## _cr1664 ## Source details **Canonical URL:** [_cr1664](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr1664.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr1664.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr1664.pdf.json) --- ### MACRO-FINANCIAL PERFORMANCE AND FINANCIAL SYSTEM OVERVIEW - Financial system characteristics: - Very small compared to countries at a similar stage of development and mostly transactional. - Banks and the Sustainability Guarantee Fund (FGS) dominate; insurance companies, mutual funds, and other NBFIs play a relatively small role. - Confidence and market deepening: - High inflation expectations and a sharp widening of the spread between the parallel and official exchange rates signal private sector uncertainty. - Government’s expanded role in allocation of credit likely to lead to further distortions and is unlikely to promote confidence. - Macroeconomic performance (subject to data caveats): - Real GDP grew, on average, by 7.2 percent between 2003 and 2012. - Unemployment rate fell from 17.3 percent to 6.9 percent over the same period. - GDP deflator growth rose to 16.3 percent at end-2012. - Provincial CPI inflation average estimate rose to 20 percent in 2012. - Annual wage growth increased to 27 percent in 2012. - Federal government gross debt: about 165 percent of GDP in 2002 → 45 percent in 2012. - Federal government debt in private hands: below 15 percent of GDP in 2012. - Corporate debt: 64 percent of GDP at end-2002 → 24 percent in 2012. - Household debt to GDP: 5.5 percent in 2002 → 9.1 percent in 2012. - NIIP: -2.4 percent of GDP in 2002 → 11 percent in 2011. - Gross international reserves: US$38.5 billion at end-May 2013. - Five-year CDS spread on federal government debt: 360 bps at end-2005 → 1,400 bps at end-2012. - Data quality caveats: - High uncertainty in official GDP and CPI measurement. - IMF issued a declaration of censure and called on Argentina to adopt remedial measures. - Fund uses alternative estimates of GDP growth and CPI inflation for surveillance. ### FINANCIAL SECTOR RISKS AND RESILIENCE - Banking system resilience and metrics: - System-wide CAR: 12.4 percent at end-2012; regulatory minimum 8 percent. - Tier 1 CAR: 11.3 percent at end-2012. - Leverage ratio: 11.5 percent. - Liquid assets: 29 percent of total assets. - Deposits account for almost 79 percent of total funding as of December 2012. - Loans < 75 percent of deposits for system; 57 percent for public banks. - NPLs fell from 3.5 percent at end-2009 to 1.7 percent by end-2012. - Provisions are 141 percent of NPLs (includes general provision of 1 percent of total loans). - Nominal ROE recovered to about 25 percent in 2011 and 2012. - Average cost of funding about 7 percent at end-2012; marginal funding costs for time deposits around 17 percent. - Mortgages: 9.4 percent of total loans. - Share of dollar loans and deposits as of March 2013: 7 percent and 9 percent respectively. - Key vulnerabilities and challenges: - Most vulnerable to credit and common name concentration risk. - Transition to new regulatory framework complicated by uncertainty about GDP/CPI measurement and need for forward-looking risk assessments. - Recent BCRA-directed lending programs will put pressure on the banking system if sustained or extended. - Recommendation: Cap the Líneas de Crédito para el Sector Productivo program at 10 percent of deposits and phase it out as these loans are repaid. - FGS interconnections and governance: - FGS accounts for 20 percent of financial system assets and about 11 percent of GDP. - FGS interconnections (deposits in banks and large equity stakes) create potential for unexpected liquidity pressures and governance issues. - FGS portfolio: four-fifths concentrated in fixed-term instruments with average duration five years; 6 percent in very short-term fixed-term deposits (35–40 days average). - Mark-to-market sensitivity: every 100 bps increase in interest rates would reduce economic value of FGS portfolio by 3.4 percent (simple estimate). - Insurance sector vulnerabilities: - Industry-wide solvency ratio: 175 percent for past several years, but 4 companies have solvency ratios below 100 percent and 57 below 125 percent. - A significant share of assets contributing to solvency bear credit risk (unpaid premia and receivables equal ARG 18.34 billion), amounting to 100 percent of free capital available. - Non-life sector weaker: claims paid plus expenses have exceeded premium income for past several years; outstanding premia ≈ one-fifth of total assets and one-third of total annual nonlife premia. - Nominal ROE rose from 8 percent in 2006 to 22 percent in 2012. - Recommendation: Lift recently introduced mandatory investment requirements and allow risk-transfer reinsurance. ### FINANCIAL SAFETY NETS AND CRISIS PREPAREDNESS - Emergency Liquidity Assistance (ELA) and facilities: - BCRA empowered to provide peso loans using public or private assets as collateral; assistance capped at capital and reserves but BCRA board can lift limit in systemic stress. - Emergency assistance available for 180 days at interest rate = 135 percent of BADLAR; renewals possible at 170 percent of BADLAR for consecutive 180 day periods. - Recommendation: BCRA should work with other supervisors to monitor liquidity risks outside its regulatory perimeter and consider liquidity regulation or ELA for systemic nonbank entities if identified. - Crisis preparedness and coordination: - Recommendation: develop a contingency plan for systemic crises; enhance prompt corrective action regime. - Recommendation: Establish a high-level systemic risk monitoring committee including BCRA, MECON, CNV, SSN, and FGD for coordinated policy responses. - Deposit Insurance Fund (FGD): - Reserves equal to 1.3 percent of total deposits and 4 percent of covered deposits. - Investments: 65 percent U.S. Treasuries and 35 percent BCRA instruments (LEBAC). - Recommendation: establish contingent funding mechanism and back-up funding access (e.g., line of credit from MECON). ### FINANCIAL SECTOR OVERSIGHT FRAMEWORK - Banking supervision: - BCRA upgraded regulation and supervision toward Basel II and has a roadmap for Basel III (piloting leverage ratio, LCR, NSFR; phase-in of buffers starting 2016). - Remaining needs: strengthen independence and legal protection of supervisors; move to forward-looking provisioning; strengthen consolidated supervision. - Provisioning and accounting: - Current provisioning is backward looking with a general provision of 1 percent; recommendation to move to forward-looking provisioning, increase granularity, tighten refinanced loan provisioning, and remove exception for public sector exposures. - Insurance supervision: - Need to adopt risk-based supervision; strengthen SSN resources, independence, legal protection; implement early warning systems and ladder of intervention. - Securities regulation: - December 2012 capital markets law improves many deficiencies but includes a provision allowing CNV to veto board decisions on listed companies to protect minority shareholders—recommendation: rescind that veto power to avoid disincentivizing listings. - CNV needs stronger legal protection and resources. ### FINANCIAL SECTOR DEVELOPMENT AND INFRASTRUCTURE - Long-term finance and gaps: - Total spending on infrastructure: 2.5 percent of GDP. - SMEs employ roughly half the workforce but receive 13 percent of bank credit to private sector. - Mortgages: only 12 percent of real estate transactions financed with mortgage; outstanding mortgage loans: 221,000. - Macroeconomic uncertainty impedes pricing and provision of long-term peso credit. - Government programs (2012–13) design principles: - Avoid moral hazard; create level playing field; adequate risk-sharing; oversight and evaluation; rely on well-targeted explicit subsidies only when necessary. - PROCREAR housing program: finance 400,000 housing units in four years, including 100,000 in 2012–13. - FGS strategy: - Recommendation: refocus FGS objective on pension responsibilities with market-based investment strategy; consider assigning infrastructure support to a different entity. - Recommendation: establish FGS as single-mandate pension reserve fund with strong independent governance and separate legal structure. ### KEY POLICY RECOMMENDATIONS (SELECTED) - Banking oversight and regulation (agency = BCRA unless specified): - Develop capital plans with banks to ensure compliance with Basel standards; transform dividend limit into Basel III capital distribution constraints. Timing: 1 = Immediate. - Cap Líneas de Crédito program at 10 percent of bank deposits and phase out as loans are repaid. Timing: 14 = Near-term. - Use bank-level panel supervisory dataset for stress testing modeling. Timing: 35 = Near-term. - Restore risk weights on lending to levels for other credit. Timing: 12 = Immediate. - Develop comprehensive database of assets, liabilities, and debt service of corporates and households. Timing: 21 = Near-term. - Move to a forward looking provisioning rule. Timing: 57 = Near-term. - Strengthen nomination/removal rules for BCRA board and superintendent; eliminate MECON’s ability to overrule BCRA decisions. Timing: 55 = Immediate. - Raise threshold for lawsuits to gross negligence for BCRA staff legal protection. Timing: 56 = Medium-term. - FGS and insurance (agencies: FGS, MECON, SSN): - Auction fixed-term deposits in banks on market price return basis and increase maturity to provide stable funds to banking system. Timing: 34 = Near-term. - Register all FGS credit and debtor information in the credit bureau; discourage unsupervised direct credit activities. Timing: 36 = Near-term. - Limit FGS exposure to banks in equity to 5 percent. Timing: 34 = Near-term. - Adopt single mandate for FGS as pension reserve fund and strengthen independent governance; create separate legal structure recognizing actuarial liabilities. Timing: 70 = Immediate/Near-term. - Apply technical premiums and efficiency in insurance; disallow more than two months of unpaid premia as admissible assets. Timing: 38 = Immediate. - Lift recent investment guidelines for insurances and allow risk-transfer reinsurance. Timing: 39 = Immediate. - Adopt risk-based supervisory approach and enhance SSN independence/legal protection. Timing: 61, 62 = Immediate/Medium-term. - Financial safety net and market oversight: - Maintain surveillance over non-bank financial companies to detect systemic liquidity risks. Timing: 42 = Near-term. - Establish contingent funding mechanism for FGD. Timing: 46 = Medium-term. - Clarify resolution framework for systemic crises and enhance prompt corrective action. Timing: 50, 44 = Medium-term. - Establish high-level systemic committee including BCRA, MECON, CNV, SSN, FGD. Timing: 52 = Medium-term. - Strengthen legal protection and resources for CNV staff; rescind article allowing CNV veto of board-approved decisions. Timing: 65–66 = Medium-term/Immediate. - Financial infrastructure: - Improve legal/regulatory framework and oversight for