspension period, there is an automatic stay of claims, enforcement actions and precautionary measures; any commitment increasing the financial institution’s liabilities is void; and the acceleration of indebtedness and interest accrual is suspended.
Deposit insurance system
Argentina also has an insurance deposit system called SEDESA that protects the rights of depositors under crisis scenarios. This system is funded with periodic mandatory contributions from banks and guarantees, currently rising up to 350,000 Argentine pesos per person, account and deposit.
IV CONDUCT OF BUSINESS
The Superintendency, in its capacity as the banking system enforcement authority, performs formal inspections of all banking institutions to monitor their compliance with the legal and regulatory requirements established by the FIL and BCRA regulations. These include control of the fulfilment of the different informative regimes established by this entity.
If regulations are breached, the Superintendency may impose various sanctions, depending on the seriousness of the infringement. Sanctions range from warning calls to fine impositions, or even the revocation of a licence. In certain cases, non-compliance may result in the mandatory filing of a specific adequacy plan, which must be approved by the BCRA to remain operational (e.g., in the case of non-compliance with minimum capital requirements). In addition, financial entities may be sanctioned through the application of other regimes’ general rules, such as the consumer’s defence regime,11 or for a breach of any obligation protected by the Argentine Civil and Commercial Code, in which case they will be treated and judged as ordinary legal entities.
At the same time, financial institutions may be judged by criminal courts when they have performed a criminal offence as provided by the Argentine Criminal Code (such as the performance of non-authorised financial or securities intermediation).
Financial institutions are also subject to the foreign exchange criminal regime, which was created to reinforce the fulfilment of BCRA regulations on foreign exchange transactions through the imposition of criminal sanctions. Sanctions range from the issuance of a fine, the suspension from or impairment to operating as a financial institution, up to the imprisonment of directors, managers or other legal representatives.
Furthermore, the FIL and BCRA communications regulate banking secrecy. Such regulations ban the disclosure of ‘passive operations’ (e.g., savings accounts, checking accounts, time deposits and other liability products) to ensure the confidentiality of information or documents related to a financial entity’s client and to a certain transaction, but only regarding information referred to passive operations and to an identified or identifiable customer. Notwithstanding, there are some exceptions to this rule (e.g., judicial disposition). The sanctions applicable for violations of banking secrecy rules are those established by the FIL, and may also constitute a criminal offence.
In addition to their own equity, financial entities may also obtain funds from deposits (in Argentine pesos or US dollars) or investments from outside the financial sector, and from other alternative sources such as the issuance of bonds and by the performance of a public offering of their shares in the market.
The FIL includes, among financial entities’ permitted activities the capacity to:
- a receive loans;
- b receive deposits from the general public in local and foreign currency;
- c securitise their customers’ debts; and
- d acquire, place and trade with shares and debt securities in the Argentine over-the-counter market, subject to the prior approval of the Securities National Commission (CNV).
They may also sell its assets through private transactions provided that certain regulatory requirements are fulfilled.
Likewise, subject to the prior authorisation of the Superintendency, the following instruments are allowed as capital contributions: securities issued by the government, debt instruments issued by the BCRA, and a financial institution’s deposits and other liabilities resulting from financial brokerage, including subordinated obligations.
Besides, the BCRA authorises financial entities under certain circumstances to carry out repurchase transactions under the observance of certain requisites. Certain financial entities may also obtain loans from the BCRA, whose average monthly use shall not exceed 40 per cent of the monthly average of deposits with fixed-term deposits in US dollars. According to the BCRA’s Organic Chart, this may provide advances or further discounts for financial entities with transitory liquidity issues. Moreover, in such transitory situations, the BCRA may assign, transfer or sell credits acquired from the affected financial institutions.
VI CONTROL OF BANKS AND TRANSFERS OF BANKING BUSINESS
i Control regime
The FIL and BCRA communications regulate the reporting duties and approval conditions required for a change in financial entities’ equity’s composition, and for the acquisition of financial entities.
Substantial modifications of equity composition
A negotiation of shares or other circumstances capable of producing a change in the qualification of, or that may alter the structure of the respective groups of shareholders of, financial entities, must be reported. This obligation shall apply to sellers and purchasers of shares, and to boards of directors of cooperative societies and their members.
Within 15 days of the performance of such reporting, detailed information of the operation must be provided to the Superintendency. The transaction (payment of the price, transfer of stocks, etc.) cannot be performed until a resolution is passed.
Authorisation is a condition precedent for a transaction to be enforceable and, once presented to the competent authorities, there is no legal time frame for the BCRA to decide on it.
The BCRA will analyse the information provided, and will pass a resolution based on the convenience and opportunity of the operation, and on the grounds of the precedents credited by the parties (regarding their previous conduct and sanction impositions). At the same time, the BCRA may also revoke authorisations granted if there have been fundamental changes in the basic conditions taken into account for the granting of such.
If granted, the authorisation to operate will depend on the suitability of the initiative, the characteristics of the project, the general and particular conditions of the market, and the background and responsibility of the applicants and their experience in financial activities. There are no specific instructions regarding how a detailed business report is to be presented to the Superintendency for its approval.
Changes in financial entities’ equity composition
Legal entities that intend to acquire shares of financial institutions must be regularly constituted, and, in the case of foreign companies, must be registered with the correspondent corporate authority in their home jurisdiction. When an acquirer is a foreign financial institution, a certificate from the supervision authority of the country of origin must be presented granting its legal establishment in such country and crediting proper supervision to the enacting authority.
