The Argentine financial system is currently composed of 63 banks and 14 financial entities (other than banks). In accordance with the last survey published by the Argentine Central Bank (BCRA),2 the top five financial institutions, in terms of consideration of their total assets, are:
- Banco de la Nación Argentina, whose assets in 2018 rose to a sum of 1,252,519.8 million Argentine pesos;
- Banco Santander Rio SA, whose assets in 2018 were worth 502,037.2 million Argentine pesos;
- Banco de Galicia y Buenos Aires SAU, whose assets in 2018 were worth 494,311.4 million Argentine pesos;
- Banco de la Provincia de Buenos Aires, with assets of 444,632.3 million Argentine pesos in 2018; and
- BBVA Banco Frances SA, whose assets in 2018 rose to a sum of 335,368 million Argentine pesos.
In spite of major efforts over the past few years that have strengthened the existing controls over the banking industry, enabling it to become a relatively conservative system and reducing risk exposures, there is still much work to be done as there continues to be a real lack of confidence in the system. Proof of this can be seen in the fact that our country still has below-average levels of banking inclusion (only 49 per cent, according to a report issued by the Argentine Fintech Chamber in 20183) in comparison with other countries of the region.
In this sense, over the past year, financial regulations have especially focused on financial inclusion, taking advantage for this purpose of the worldwide appearance of new players in the financial system: fintechs. Through the strategic alliance of and cooperation between banks and fintechs, it is expected that banks will improve their functionality and expand their reach to the significant majority of people currently excluded from the financial system. The financial regulators have been encouraging this symbiosis to encourage the system's growth, leading to an interesting new range of possibilities, such as the use of technology in the provision and development of financial services, allowing, for instance, the creation of digital wallets for the performance of instant payments or money transfers ordered through mobile devices or computers, or even the withdrawal of cash from retail stores having regulated non-financial correspondents.
Major improvements have also occurred in the foreign exchange field, where restrictions on the outflow from and the entrance of foreign currency into the country have been eliminated, dramatically reducing the control performed over these operations by financial institutions, and consequently increasing the performance of foreign investments in the country.
II THE REGULATORY REGIME APPLICABLE TO BANKS
The Argentine banking industry is subject to strict regulations and controls, mainly provided by the Financial Institutions Law (FIL),4 which has been regulating banking activities in Argentina since 1977. At the same time, the FIL 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,5 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: all the concrete measures and actions taken to promote monetary and financial stability, which are the typical functions performed by central banks; and the regulatory faculties, which include the elaboration and enforcement of the regulations necessary to achieve its aims. Regarding its regulatory faculties, the 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:
- granting and revoking bank licences;
- authorising the establishment of bank branches abroad;
- approving bank mergers, capital increases and certain transfers of stock;
- setting minimum capital, liquidity and solvency requirements and lending limits;
- granting credit facilities to financial institutions in cases of liquidity problems; and
- 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. The BCRA is also the enforcement authority of the foreign exchange market, regulating all relevant aspects of it. Furthermore, the BCRA regulates certain effects produced in the banking system by some other specific regimes, such as those introduced by the following regulations:
- the Capital Markets Act;6
- the Anti-Money Laundering Act;7
- the Credit Cards Act;8
- the Data Protection Act;9
- the Antitrust Act;10 and
- the Consumer's Defence Act.11
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 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 audit. Whenever the internal audit function is conducted by independent professionals, the tasks of the internal audit designated responsible may be conducted by any of the designated directors (members of the committee).
In addition, BCRA policies have established that financial institutions must implement adequate internal control procedures for monitoring compliance with corporate governance requirements, and the applicable laws and regulations, and for reporting any deviation to the managers or the board of directors. Therefore, the BCRA has established guidelines and methodologies that firms' internal controls should follow. Under these, the 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 the applicable laws and regulations.
The responsibility for compliance with the internal controls lies, according to the BCRA criteria, on all members of financial entities. However, such responsibility is especially assigned by the 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, a specific procedure and requirements must be met for their granting, mostly related 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.