payments and settlement systems and credit reporting; modernize secured transactions framework. Timing: 71 = Near-term. - Specific recommendation on directed credit: - Líneas de Crédito program should not be continued and should be allowed to wind down as current stock of loans is repaid; broadening interest rate caps would be especially damaging. ### MACROECONOMIC STANCE, FISCAL AND MONETARY OUTCOMES - Fiscal and monetary outcomes: - Primary balance of consolidated public sector: surplus of 5.4 percent of GDP in 2004 → moderate deficit in 2012. - Growth in base money (M2): 11.4 percent (33.5 percent) in 2004 → 39 percent (40.1 percent) in 2012. - Predetermined net short-term drains on foreign currency assets: US$10.5 billion at end-May 2013 (including US$9.4 billion of foreign currency loans, securities and deposits). - Exchange rate measures helped contain short-term peso volatility while allowing gradual depreciation. - Administrative measures and FX controls: - Measures include administered prices, export restrictions, tariff/fee adjustments, and controls on foreign exchange transactions and imports. - Private sector dollar deposits declined by half since October 2011, matched by same reduction in private sector dollar lending. - Spread between parallel and official exchange rates: peaked at 100 percent, down to 50 percent in June 2013. - Near-term growth and inflation outlook (Fund staff projections at time of mission): - Real GDP: 2.8 percent in 2013 and 3.5 percent in 2014 before stabilizing at 4 percent. - Authorities expected 4.6 percent in 2013 and used 4 percent for stress testing in 2014 and beyond. - Fund staff noted no indications price increase pace will slow. ### CREDIT GROWTH, HOUSEHOLD AND CORPORATE BALANCE SHEETS - Credit levels and distribution: - Credit to private sector: < 9 percent of GDP in mid-2004 → 16 percent of GDP in Q3 2012. - Number of borrowing households: +150 percent (Dec 2004 → Jun 2012); loans per family +24 percent. - Number of indebted businesses: +27 percent (2004 → 2012); loans per business +44 percent. - Household metrics: - Household debt to income ratio: >54 percent in 2001 → 30 percent in 2012. - Household debt to GDP: 9 percent in Argentina vs average 19 percent in Latin America and 92 percent in advanced economies. - Total interest payments ≈ 6 percent of household income in Dec 2012; implicit effective interest rate ≈ 20 percent. - Net household debt (adjusted by deposits) still less than zero but increased over time due to declining deposits. - Corporate metrics: - Corporate debt to GDP: 45 percent at end-2003 → 24 percent in Sep 2012. - Shift toward domestic currency financing; dollar denominated loans declined. - Large firms’ financial ratios (weighted by assets): - Short-term Debt / Total Debt: 2004 = 0.45; 2012 = 0.65 - Gross Debt / Equity: 2004 = 1.98; 2012 = 0.41 - Current Assets / Current Liabilities: 2004 = 1.04; 2012 = 1.42 - Gross interest payments / EBIT: 2004 = 1.13; 2012 = 0.35 - Gross interest payments as share of EBIT: 35 percent in 2012. - Sensitivity: a 500 bps interest rate increase from 20 to 25 percent raises household interest payments from 6 percent to 7.5 percent of annual income in the illustrative example. ### STRESS TESTS: METHODOLOGY, SCENARIOS, AND RESULTS - Coverage and approach: - Tests covered 22 largest banks (90 percent of system assets); top-down (authorities) and Fund-staff TD exercises using macro and satellite models. - Two baseline scenarios: authorities’ projection and Fund staff projection. - Adverse scenarios (two-year horizon, 2013–14): - (i) Adverse based on authorities’ baseline: cumulative GDP decline = 1.7 standard deviations over two years. - (ii) U-shaped adverse relative to Fund-staff baseline: cumulative GDP decline = 2 standard deviations (13.3 percentage points) over two years relative to baseline. - (iii) V-shaped adverse relative to Fund-staff baseline: cumulative GDP decline = 2 standard deviations (13.3 percentage points) over two years relative to baseline. - Key stress-test results (Fund-staff adverse scenarios): - Loan loss ratio increases from 1.5 percent to 4.4 percent (U-shaped) and to 6.2 percent (V-shaped) by 2014. - U-shaped: 4 of 22 largest banks would fall below required minimum CAR of 8 percent. - V-shaped: 6 banks (about 16 percent of sample banking assets) would be undercapitalized. - Capital shortfall in V-shaped estimated at about 0.2 percent of GDP. - Sensitivity and other tests: - Interest rate shock: 900 bps increase in real interest rates sustained for two years would render 5 of 22 largest banks undercapitalized. - Depreciation-inflation spiral: 30 percent peso depreciation with 0.2 pass-through increasing inflation by 6 percentage points raises NPLs by about ½ percentage point on average; under strong assumption of no pre-impairment profits, capitalization of five banks could fall below required minimum. - Concentration risk: failure of the five largest borrowers would cause undercapitalization in 8 of 22 banks; failure of 10 largest counterparts would undercapitalize 12 banks. - Liquidity stress tests: - Cash flow-based tests assume BCRA can waive reserve requirements for up to 30 days or inject liquidity. - All banks could withstand persistent and sizable withdrawals for 30 days without BCRA assistance. - After 30 days, two of 22 largest banks would need BCRA assistance in pesos and one in dollars; a reserve-requirement waiver extension would suffice. - Reverse liquidity stress test (wholesale deposits): all banks have liquidity to deal with losses of 33 percent or more of total wholesale deposits without recourse to BCRA facilities; 15 of 22 largest banks can confront withdrawals of 100 percent of maturing wholesale deposits without a liquid asset shortfall over two years. - Contagion and interbank: - Direct interbank contagion limited: interbank exposures very small relative to capitalization. - As of Sep 2012 only one of 22 large banks had total interbank exposure larger than its excess capital over the required minimum; in that low probability case, five other institutions would have to fail for that bank to breach required minimum. - FGS exposures and deposit allocations may create liquidity vulnerability for some smaller banks. ### INTERBANK, FGS, AND INSURANCE CONTAGION CONCERNS - Interbank contagion limited by small bilateral exposures. - FGS-related risks: - FGS fixed-term deposits represent a short-term funding source for some banks (for some banks >4 percent of total deposits). - Allocation mechanism lacks transparent criteria; most FGS deposits as of Sep 2012 invested below market prices in the largest public bank or in a private bank where FGS is a significant shareholder. - FGS loans are outside BCRA regulatory perimeter and are not registered in credit registry. - Recommendation: strengthen governance and regulatory perimeter clarity for FGS activities. - Insurance sector contagion: - Contagion risk to banks limited; banks’ exposures via deposits and bonds are of limited significance. - Only two banks hold equity in insurance subsidiaries. ### REGULATORY STANDARDS, IMPLEMENTATION, AND INDEPENDENCE - Basel implementation and roadmap: - Risk Management regulation effective Jan 2012; Basel II Pillar 1 effective Jan 2013; Pillar 2 effective Feb 2013; Pillar 3 effective Dec 2013. - Road Map towards Basel III: capital standard in Jan 2013 includes key features; BCRA piloting leverage ratio, LCR, NSFR with view to implement in 2015 and 2018 respectively; start phasing in buffers from 2016. - Independence and legal protection: - Political, operational, and financial independence of BCRA and SEFyC considered weak; MECON can approve budget and potentially overrule decisions. - Recommendation: strengthen independence, nomination/removal rules, and legal protection of supervisors; limit lawsuits to cases of gross negligence or willful misconduct; consider extending protection to SEDESA staff. - Supervision scope: - SEFyC supervises banking groups on consolidated basis “from the bank down”; unregulated parent companies fall outside supervision. - Need clearer lead supervisor assignment for conglomerates and strengthened monitoring of growing NBFIs (credit mutuales and cooperatives). ### LEGAL FRAMEWORK, PAYMENT SYSTEMS, AND SECURED TRANSACTIONS - Secured transactions and registries: - Legislation largely complete but fragmented; recommendation to adopt a single unified law on security interests in movable property. - No single national Real Estate Registry; registration can be slow and costly (provincial stamp taxes). - Movable collateral registry is centralized but paper-based; recommendation to implement online electronic registry to reduce costs and improve access. - Execution of collateral can be difficult and could constrain recovery if NPLs rise. - Payment and settlement systems: - Work relatively well but fragmented; recommendation to enact payments system law, strengthen oversight, rationalize payments architecture, and assess clearing/settlement systems per CPSS–IOSCO Principles. - Credit reporting: - Relatively well developed but needs improved regulatory framework, data quality/completeness, and industry code-of-conduct; overlapping legislation restricts some data sharing. ### RISK ASSESSMENT MATRIX — HIGHLIGHTS - Major risks and staff assessments (Likelihood / Impact = Medium/Medium unless noted): 1. Recession or weak recovery in Brazil due to reversal of capital flows — Medium / Medium. 2. Global growth slowdown (China) causing commodity price decline — Low (nature) / Medium (impact). 3. Tightening of monetary conditions to contain inflation — Medium / Medium. 4. Loss of confidence, decline in money demand, capital outflows, and peso depreciation — Medium / Medium. - Impacts commonly include lower exports, currency depreciation, higher NPLs, pressure on bank earnings and capital, and declines in money demand. *Source: _cr1664 (IMF staff report).