Acquisitions by financial entities
Financial entities shall report to the Superintendency prior to making commitments or undertaking negotiations aimed at acquiring shares of another financial institution in such a proportion as to enable it to exercise control when total deposits of the entity whose shares would be transferred exceed 2 per cent of the deposits of the financial system; total deposits of the entity whose shares would be transferred exceed 50 per cent of the total deposits of the acquiring entity; or when the entity that would acquire those shares have a rating of three to five with the Superintendency.
Acquisition by controlling entities of other financial entities
Companies that directly or indirectly control financial entities must report directly to the Superintendency prior to entering into commitments or negotiations aimed at acquiring, directly or through branches or subsidiaries, shares of another financial entity in such a proportion that allows them to exercise control for the welfare of society when any of the following situations occurs: the total deposits of the entity whose shares would be transferred exceed 2 per cent of the total deposits of the financial system; the total deposits of the entity whose shares would be transferred exceed 50 per cent of the total deposits of the entity already controlled; or when some of the financial entities controlled by the acquiring company of the shares of another financial institution have a rating of three to five with the Superintendency.
Other approvals for acquisitions of financial entities
There are some other notifications duties and approvals necessary for the purchase of shares of a financial institution when such implies a change of control: notification to the CNV and to the National Commission of Competition (CNDC).
Pursuant to the applicable regulations, in the event of a change of control, the local licensed company will retain its licence. However, such company must promptly notify the CNV and any other relevant market. Such notification shall be carried out immediately after the first binding document or memorandum of understanding is executed. Otherwise, an administrative investigation might be started, and the CNV might apply warnings, fines and even the suspension of a licence.
In addition, unless a ‘first landing exception’ becomes applicable – that is to say, the purchasing group does not own shares of Argentine companies or Argentine assets – the transaction must also be submitted to the CNDC for approval. Even though it is a not a condition precedent for closing pursuant to the applicable law, the operation shall not have effects until the approval is received. Filing must be performed within seven days of closing by any of the parties involved. The CNDC could reject a transaction or raise objections. In any case, a buyer will be requested to take measures in order for the transaction to be approved (e.g., sale of assets, partial divestiture).
There are no specific rules regarding banking acquisition structuring processes other than those above explained. Notwithstanding, is important to highlight the fact that financial entities cannot constitute liens on their assets without the prior approval of the BCRA. They also cannot receive their own shares as guarantees.
ii Transfers of banking business
Bank business transfers do not have a specifically regulated process, and banks are allowed to sell or transfer portions of their business by single transactions as long as they do not constitute transfers of goodwill. Transfers of goodwill must be approved by the Superintendency.
VII THE YEAR IN REVIEW
Regulations enacted throughout 2016 show a strong determination to strengthen the financial industry through achieving financial stability and the modernisation of the banking system. The most important changes have been made through:
- a a softening of the foreign exchange market;
- b the introduction and development of certain technological tools and resources for banking operations;
- c the BCRA’s intervention on the regulation of interest rates; and
- d efforts made in the field of financial inclusion.
By the end of 2015, the local foreign exchange market, which had been subject to strict controls and regulations, began to witness a softer scenario. Many of the restrictions imposed on the inflow of foreign currency into the country were eliminated.
In addition, restrictions related to the remittance of funds abroad have been essentially abrogated. At the same time, in an attempt to promote wider societal banking inclusion, the BCRA has eradicated certain costs to consumers for opening banking accounts, and has authorised the creation of savings accounts for consumers under the age of 18.
Furthermore, the BCRA has worked to improve its technological resources, and has advanced the digitisation of financial users’ transactions, allowing immediate fund transfers through the use of home banking and other electronic systems free of charge for people, and with certain cost benefits for companies.
On another note, the BCRA has active intervened in the economy, raising local interest rates to reduce inflation. It has also expanded lending capacity in foreign currencies. It has promoted the deepening of savings and long-term credit tools (e.g., by implementing an indexation mechanism for deposits and loans in accordance with inflation) and continues to adjust, by every means, local regulations to international recommendations (e.g., Basel III) that foster a framework of financial stability.
The Argentine financial system has made significant progress in recent years by increasing minimum capital requirements and strengthening compliance regulations, mainly in the anti-money laundering field, to comply with international standards. Notwithstanding all of the above, changes are expected to continue so that the financial system can continue to grow and to substantially develop.
VIII OUTLOOK and CONCLUSIONS
There are some issues that, while they have not yet been subject to any evolution, are currently found on the political agenda as issues to be dealt with in the near future, including the amendment and updating of the Digital Signature Law and other initiatives for whole society financial inclusion, with the possibility of an amendment on the FIL for such purpose. Other changes are also expected in the technological fields to keep the pace with the rest of the world’s financial entities.
1 Pablo José Torretta is a partner and Ivana Inés Grossi is an associate at Estudio Beccar Varela.
3 No. 21,527.
4 Law No. 24,144.
5 No. 26,831.
6 No. 25,246.
7 No. 25,065.
8 No. 25,326
9 No. 25,156.
10 No. 24,240.
11 The Consumer’s Defence Act establishes the mandatory disclosure of the annual effective interest rate for financial operations for consumption and consumer’s credit. Its omission will determine that the obligation of the borrower to pay interest will be adjusted to the annual average passive rate, published by the BCRA on the date of conclusion of the contract. By this Act, the BCRA is entitled to take the necessary measures to reinforce such obligations.