In this sense, the regulations establish that bonus payments may be carried out provided that financial entities are not found to be undergoing a regularisation or restructuration process; they do not register for financial assistance from the BCRA; and they do not present delays or non-compliance with the BCRA informative regimes, or deficiencies of integration of capital or minimum cash requirements.
iii Regulatory capital and liquidity
Minimum capital requirements
The BCRA has also worked during the past few years on the implementation of policies aiming to comply with the Basel III guidelines, designing a roadmap for this purpose. 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 the 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 when 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 daily 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 that is not higher than 20 per cent or lower than 10 per cent of their yearly 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 shareholder in Argentina or abroad to prepare consolidated financial statements of the group to be presented semi-annually to the Superintendency. 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 that are 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 a financial institution 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
Argentina's legal system has a specific procedure to deal with banking insolvency – which differs from the ordinary procedure established by the 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:
- taking steps to reduce, increase or sell the financial institution's capital;
- 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;
- excluding and transferring assets and liabilities;
- constituting trusts with part or all of the financial institution's assets;
- granting temporary exemptions to comply with technical regulations, or paying charges and fines arising from such defective compliance, or both; and
- 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 the 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, which has currently risen up to 450,000 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,12 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 and 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:
- receive loans;
- receive deposits from the general public in local and foreign currencies;
- securitise their customers' debts; and
- acquire, place and trade with shares and debt securities in the Argentine over-the-counter market, subject to a report to 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 intermediation, including subordinated obligations.
Furthermore, under certain circumstances, the BCRA authorises financial entities to carry out repurchase transactions provided that determined requisites are observed. Certain financial entities may also obtain loans from the BCRA, whose repayment shall pre-emptively occur when an entity's liquidity ratio exceeds 40 per cent. 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, an 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 notification duties and approvals necessary for the purchase of shares of a financial institution when such purchase implies a change of control, such as 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 administrative authority. The notification shall be performed immediately after the first binding document or memorandum of understanding has been 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, an operation shall not have effect until the approval is received. Filing must be performed by any of the parties involved, within seven days from the relevant documents' execution date. 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 explained above. Notwithstanding, is important to highlight the fact that financial entities cannot constitute liens on their assets without the prior approval of the BCRA; nor can they 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
Following the goals and efforts completed throughout the past couple of years, regulations still aim to boost the financial industry to achieve financial stability and modernise the banking system. This has been approached mainly through the loosening of restrictions on the foreign exchange market, the introduction and development of certain technological tools and resources for banking operations, the BCRA's active intervention in the regulation of the economy, and by several efforts undertaken to achieve financial inclusion, leading to the following changes:
- the Argentine foreign exchange market has been released from the strict controls and regulations to which it was previously subject (as already mentioned);
- in the wake of the softening of the foreign exchange rules, since March 2018, retail stores and other individuals may register within the BCRA to be authorised to perform foreign exchange transactions with the public; and
- to contribute to financial inclusion, in November 2018 the BCRA began to regulate non-financial correspondents, thereby enabling financial entities to assign certain services to be rendered by other persons (individuals or entities) in their favour, especially in places where financial entities do not have a physical presence.
Meanwhile, the BCRA is also continuing to adjust, by every feasible means, local regulations to align with international recommendations, such as Basel III (e.g., it has stated that the observance of the International Financial Reporting Standards by financial institutions is mandatory), to keep pace with worldwide tendencies and regulations.
In addition, the Argentine financial system has made significant progress in recent years in increasing minimum capital and cash requirements, and strengthening compliance regulations, mainly in the anti-money laundering field, to comply with international standards.
VIII OUTLOOK and CONCLUSIONS
On the past few years, and especially since the political transformation the country has witnessed since 2015, the financial industry in Argentina has continued to evolve considerably. There is still much work to be done, not only towards improving financial inclusion, the incorporation of technology into banks' operations and expanding the size of the financial market, but also towards fighting inflationary pressure and achieving financial stability.
1 Pablo José Torretta is a partner and Ivana Inés Grossi is an associate at Estudio Beccar Varela.
3 Argentine Fintech Chamber Report: Informe Ecosistema Fintech Argentino (2018); page 43.
4 Law No. 21,527.
5 Law No. 24,144.
6 No. 26,831.
7 No. 25,246.
8 No. 25,065.
9 No. 25,326
10 No. 25,156.
11 No. 24,240.
12 The Consumer's Defence Act establishes the mandatory disclosure of the annual effective interest rate for financial operations for consumption and consumers' 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.