* ### EXECUTIVE SUMMARY ___________________________________________________________________________ 5 ### EXECUTIVE SUMMARY ### MACRO-FINANCIAL PERFORMANCE AND FINANCIAL SYSTEM OVERVIEW - Argentina’s financial system is very small compared to countries at a similar stage of development and mostly transactional. - Banks and the Sustainability Guarantee Fund (FGS) dominate the financial landscape; insurance companies, mutual funds, and other nonbank financial institutions (NBFIs) play a relatively small role. - Building greater confidence in the macroeconomic outlook is essential to deepen financial markets: - Persistence of high inflation expectations and a sharp widening of the spread between the parallel and official exchange rates in the past few months signal private sector uncertainty and make pricing of financial risks extremely difficult. - The government’s recently expanded role in the allocation of credit will likely lead to further distortions and is unlikely to promote confidence. - Macroeconomic performance (subject to data caveats): - Real GDP grew, on average, by 7.2 percent between 2003 and 2012. - Unemployment rate fell from 17.3 percent to 6.9 percent over the same period. - Growth of the GDP deflator increased from less than 10 percent in 2004 to 16.3 percent at end-2012. - Average estimate of provincial CPI inflation rose from less than 5 percent in 2004 to 20 percent in 2012. - Annual wage growth increased from 11 percent in 2004 to 27 percent in 2012. - Federal government gross debt as a share of GDP declined from about 165 percent in 2002 to 45 percent in 2012. - Federal government debt in the hands of the private sector fell to below 15 percent of GDP in 2012. - Corporate debt as a share of GDP declined from 64 percent at end-2002 to 24 percent in 2012. - Household debt to GDP increased from 5.5 percent in 2002 to 9.1 percent in 2012. - NIIP improved from -2.4 percent of GDP in 2002 to 11 percent in 2011. - Gross international reserves amounted to US$38.5 billion at end-May 2013. - Five-year credit default swaps spread on federal government debt rose from 360 bps at end-2005 to 1,400 bps at end-2012. - Data quality caveats: - High degree of uncertainty surrounding official measurement of key macroeconomic variables—GDP and CPI. - IMF issued a declaration of censure and called on Argentina to adopt remedial measures to address the quality of the official GDP and CPI-GBA data. - Alternative data sources show significantly lower real growth than official data since 2008 and considerably higher inflation rates than official data since 2007. - The Fund is using alternative estimates of GDP growth and CPI inflation for surveillance. ### FINANCIAL SECTOR RISKS AND RESILIENCE - Banking system resilience: - Banks exhibit large capital and liquidity buffers and strong asset quality. - Recovery in bank profitability over the past few years driven by sizable financial margins and strong service income. - Stress tests show the banking system would be capable of withstanding a wide range of shocks, but is most vulnerable to credit and common name concentration risk. - Challenges for banks: - Transition to the new regulatory framework will be complicated by uncertainty about measurement of key economic variables and by the need to develop comprehensive forward-looking risk assessments. - BCRA could use the Basel framework to agree on capitalization plans for banks and adopt a risk-focused approach to dividend payments. - Recent lending programs required by the BCRA, if sustained and especially if extended, will put pressure on the banking system. - Recommendation: Cap the Líneas de Crédito para el Sector Productivo program at 10 percent of deposits and phase it out as these loans are repaid. - FGS interconnections and governance: - The FGS is interconnected with the financial system, creating potential for unexpected liquidity pressures. - Large equity stakes of the FGS in some private banks raise governance issues. - Insurance sector vulnerabilities: - A large percentage of the available capital for solvency is illiquid and not fully suitable to protect companies in case of adverse events. - The non-life sector is on a weaker financial footing than the life or retirement sectors and faces credit and liquidity risks. - Recommendation: Lift the recently introduced mandatory investment requirements, which could accentuate these vulnerabilities. ### FINANCIAL SAFETY NETS - Emergency Liquidity Assistance (ELA): - ELA facilities for banks are comprehensive. - Recommendation: BCRA should work with other supervisors to monitor potential liquidity risks outside its regulatory perimeter. - Crisis preparedness and coordination: - BCRA could strengthen crisis management preparedness by developing a contingency plan for systemic crises and enhancing the prompt corrective action regime. - Recommendation: Establish a high-level systemic risk monitoring committee that includes all relevant institutions to ensure coordinated and effective policy responses. - Other safety-net considerations: - Need to enhance crisis management arrangements and legal clarity on resolution in systemic crises (see FSAP recommendations for timing and responsible authorities). ### FINANCIAL SECTOR OVERSIGHT FRAMEWORK - Banking supervision: - Anchored by a thorough supervision and examination process. - BCRA has made important strides upgrading regulation and supervision to Basel II standards and has developed a road map for full implementation of Basel III. - Remaining needs: strengthen independence, legal protection for supervisors, loan provisioning rules, and consolidated supervision. - Insurance supervision: - Need to adopt a risk-based supervisory approach and strengthen resources and independence of the National Insurance Supervisor (SSN). - Securities regulation: - New capital markets law addresses many deficiencies but contains features that could hinder capital markets development. - Important recommendation: Remove the provision that gives the National Securities Commission (CNV) the power to veto decisions approved by a majority of the board of listed companies on the grounds of protection of minority shareholders or investors. ### FINANCIAL SECTOR DEVELOPMENT - Government programs launched during 2012–13 to enhance financing for housing, infrastructure and SMEs: - Critical design principles: avoid moral hazard, create a level playing field, provide an adequate risk-sharing framework, involve adequate oversight and evaluation, and rely only when necessary on well-targeted and explicit subsidies. - FGS role and strategy: - Objective of the FGS should be refocused on its pension responsibilities and rely on a market-based investment strategy. - Increasing FGS role in supporting productive investments would benefit from additional safeguards. - Better to assign infrastructure support activities to a different entity. - Financial infrastructure and consumer protection: - Continuing improvements to financial infrastructure would enhance access to finance by reducing information asymmetries and lowering costs and risks to financial institutions. - Ongoing efforts to strengthen consumer protection are welcome given existing fragmentation in the institutional framework. ### KEY RECOMMENDATIONS (SELECTED FROM TABLE 1) - Banking oversight: - Develop capital plans with banks to ensure compliance with the new Basel standards and transform dividend limit restriction into capital distribution constraints under Basel III (BCRA). Timing: 1 = Immediate. - Cap Líneas de Credito program at 10 percent of bank deposits and phase it out as loans are repaid (BCRA). Timing: 14 = Near-term. - Use bank-level panel supervisory dataset for stress testing modeling (BCRA). Timing: 35 = Near-term. - For regulatory capital, restore risk weights on lending to levels for other credit (BCRA). Timing: 12 = Immediate. - Develop comprehensive database of assets, liabilities, and debt service of corporate and households (BCRA). Timing: 21 = Near-term. - Move to a forward looking provisioning rule (BCRA). Timing: 57 = Near-term. - Strengthen rules to nominate and remove members of the BCRA board and the Superintendent; eliminate MECON’s ability to overrule BCRA decisions (BCRA). Timing: 55 = Immediate. - Raise threshold for lawsuits to gross negligence for BCRA staff’s legal protection (BCRA). Timing: 56 = Medium-term. - Public Pension Fund and Insurance oversight: - Auction fixed-term deposits in banks on a market price return base and increase maturity to provide stable funds to banking system (FGS). Timing: 34 = Near-term. - Discourage unsupervised direct credit activities; register all credit and debtor information from FGS loan programs in the credit bureau (FGS). Timing: 36 = Near-term. - Establish a limit of 5 percent for the FGS exposure to banks in equity (FGS). Timing: 34 = Near-term. - Adopt a single mandate as a pension reserve fund with investment decisions driven by a strong and independent governance structure (MECON). Timing: 70 = Immediate. - Strengthen independence of the FGS by creating a separate legal structure with recognition of actuarial liabilities and an independent Board (MECON). Timing: 70 = Near-term. - Apply technical premiums and efficiency; disallow more than two months of unpaid premia (SSN). Timing: 38 = Immediate. - Lift recent investment guidelines for insurances and allow risk-transfer reinsurance (SSN). Timing: 39 = Immediate. - Adopt a risk-based supervisory approach and enhance operational independence and legal protection for SSN staff (SSN). Timing: 61, 62 = Immediate/Medium-term. - Financial safety net and market oversight: - Maintain surveillance over activities of non-bank financial companies to detect systemic liquidity risks (BCRA, CNV). Timing: 42 = Near-term. - Establish contingent funding mechanism for the Deposit Insurance Fund, FGD (MECON, FGD). Timing: 46 = Medium-term. - Clarify resolution framework in case of systemic crisis and enhance prompt corrective action scheme (BCRA). Timing: 50, 44 = Medium-term. - Establish a high-level systemic committee comprising all players of the safety net (BCRA, MECON, CNV, SSN, FGD). Timing: 52 = Medium-term. - Strengthen legal protection and resources for CNV staff and rescind article 20 of the capital markets law so CNV cannot veto board-approved decisions of listed companies (CNV, MECON). Timing: 65–66 = Medium-term/Immediate. - Financial infrastructure: - Improve legal and regulatory framework and oversight on payments and settlement systems and credit reporting; modernize secured transactions framework (BCRA). Timing: 71 = Near-term. *Source: _cr1664 - EXECUTIVE SUMMARY (IMF staff report).* ### 4. Fiscal and monetary policies supported a sustained expansion in demand in recent ### _cr1664 - 4. Fiscal and monetary policies supported a sustained expansion in demand in recent ### Macroeconomic stance and fiscal outcomes - The primary balance of the consolidated public sector moved from a surplus of 5.4 percent in 2004 of GDP to a moderate deficit in 2012. - Growth in base money (M2) rose from 11.4 percent (33.5 percent) in 2004 to 39 percent (40.1 percent) in 2012. - The Fund’s International Reserves Template reports predetermined net short-term drains on foreign currency assets amounted to US$10.5 billion at end-May 2013, including US$9.4 billion of foreign currency loans, securities and deposits. - Exchange rate policy sought to contain short-term volatility in the peso vis-à-vis the U.S. dollar while allowing gradual depreciation. ### Administrative measures, incomes policies and foreign exchange measures - The government used incomes policies and administrative controls, including administered prices, export restrictions, and adjustments of tariffs and fees of public services. - Since late 2011, the government introduced measures related to foreign exchange transactions and imports to contain domestic demand for dollars; private sector dollar deposits have declined by half since October 2011, matched by the same reduction in private sector dollar lending. - The spread between the parallel and the official exchange rates reached a peak of 100 percent and later came down to 50 percent in June 2013. ### Near-term activity and inflation outlook - Fund staff projections (at the time of the FSAP mission): real GDP would rise by 2.8 percent in 2013 and 3.5 percent in 2014 before stabilizing at 4 percent. - The authorities expected real GDP growth to reach 4.6 percent in 2013 and for the purpose of stress testing to level off at 4 percent in 2014 and beyond. - Fund staff noted there are no indications that the pace of price increase will slow. - Inflation indicators: GDP deflator, provincial CPI, and 12-month inflation expectations show elevated inflation trends (figures referenced in source). ### Financial system structure (key statistics) - Financial system assets amount to 50 percent of GDP. - Banks account for about two-thirds of financial sector assets, or 35 percent of GDP. - Banking system assets composition: loans to the private sector 50 percent; liquid assets about 30 percent; exposure to federal or provincial governments 10 percent; exposure to the central bank 10 percent. - Mortgages are 9.4 percent of total loans. - Share of dollar loans and deposits as of March 2013: 7 percent and 9 percent of their respective totals. - The FGS accounts for 20 percent of financial system assets and about 11 percent of GDP. - Equity market capitalization amounts to less than 7 percent of GDP, with 107 listed firms at end-2012. - Deposit insurance: private sector bank deposits up to ARS$120,000 are insured through the Deposit Insurance Fund (FGD). ### Banking sector resilience (snapshots and metrics) - System-wide total capital adequacy ratio (CAR) amounted to 12.4 percent at end-2012; regulatory minimum is 8 percent. - System-wide Tier 1 CAR was 11.3 percent at end-2012. - Leverage ratio (capital as a share of total assets) broadly stable at 11.5 percent. - Liquid assets (cash and reserves held in the central bank) amounted to 29 percent of total assets. - As of December 2012, deposits from the public and private sector accounted for almost 79 percent of total funding. - Loans are less than 75 percent of deposits for the system as a whole, and 57 percent in the case of public banks. - Nonperforming loans (NPLs) fell from 3.5 percent at end-2009 to 1.7 percent of loans by end-2012. - Provisions are 141 percent of NPLs (includes a general provision of 1 percent of total loans in addition to specific provisions). - Nominal return on equity (ROE) recovered from over 13 percent to about 25 percent in 2011 and 2012. - Average cost of funding about 7 percent a year at end-2012; marginal funding costs for time deposits around 17 percent. - Average lending interest rate mostly fixed with short maturities: above 20 percent (rates above 30 percent for many types of consumer credit; 15–20 percent on corporate and secured credits). ### BCRA policy actions and directed credit programs - New BCRA charter (approved 2012) broadens mandates to include monetary stability, financial stability, employment and economic development with social equity, and allows it to set caps on lending interest rates. - 2011 Plan del Bicentenario: BCRA auctioned funds to banks to lend to the productive sector at a fixed interest rate of 9.9 percent (99 basis points intermediation spread) and an average maturity of 2.5 years. - Starting in 2012, Líneas de Crédito para el Sector Productivo requires banks with a deposit market share greater than one percent of system deposits to lend 5 percent of their deposits at a below-market interest rate of 15 percent and an average of three years with a one year grace period; half of these loans must be made to SMEs. By June 2013, this lending program is to be increased by another 5 percent of deposits. - Lending program uptake: About ARS$6 billion of loans (0.9 percent of bank credit to the private sector) were extended under the Plan del Bicentenario. - Banks are not allowed to transfer the opportunity cost of these programs to other types of lending. ### Risks stemming from directed credit and regulatory constraints - Allocation of 10 percent of bank deposits translates into about 15 percent of total credit if fully implemented. - The cap on the lending interest rate imposes a sizable opportunity cost on private banks that will diminish profitability over time. - The limited window to meet the quota may lead to an increase in credit risk. - Recommendation in source: Líneas de Crédito program should not be continued and should be allowed to wind down as the current stock of loans is repaid; broadening the range of loans subject to interest rate caps would be especially damaging. - BCRA dividend distribution policy: currently banks may distribute dividends only when their CAR exceeds the minimum regulatory requirement by 75 percent; this has helped build capital cushions but constrains ability to raise capital in equity markets. - Suggested reform in source: replace uniform dividend distribution limit with capital distribution constraints tailored under Basel III (capital conservation buffer and the counter-cyclical buffer) and use risk-profile tailored capitalization plans. ### Key external and domestic risks - Limited links to international capital markets: external bond issuance by corporate and financial institutions is very small; gross cross-border claims for each of the largest 22 Argentine banks represent less than 10 percent of their own assets except for two banks where claims are somewhat over 10 percent. - Trade credits are a relatively small share of GDP. - Significant trade linkages remain: vulnerability to commodity price shocks (notably soy) and to a slowdown in Brazil affecting industrial production and automobile exports. - Domestic risk scenarios highlighted: - Need for slower growth in base money to contain/reduce inflationary pressures, putting upward pressure on real interest rates. - Risk of a loss of confidence where money demand would drop, leading to liquidity pressures on banks and possible downward pressure on the currency if sudden. - Alternatively, capital and exchange controls could steadily drag down growth and weaken the quality of bank assets. *Source: _cr1664 - 4. Fiscal and monetary policies supported a sustained expansion in demand in recent (IMF staff report content provided).* ### 19. The recent rapid growth in credit to the private sector is of concern, although there ### _cr1664 - 19. The recent rapid growth in credit to the private sector is of concern, although there ### Credit growth, composition, and distribution - Credit to the private sector fell to less than 9 percent of GDP in mid-2004 and expanded to 16 percent of GDP in the third quarter of 2012. - Level of credit remains extremely low by regional standards. - Households: - Number of households borrowing from banks increased by 150 percent between December 2004 and June 2012. - Amount of loans per family increased by 24 percent between December 2004 and June 2012. - Businesses: - Number of businesses with debt increased by 27 percent between 2004 and 2012. - Amount of loans per business increased by 44 percent between 2004 and 2012. ### Macroprudential and prudential framework - Existing measures limiting currency mismatches include: - capital requirements differentiated by currency denomination; - limits on banks’ short foreign currency net position (±15 percent of the regulatory capital); - a ban on foreign currency lending to domestic firms without foreign exchange earnings. - Reserve requirements: - applied to both domestic and foreign currency deposits; - are relatively high at 17 and 20 percent respectively. - Empirical finding: an increase in the average reserve requirement lowers credit growth, but has only a small effect on the intermediation spread. ### Household and corporate balance-sheet assessment (Box 1) - Household sector: - Household debt to income ratio declined from over 54 percent in 2001 to 30 percent in 2012. - Household debt as a share of GDP: 9 percent in Argentina versus an average of 19 percent in Latin America and 92 percent in advanced economies. - Total interest payments ≈ 6 percent of total household income in December 2012, implying an implicit effective interest rate of 20 percent. - Hypothetical: for a household with debt to income ratio of 30 percent, an interest rate increase of 500 basis points from 20 to 25 percent would raise interest payments from 6 percent to 7.5 percent of annual income. - Net household debt (adjusted by deposits) is still less than zero but has increased over time due to declining deposits. - Housing value adds to household assets. - Corporate sector: - Corporate debt to GDP declined from 45 percent at end-2003 to 24 percent in September 2012. - Share of financing in domestic currency increased; share of dollar denominated loans declined. - Large publicly listed firms: improved balance sheets 2004–2012 but higher leverage than average firms and greater share of short-term debt. - Financial ratios for large corporations (weighted average using total assets): - Short-term Debt / Total Debt: 2004 = 0.45; 2012 = 0.65 - Gross Debt / Equity: 2004 = 1.98; 2012 = 0.41 - Current Assets / Current Liabilities: 2004 = 1.04; 2012 = 1.42 - Gross interest payments / EBIT: 2004 = 1.13; 2012 = 0.35 - Gross interest payments as a share of EBIT were 35 percent in 2012. - Hypothetical: a 500 basis point increase in interest rates would boost gross interest payments / EBIT to 47 percent when using gross debt, or 62 percent when using total liabilities. ### Data and monitoring recommendation - The BCRA would benefit from more thorough monitoring of balance sheet data on households and corporates: - develop a comprehensive database of assets and liabilities and of debt service; - include breakdowns by size of corporation, income level of household, and geographic location; - to better assess distribution of debt burden and identify groups under distress. ### Stress tests: methodology and caveats - Stress testing in the Argentine context is conceptually challenging; results require high degree of caution due to: - model and estimation uncertainty given institutional and structural changes over last two decades. - Coverage and approach: - Tests covered the 22 largest banks (90 percent of system assets). - Conducted by authorities and FSAP team using macroeconomic and satellite models. - Tests assessed solvency, liquidity, and contagion via macroeconomic scenarios and sensitivity analysis. - Two baseline scenarios: one based on authorities’ projections and one based on Fund staff projections. - Three adverse scenarios: - (i) adverse based on authorities’ baseline: cumulative decline of GDP equivalent to 1.7 standard deviations over two years; - (ii) U-shaped adverse relative to Fund-staff baseline: cumulative decline of GDP equivalent to 2 standard deviations (13.3 percentage points) over two years relative to baseline; - (iii) V-shaped adverse relative to Fund-staff baseline: cumulative decline of GDP equivalent to 2 standard deviations (13.3 percentage points) over two years relative to baseline. - Methodological difference: - Authorities’ tests allow credit and deposits to diverge from nominal GDP growth (money demand can fall sharply relative to GDP). - Fund-staff tests assume constant balance sheet growth (balance sheets grow in line with nominal GDP). ### Stress-test results: solvency and credit risk - Credit risk is the most important vulnerability. - Under Fund-staff baseline adverse scenarios: - NPL rates rise sharply under an external-shock-driven adverse scenario. - U-shaped adverse scenario: capitalization in 4 of the 22 largest banks would fall below the required minimum of 8 percent. - V-shaped adverse scenario: 6 banks (half public and half private domestic, representing about 16 percent of the banking assets in the sample) would be undercapitalized. - Loan loss ratio would increase from 1.5 percent to 4.4 percent (U-shaped) and to 6.2 percent (V-shaped) by 2014. - Capital shortfall: - In the V-shaped adverse scenario the system’s shortfall is estimated at about 0.2 percent of GDP. - Small shortfall partly reflects the small size of the banking system relative to the economy. - Market and sovereign risk: - Banks hold highly liquid bonds and money market instruments—mostly those issued by the central bank and to a much lesser extent securities issued by the government. - Adverse scenarios result in significantly higher interest rates and inverted yield curves producing sizable sovereign losses via haircuts, partially offset by price appreciation and short duration of central bank instruments. - Simulated yield changes (V-shaped adverse scenario): - average yields increased by about 1,500 basis points for U.S. dollar denominated bonds; - 2,000 basis points for peso denominated bonds adjusted by inflation; - about 2,800 basis points for bonds linked to the wholesale (BADLAR) interest rate; - yield changes of peso-denominated nominal instruments (fixed coupon bonds and discount money market instruments) were about 450 basis points. - Exchange rate risk: banks hold positive net open foreign currency exposures; a peso depreciation in adverse scenarios has a positive impact on profits. ### Sensitivity tests: interest rates, depreciation, and concentration risk - Interest rate shock: - A 900 basis point increase in real interest rates sustained for two years would render 5 of the 22 largest banks undercapitalized. - Depreciation-inflation spiral: - Assuming real rates remain constant, a 30 percent peso depreciation that is partially transmitted to domestic prices would increase inflation by 6 percentage points under a 0.2 pass-through assumption. - NPL ratios would increase by about ½ percentage point on average. - Under the strong assumption banks earned no pre-impairment profits, the capitalization ratio of five banks could fall below the required minimum. (Actual impact likely mitigated by positive pre-impairment profits and gains from banks’ net open FX positions.) - Concentration risk: - Failure of the five largest borrowers would cause undercapitalization in 8 of the 22 banks. - Failure of the 10 largest counterparts would result in undercapitalization of 12 banks. - Several firms are large counterparts of many banks simultaneously, compounding systemic risk. ### Liquidity stress tests and reverse stress tests - Cash flow-based liquidity stress tests: - Assumed BCRA could assist by waiving reserve requirements for a maximum of 30 days or injecting liquidity via standing facilities. - All banks would be able to withstand persistent and sizable withdrawals of funding for 30 days without BCRA assistance. - After 30 days, only two of the 22 largest banks would need BCRA assistance in pesos and one in dollars; an extension of the reserve requirement waiver would suffice for these cases. - No bank would need emergency liquidity assistance from the BCRA for two years besides access to own minimum required reserves. - BCRA pilot program: LCR and NSFR calculations for banks; three banks tested show ratios above 100 percent for both indicators. - Reverse liquidity stress test (wholesale deposits): - Assumed 100 percent run-off rates on maturing wholesale deposits and full rollover rates in other funding lines. - All banks have liquidity to deal with losses of 33 percent or more of total wholesale deposits without recourse to BCRA facilities. - 15 of the 22 largest banks would be able to confront withdrawals of 100 percent of maturing wholesale deposits without experiencing a shortfall of liquid assets at any time in the two-year assessment period. *Source: BCRA, INDEC, WEO and IMF Staff Projections; IMF staff text as provided.* ### 33. Direct contagion risk through bilateral interbank exposures is limited. Interbank ### _cr1664 - 33. Direct contagion risk through bilateral interbank exposures is limited. Interbank ### Interbank contagion and exposures - Direct contagion risk through bilateral interbank exposures is limited: interbank exposures are very small compared to banks’ capitalization. - As of September 2012, only one of the 22 large banks had a total interbank exposure that was larger than its excess of capital over the required minimum—and in this low probability case, five other institutions would have to fail for that bank’s capital to fall below the required minimum. - The banking system is interconnected with the FGS, which has the potential to create unexpected liquidity pressures. - The FGS has 6 percent of its portfolio invested in fixed-term deposits, for very short term (on average 35–40 days). - For some banks, FGS deposits represent more than 4 percent of total deposits. - The allocation mechanism for these deposits does not seem to be driven by transparent criteria; most of them as of September 2012 were invested below market prices (in the largest public bank, or in a private bank where the FGS is a significant shareholder). - Absence of clear criteria and consequent risk of sudden withdrawal may generate liquidity pressures for smaller banks. - Large equity stakes of the FGS in some private banks raise governance issues. ### Pesos liquidity stress-test results (as presented) - Survival Period for Pesos Liquidity (note: results for pesos liquidity stress tests; assumption that the BCRA waives compliance with the minimum reserve requirement for up to one month): - Up to one day: Number of banks meeting contractual obligations without BCRA support: 2 - Greater than one day and up to one week: Number of banks meeting contractual obligations without BCRA support: 2 - Greater than one week and up to one month: Number of banks meeting contractual obligations without BCRA support: 2 - Greater than one month and up to two months: Number of banks meeting contractual obligations without BCRA support: 2 - Greater than two months and up to three months: Number of banks meeting contractual obligations without BCRA support: 2 - Greater than three months and up to six months: Number of banks meeting contractual obligations without BCRA support: 2 - Greater than six months and up to one year: Number of banks meeting contractual obligations without BCRA support: 2 - Greater than one year and up to two years: Number of banks meeting contractual obligations without BCRA support: 0 - Up to one day: Number of banks meeting contractual obligations with BCRA support: 2 - Greater than one day and up to one week: Number of banks meeting contractual obligations with BCRA support: 2 - Greater than one week and up to one month: Number of banks meeting contractual obligations with BCRA support: 2 - Greater than one month and up to two months: Number of banks meeting contractual obligations with BCRA support: 2 - Greater than two months and up to three months: Number of banks meeting contractual obligations with BCRA support: 2 - Greater than three months and up to six months: Number of banks meeting contractual obligations with BCRA support: 2 - Greater than six months and up to one year: Number of banks meeting contractual obligations with BCRA support: 2 - Greater than one year and up to two years: Number of banks meeting contractual obligations with BCRA support: 2 - Note in table footnote: Two banks need liquidity support to comply with the fully enforced minimum reserve requirement after one month. These two banks, however, would need no other liquidity assistance if the BCRA were to waive the minimum reserve requirement for a period longer than one month. ### BCRA stress-testing toolkit and supervisory data - Recommendation: The BCRA could further refine its stress testing toolkit. - Make fuller use of existing bank-level supervisory dataset containing detailed balance-sheet and P&L information for modeling. - Establish a mechanism to make this dataset available to stress-testing team members on short notice. - The BCRA has begun refining satellite models for profits of the TD stress testing using higher frequency data to improve fit for smaller banks. ### FGS (Sustainability Guarantee Fund) market and credit risks - About four-fifths of the FGS investment portfolio is concentrated in fixed-term instruments with a duration of five years on average. - Simple estimates: assuming all fixed-term instruments were marked to market, for every 100 bps increase in the interest rate, the economic value of the FGS investment portfolio would decline by 3.4 percent. - The FGS has begun to extend credit; because it falls outside the regulatory perimeter of the BCRA and loans are not registered in the credit registry, this activity could be a source of risk. ### Insurance sector vulnerabilities and solvency - Profitability: - Nominal ROE rose from 8 percent in 2006 to 22 percent in 2012. - The nominal ROE in 2012 is still below many indicators of inflation, such as wage growth, although somewhat above the rate of increase in the GDP deflator. - Nominal ROE is supported by returns on investment rather than underwriting income, where many insurers show losses. - Solvency: - Under current solvency regime, 4 companies have solvency ratios below 100 percent and 57 have ratios below 125 percent. - Industry-wide solvency ratio has amounted to 175 percent for the past several years. - A significant share of assets that contribute towards solvency bear significant credit risk (unpaid premia and other receivables as reported in 2012); these assets with credit risk amount to 100 percent of the free capital available to the sector (ARG 18.34 billion). - Implication: a large percentage of available capital for solvency is illiquid and not fully suitable to protect companies in adverse events. - Non-life sector specifics: - Non-life sector weaker than life or retirement sectors; vulnerabilities to credit and liquidity risks. - Claims paid plus expenses have exceeded premium income for the past several years. - Accounts receivable are high: outstanding premia equivalent to about one-fifth of total assets and one-third of the total annual nonlife premia. - Proposed regulatory change: disallow more than two months of unpaid premia to be admissible as assets (this would reduce credit risk). - For the 20 largest nonlife insurers in 2012, liquid assets amounted to 106 percent of claims paid on average; 6 of these firms had liquid assets below 75 percent of claims paid. - High number of court claims could indicate liquidity strains and legal-system inefficiencies. - Regulatory changes that could add vulnerabilities: - New mandatory investment guidelines could weaken investment income, reduce liquidity, and accentuate maturity mismatches, especially for life insurers. Recommendation: lift these guidelines or tailor them to avoid significant maturity mismatches and prevent politically driven investment choices. - 2012 reinsurance regulation curtails ability to reinsure abroad, reducing diversification and curtailing product innovation. Recommendation: allow risk-transfer reinsurance and business financing with foreign reinsurers to support industry growth and diversify risk. - Contagion to banks: - Contagion risk from the insurance sector to banks is limited. - Banks’ exposures to insurance sector through deposits and some bonds are of very limited significance for banking-sector funding. - Only two banks hold equity in insurance company subsidiaries. ### Emergency liquidity assistance (ELA) and financial safety nets - BCRA ELA framework: - BCRA empowered to provide peso loans to distressed financial institutions using public or private sector assets as collateral; wider range of collateral than normal liquidity facilities. - Total assistance capped at the equivalent of the capital and reserves of the borrower, but the BCRA board can lift this limit in systemic stress. - Emergency assistance available for 180 days at an interest rate equal to 135 percent of BADLAR, with close supervisory monitoring. - Renewals possible for unlimited consecutive 180 day periods at rate equal to 170 percent of BADLAR. - Assets may be ‘pre-qualified’ as collateral in anticipation of need (mortgages, auto loans, consumer loans, post-dated checks, and publicly-offered securities). - Caveat: framework not tested in current environment where banks hold far less government securities than in 2001–02 and collateral haircuts may be steeper. - Recommendation: BCRA should work with other supervisors to monitor potential risks outside its regulatory perimeter and consider liquidity regulation or ELA facilities for systemic nonbank entities if systemic liquidity risks are identified. ### Corrective action, supervision, and resolution - Supervision: - SEFyC conducts risk-based supervision (offsite and onsite), develops follow-up plans, and can suspend banks from transacting business for 30 days (extendable up to 90 additional days with BCRA board approval). - Recommendation: enhance prompt corrective action framework by adding quantitative triggers such as benchmark capital or liquidity thresholds to supplement CAMELBIG-linked triggers. - Deposit Guarantee Fund (FGD): - FGD reserves amount to the equivalent of 1.3 percent of total deposits and 4 percent of covered deposits. - Reserves invested: 65 percent U.S. Treasuries and 35 percent BCRA instruments (LEBAC). - SEDESA exercises fiduciary oversight over the FGD. - Recommendation: establish contingency plan and ensure access to back-up funding (e.g., a line of credit from MECON) for systemic crises. - Recommendation: review liquidation arrangements and MoUs with home country supervisors of foreign banks to address cross-border resolution issues. - Bank resolution framework: - Since 1995 the BCRA involved in 36 bank resolutions; 34 employed purchase-and-assumption with 98.6 percent of deposits assumed; one depositor payout; one open bank assistance (1996); bridge bank (2002). - Recovery and resolution processes administered by the BCRA; liquidations occur after license revocation and are under bankruptcy court purview. - Recommendation: review and update framework, processes and norms for resolution tools in systemic crises; prescribe processes in regulations; prepare manuals and regulations listing steps and possible instruments for systemic situations to allow speedy response and safeguard public funds. ### Coordination and systemic risk governance - Mandates for financial stability and macroprudential policy are spread among BCRA, MECON, CNV, SSN, and FGD. - BCRA and MECON share responsibilities over macroprudential instruments, detection of systemic risk, and decisions on macroprudential policy adoption and enforcement. - CNV and SSN set macroprudential policies for capital and insurance markets respectively. - BCRA and MECON belong to the Coordinating Council of Monetary, Financial, and Exchange Policy. - BCRA has cooperation and information-exchange agreements with other domestic agencies. - Recommendation: establish a high-level systemic risk monitoring committee including BCRA, MECON, CNV, SSN, and FGD to develop contingency planning, meet regularly to highlight systemic risks, clear legal hurdles for action during crises, and ensure resolution and recovery procedures are well defined. *Source: IMF staff report text as provided in the supplied content unit.* ### 2011. The Financial Action Task Force/GAFISUD assessment of Argentina’s compliance with Anti-Money ### 2011. The Financial Action Task Force/GAFISUD assessment of Argentina’s compliance with Anti-Money ### Advances in Regulation and Supervision (Box 2) - The BCRA has issued regulations advancing a more risk sensitive and proactive capital approach; Argentina is in the implementation stage of Basel II, 2.5 and III per the Basel Committee report. - Key regulations and timelines: - Risk Management of Financial Institutions (effective January 2012): defines procedures to manage credit, liquidity, market, interest rate and operational risks; outlines stress tests and contingency planning; requires independent risk management committees. - Basel II, Pillar 1 (effective January 2013): standardized approach of Basel II; introduces a capital charge for operational risk and a capital charge for off-balance sheet transactions; slightly raises the capital premium based on the risk rating assigned by the SEFyC; lowers the risk weight of sovereign claims in pesos from 100 percent to zero. - Basel II, Pillar 2 (effective February 2013): requires an internal capital adequacy assessment process; establishes Board and management responsibility for internal control, policies and procedures to monitor and control risk. - Basel II, Pillar 3 (effective December 2013): establishes disclosure requirements of Pillar III to be implemented by December 2013. - Road Map towards adoption of Basel III: January 2013 capital standard incorporates key features of Basel III for common equity, Tier 1 and total capital; BCRA developing a leverage ratio and piloting LCR and NSFR liquidity with a view to implementing these in 2015 and 2018, respectively; starting in 2016, plans to phase in the capital conservation buffer, the counter-cyclical capital buffer and capital charges for domestic systemically important banks. ### Independence, Governance, and Legal Protection of Supervisors - The May 2011 assessment emphasized that the political and financial independence of the BCRA is not sufficient; political, operational, and financial independence of the BCRA and the SEFyC is weak, particularly: - rules to nominate and remove members of the BCRA board and the Superintendent; - the approval of the budget by the MECON; - the ability of the MECON to potentially overrule BCRA’s and SEFyC’s decisions. - The legal protection framework for BCRA employees and persons appointed by the BCRA under the resolution regime should be enhanced: - Supervisory and resolution agency staff should be protected from lawsuits except in cases of gross negligence or willful misconduct; - Consideration should be given to extending legal protection to SEDESA staff. - The SSN (insurance supervisor) staff need additional resources, legal protection, operational independence, and ability to offer more competitive salaries; SSN staff has limited legal protection against lawsuits. ### Provisioning, Accounting, and Valuation - The BCRA has opted to apply the basic approach to estimation of the charge for operational risk. - Existing provision framework: - Applies backward-looking fixed percentages for specific provisions that apply to impaired loans depending on their classification. - There is a general provisioning requirement of 1 percent of all loans. - Assessment findings and recommendations on provisioning: - Banks’ provisioning rules are still backward looking and might not be adequate in a downturn. - Recommendations to move to a forward looking provisioning rule including: - increasing the granularity of the classification of normal loans; - moving forward the buildup of provisions for consumer loans as they deteriorate; - establishing more stringent standards for the provisioning of refinanced loans; - removing the exception for the provisioning of exposures with the public sector. - BCRA accounting rules are generally prudent, but notable exceptions exist: - Valuation of some government securities and amortization of legal contingencies from the 2001–02 banking crisis differ from international standards. - Other differences with International Financial Reporting Standards include loan loss provisions, linear amortization of intangible assets, linear accrual of derivatives, and a more prudent treatment for deferred taxes. ### Supervision Architecture and Scope - SEFyC supervises banking groups on a consolidated basis but “from the bank down”: - Financial information is collected on immediate parent companies, but unregulated parent companies do not fall within BCRA supervision. - Local banking groups’ participation in insurance and capital markets requires adequate oversight for risks to the overall banking group. - The role of the lead supervisor of a financial conglomerate should be the supervisor of the local entity with the highest risks; responsibilities for consolidated supervision and other domestic supervisors should be clearly defined. - Monitoring of NBFIs may need strengthening as they grow in significance: - Credit mutuales and cooperatives are monitored by INAES; as they grow, consideration may be given to enhancing their regulation and supervision. ### Insurance Supervision - May 2011 assessment: adoption of a risk-based supervisory approach is essential for SSN to monitor a rapidly evolving market; sector growth and sophistication require risk-based capital requirements and strong licensing criteria. - SSN plans to move towards risk-based regulation and supervision based on solvency, licensing, and consumer protection; this should be accompanied by: - strengthening SSN early warning system; - preventive remedial and corrective action framework; - establishing a ladder of intervention and legal powers to enforce preventive and corrective measures. - National Strategic Plan for Insurance 2012–2020 (PlaNeS) has been developed with stakeholder consultation and political endorsement to support strong expansion in the sector. - PlaNeS goals imply substantial additional capitalization needs: - PlaNeS assumes an increment in the order of a factor of six for the premium per capita by 2020. - The sector faces severe solvency strain reflected by high levels of outstanding premium and other receivables and dependence on high yields to generate profits. ### Securities Regulation - May 2011 assessment: CNV had strengths (transparent program for public offers, oversight regimes for credit rating agencies, preparation to apply international accounting standards) and critical weaknesses: - Insufficient or constrained powers to supervise conduct of business and prudential matters for securities intermediaries; - Inability to sanction market intermediaries directly; - Lack of independence of the CNV; - Severe limitations on ability to apply sanctions or enforce compliance; - Legal barriers to information sharing with other supervisory agencies; - Absence of specific criminal penalties for insider trading and market manipulation. - December 2012 capital markets law: - Includes many positive reforms that could correct deficiencies: gives CNV full authority to enforce securities laws across all markets; requires registration of all entities that provide financial services; improves information sharing and governance standards. - Implementation essentials: CNV must have sufficient resources for enforcement and oversight and much stronger independence from undue political or industry influence; processes should preserve fundamental fairness to market participants. - The law includes reforms that may hinder capital market development: - broad power of the CNV to veto boards of listed companies’ decisions to protect minority shareholders may disincentivize listing and should be rescinded; - new appellate processes may leave CNV with weaker legal protection. - Noted contextual point: the largest institutional investor—the FGS—is part of the public sector. ### Financial Sector Development — Long-term Finance - Long-term finance is almost non-existent in Argentina, constraining economic growth; notable gaps exist for housing, infrastructure, and lending to SMEs. - Key statistics and facts: - Total spending on infrastructure is estimated at only 2.5 percent of GDP. - SMEs employ roughly half the workforce, yet receive only 13 percent of bank credit to the private sector. - Mortgages account for a much smaller share of bank credit than in comparable countries; only 12 percent of all real estate transactions are financed through a mortgage. - Current stock of total outstanding mortgage loans: 221,000. - Drivers and policy implications: - Macroeconomic uncertainty impedes banks’ ability to assess credit risk beyond a short horizon and price long-term credit, especially fixed interest rate credit in pesos. - Uncertainty surrounding measurement of inflation makes it impossible to set reference interest rates or to price risk in inflation-adjusted terms. - Government programs and design considerations: - 2012–13 government programs aim to enhance financing for housing, infrastructure and SMEs; program design should avoid moral hazard, create a level playing field, provide adequate risk sharing, involve adequate oversight and evaluation, and rely only when necessary on well-targeted and explicit subsidies. - PROCREAR housing policy program aims to finance 400,000 housing units in four years, including 100,000 in 2012–13, and is open to over 90 percent of total households. - Ensuring adequate oversight by the BCRA and strong governance of PROCREAR is crucial to avoid market distortions. - FGS (Fondo de Garantía de Sustentabilidad) recommendations: - FGS should adopt a single mandate as a pension reserve fund and make investment decisions driven by strong and independent governance. - FGS currently has a dual mandate: supporting economic growth and serving as a pension reserve fund; it can invest up to 20 percent of its portfolio in ‘productive projects’. - Recommendation: establish the FGS as a reserve fund for pensions with strong independence and governance, possibly as a separate legal entity different from ANSES with actuarial liabilities clearly identified. ### Financial Infrastructure - Payment and settlement systems: - Work relatively well but present opportunities for enhancement; some fragmentation exists despite a comprehensive BCRA regulatory framework. - Recommendations: enact a payments system law to address gaps and consolidate legal framework; BCRA should strengthen oversight of payment systems; rationalize payments “architecture” into a consolidated platform; address fragmentation and duplication of collateral requirements; increase efficiency. - In the context of the new Capital Markets Law, assess securities and derivatives clearing and settlement systems based on the Committee on Payment and Settlement Systems–IOSCO Principles for Financial Market Infrastructures. - Government efforts to strengthen consumer protection in financial services are welcomed. - Credit reporting system: - Relatively well developed but would benefit from improved regulatory framework and data quality and completeness. - No direct regulation of the credit reporting industry and no comprehensive industry code-of-conduct. - Overlapping legislation affects data sharing (credit cards law restricts sharing of negative credit card debt information among all market players). - Greater participation of NBFIs in the system would improve completeness of data, including information regarding the Argenta card provided to pensioners by ANSES. *Source: _cr1664 - 2011. The Financial Action Task Force/GAFISUD assessment of Argentina’s compliance with Anti-Money* ### 73. The secured transactions system should be modernized. Legislation covering secured ### 73. The secured transactions system should be modernized. ### Legal framework and fragmentation - Legislation covering secured transactions is largely complete, but fragmented in various laws. - A single unified law on security interests in movable property would create less conflicts and uncertainty. ### Real estate and immovable property registration - There is no single national Real Estate Registry. - The process of recording and registering immovable property can take a few months, and can be costly, especially in jurisdictions where provincial authorities levy stamp taxes. ### Movable collateral registry and access to information - Pledges of movable property are registered in a centralized national registry, but the process is paper-based, adding to costs and making access to information more difficult. - An online electronic registry system for movable collateral would make information easily available, reliable, and would reduce costs. ### Execution of collateral and potential constraints - Market players report that execution of collateral can be difficult. - Although traditionally not a problem, execution difficulties could become a constraint in case of rising NPLs. *Source: IMF staff note contained in content unit _cr1664 - 73. The secured transactions system should be modernized.* ### Appendix I. Risk Assessment Matrix ### Appendix I. Risk Assessment Matrix ### 1. A Reversal of Capital Flows to Emerging Markets Causes a Recession or a Weak Recovery in Brazil - Staff assessment: Medium (Nature/Source of Main Threats) - A sudden stop of capital inflows would cause a correction in asset prices, recession, and currency depreciation in Brazil. - Given the presence of tight trade linkages between Argentina and Brazil, Argentina is exposed to an export-demand shock from its main trade partner. - A generalized capital flight from emerging markets could also have a direct impact on Argentina, limiting the private sector’s access to international funding. - Staff assessment: Medium (Likelihood of Severe Realization / Expected Impact on Financial Stability) - The macroeconomic effects on Argentina could be sizable. GDP growth would be negatively affected by the decline in exports to Brazil (particularly automobiles) and capital outflows. - The Argentine peso would depreciate against the U.S. dollar to partially prevent a loss of competitiveness vis-à-vis Brazil. - Bank earnings and capital would be affected the rise in NPLs. - (In the stress tests, this risk is incorporated in the adverse macroeconomic scenarios). ### 2. Global Growth Slows, Especially in China, Causing a Sharp Decline in Commodity Prices - Staff assessment: Low (Nature/Source of Main Threats) - Soy is a key export product and slower global growth, especially in China, will affect Argentina mainly through the global trade channel, as Argentina’s dependence on the external financing is limited. - Staff assessment: Medium (Likelihood of Severe Realization / Expected Impact on Financial Stability) - A fall in commodity prices would probably cause a simultaneous (negative) effect in Brazil, exacerbating the vulnerability of the Argentine economy to the shock. - The fall in aggregate demand, associated with the decline in net exports would cause a recession. - Bank earnings and capital would be affected due to higher NPLs. - (In the stress tests, this risk is incorporated in the adverse macroeconomic scenarios). ### 3. Tightening of Monetary Conditions to Contain Inflationary Pressures - Staff assessment: Medium (Nature/Source of Main Threats) - Inflationary pressures could increase in the near term. - Real interest rates have been negative. - Inflation expectations are not well-anchored. - A tightening of monetary conditions would reduce the rate of money growth, increasing nominal and real interest rates. - Staff assessment: Medium (Likelihood of Severe Realization / Expected Impact on Financial Stability) - Nominal and real deposit rates would increase immediately. - Given sufficient time, real lending rates would go up as banks pass on to borrowers the increase in deposit funding costs. - Higher real lending rates will increase NPLs, negatively affecting bank earnings and capital. - (In the stress tests, this risk is evaluated through sensitivity analysis). ### 4. Loss of Confidence and Subsequent Decline in Money Demand, Increased Capital Outflows, and Depreciation of the Peso - Staff assessment: Medium (Nature/Source of Main Threats) - With Argentina’s history of volatile growth, money demand is more sensitive to expectations than in other countries. - Many factors could cause a loss in confidence, which could trigger a sharp decline in money demand. - Staff assessment: Medium (Likelihood of Severe Realization / Expected Impact on Financial Stability) - Banks would suffer a liquidity shock in the form of deposit withdrawals (associated with the decline in money demand). - Bank solvency could be affected through a number of channels: - In the short term, net interest margins would decline as deposit rates increase faster than lending rates (due to the loan-deposit maturity gap). - With output negatively affected, NPLs would increase. - Peso-denominated, long duration nominal bonds held by banks would decline in value. - (In the stress tests, this risk is evaluated through sensitivity analysis). *Source: Appendix I. Risk Assessment Matrix (content provided)* --- ### Appendix II. Stress Test Methodology — Solvency, Liquidity, and Contagion Overview ### Solvency Stress Tests: Design and Scenarios - Solvency stress tests were based on TD exercises by the authorities and Fund staff, covering credit, market, and sovereign risks. - In stress tests based on the authorities’ baseline, macroeconomic scenarios were constructed using models developed by the BCRA and expert judgment. - In contrast, stress tests corresponding to the Fund-staff baseline assumed that banks’ balance sheets grow in line with nominal GDP (constant balance sheet growth). Dividend payout ratios are consistent with existing regulations and past experience. - The macroeconomic stress tests examined two baseline scenarios characterized by an improvement in external conditions in 2013–14 that result in a gradual recovery in output growth: - One based on the authorities’ projections. - Another based on Fund staff projections (using Vector Auto Regression (VAR) analysis). - Adverse scenarios were developed over a two-year horizon, 2013–14, to simulate external shocks including: - Declines in main trading partners’ growth. - Adverse terms of trade shocks. - A rise in global risk aversion that triggers capital outflows. - Adverse scenario transmission to individual banks’ profitability and capitalization assessed using satellite models developed by the authorities and validated by Fund staff. Macroeconomic stress tests were dynamic and required assumptions on banks’ behavior, balance sheet growth, and off-balance sheet exposures. ### Credit Satellite Model (methodology and empirical implementation) - A dynamic panel model projects bank-specific loan loss rates from macroeconomic scenarios: - Model form (as presented): LLR_it = μ_i + δ LLR_{i,t-1} + β1 CR_{i,t-1} + β2 CR_{i,t-2} + ... + γ1 g_{t-2} + γ2 rr_{t-2} + γ3 π_{t-1} + ε_it (textual representation preserved). - LLR denotes the logistic transformation of the loan loss rate: LLR = ln(loan loss rate / (1 - loan loss rate)). - g denotes real GDP growth. - rr is the (ex-post) real interest rate defined as the difference between the (lagged) short-term nominal lending rate (“adelantos”) and contemporaneous inflation measured by the GDP deflator. - π denotes the rate of growth of the GDP deflator. - CR is the bank-specific and time varying capital-assets ratio. - μ_i denotes bank specific fixed effects. - Estimation sample and method: - Unbalanced panel dataset including 193 banking institutions. - Annual observations for the period 1994–2011. - Two-step Arellano-Bond approach; estimated coefficients (except fixed effects) reported in source. - Numerical example illustrating sensitivity: - Assumptions: intercept equal to average fixed effect = -3.1; real interest rate rr = 0.03; capital-asset ratio CR = 0.09; initial loss rate = 1.7 percent (similar to private banks in 2012). - The dynamic model produces differing loan loss rate paths under baseline and adverse macroeconomic scenarios (baseline, adverse U, adverse V) — specific year-by-year outcomes displayed in source tables. - Estimated coefficients (dependent variable: loan loss rate (logistic transformation)): - Loan loss rate (lagged): 0.19 - Real GDP growth: -9.77 - Real GDP growth squared: 73.70 - Capital to assets ratio (lagged): -2.89 - Capital to assets ratio squared (lagged): 2.25 - Capital to assets ratio cubic (lagged): -0.53 - Real interest rate: nominal lending rate (peso loans, short term) (lagged) - growth of GDP deflator: 1.52 - Growth of GDP deflator: 1.86 ### Interpretation and Robustness - The credit risk model implies a non-linear response of credit loss rates to changes in output growth: loss rates increase more sharply in the V-shape scenario than in the U-shape scenario, conditional on the initial loss rate (1.5 percent in 2012). - The model exhibits low sensitivity of loan loss rates with respect to changes in real interest rates. - Fund staff conducted econometric checks; results robust to changes in model specification, sample periods, and time-varying explanatory variables. Replacing loan loss rate with NPL ratio as dependent variable yields robust implications. ### Market, Sovereign, and Sensitivity Stress Tests - Market and sovereign risks assessed through satellite models for interest rate risks; authorities projected shifts in yield curves and applied yield changes to trading and banking book positions. - Impact on market losses mitigated by low average duration of banks’ positions. - BCRA revised satellite models for net fee and service income and operating and administrative expenses; specifications aligned in structure with models used in the United Kingdom (RAMSI model). - Sensitivity stress tests (static) assessed vulnerabilities to domestic shocks: - Tightening of domestic monetary conditions (rise in domestic real interest rates). - Loss of confidence triggering capital outflows and widening of parallel vs. official exchange rates (nominal depreciation of the peso). - Failure of a number of large corporate exposures (concentration). - Sensitivity tests assume banks earn no pre-impairment profits under stress; increase in real interest rates is sustained for two years and affects credit losses and NPL ratios only. ### Liquidity Stress Tests - Liquidity stress tests implemented using TD approaches and cash-flow based stress testing with maturity buckets capturing: - (i) liquidity needs from outflows, - (ii) standby liquidity from inflows, - (iii) liquidity buffers to cover gaps. - High run-off rates assumed for main deposit lines due to deposit-funded business model. - Sources of liquidity absent special central bank assistance: - Use of repo market (with other banks or open market operations with the BCRA). - Outright sale of government securities (including those issued by the BCRA). - Use of cash and reserve deposits at the central bank (assumed permitted use of compulsory minimum reserves for a maximum period of one month). - If negative funding gaps persist after exhausting these sources, special central bank liquidity assistance would be required. - Reserve liquidity stress testing was also undertaken. ### Contagion Stress Tests - Network model techniques and interbank contagion models used to assess contagion effects. - A network model map with centrality measures illustrated linkages between banking and non-banking institutions. - A pure contagion interbank model was used to assess the low interbank activity. *Source: Appendix II. Stress Test Methodology and Appendix III. Stress Test Matrix excerpts (content provided)* ### 5. Regulatory and Market-Based Standards and Parameters ### 5. Regulatory and Market-Based Standards and Parameters ### Calibration of risk parameters - Backward-looking rates for specific provisioning. - Fixed risk-weights for risk-weighted assets. - Regulatory/Accounting and Market-Based Standards: n.a. - Bottom-Up by Banks: Backward-looking rates for specific provisioning; Fixed risk-weights for risk-weighted assets. - Top-Down by Authorities: Regulatory Capital and Tier 1 Capital; Standard approach; Basell III hurdle rates. - Top-down by FSAP Team: Regulatory Capital and Tier 1 Capital; Standard approach; Basel III hurdle rates. ### Reporting format for results (credit/solvency) - Output presentation: Capital shortfall system wide. - For each hurdle rate (or range), percentage of assets that fail. ### Banking sector: Liquidity risk — institutional perimeter and data - Institutions included (Top-Down by Authorities): 22 major banks: - Banco de la Nación Argentina; Banco de la Provincia de Buenos Aires; Banco de Galicia y Buenos Aires S.A.; Banco Santander Río S.A.; Banco Macro S.A.; BBVA Banco Frances S.A.; HSBC Bank Argentina S.A.; Banco de la Ciudad de Buenos Aires; Banco Credicoop Cooperativo Limitado; Banco Patagonia S.A.; Standard Bank Argentina S.A.; Citibank N.A.; Banco Hipotecario S.A.; Banco de la Provincia de Cordoba S.A.; Banco Supervielle S.A.; Nuevo Banco de Santa Fe S.A.; Banco Itaú Argentina S.A.; Banco de San Juan S.A.; Banco Comafi S.A.; Banco de la Pampa Sociedad de Economía Mixta; Nuevo Banco de Entre Rios S.A.; and Banco Industrial S.A. - Market share: 90 percent of total sector assets. - Data and baseline date: September 2012. - Scope of consolidation: solo. ### Banking sector: Liquidity risk — methodology, risks, buffers, shocks, reporting - Methodology (Top-Down by Authorities): - Three methods: - Cash flow-based liquidity stress test using maturity buckets. - Macro stress tests: authorities’ macroeconomic and satellite models with FSAP team guidance. - Reserve liquidity test as sensitivity tests. - Risks: - Funding liquidity. - Market liquidity. - Buffers: - Counterbalancing capacity. - Central bank facilities. - Tail shocks / Size of the shock: - Bank run and dry up of wholesale funding markets, taking into account haircuts to liquid assets. - Run-off rates calculated following historical events and LCR rates. - Regulatory standards: - Liquidity gap, survival period. - Basel III draft standards (LCR and NSFR). - Output presentation: - Liquidity gap by bank and currency, aggregated. - Survival period in days by bank, number of banks that still can meet their obligations. ### Banking sector: Contagion risk — perimeter and data - Institutions included (Top-down by FSAP Team): - 22 major banks (same list as under Liquidity risk). - FGS; mutual funds; insurance companies, retirement funds, brokerages. - Market share: 90 percent of total sector assets. - Data and baseline date: December 2012. - Source: institutions’ own, supervisory. - Scope of consolidation: Solo. ### Banking sector: Contagion risk — methodology and shocks - Methodology (Top-down by FSAP Team): - Network model map using centrality measures for contagion between banks and non-banks financial institutions. - Pure contagion interbank model by Cihak (2007). - Tail shocks / Size of the shock: - Pure contagion: default of institutions; market closure; or retrenchment of claims. - Output presentation: - Network Model Map. ### Appendix IV: Bank Solvency Stress Test Results, Tier 1 Ratios (source: Banco Central de la República Argentina) - Sensitivity Tests: Credit Risk note: 1/ SOV = Increase in Sovereign Yields VAR 90%, RE = Real Interest Rate Increases 900 bps, ND = Nominal Depreciation of 30%, 2 EXP = Failure of Largest 2 Exposures, 5 EXP = Failure of Largest 5 Exposures, 10 EXP = Failure of Largest 10 Exposures. - Charts shown for years 2012, 2013, 2014 under Baseline WEO, Adverse (U), Adverse (V), Adverse Authorities, and various sensitivity tests with Tier 1 ratio bands: - >= 12 % - < 12 % - < 10 % - < 8 % - < 5.5 % - < 4.5 % - < 4 % - < 2 % - Specific charted datapoints include numerical labels such as: 10.7, 12.0, 13.6, 9.6, 11.9 and axis labels indicating Percentage and Percentage points; contributions to changes in TIER 1 Ratio include: - Profit before losses (excl. govt. and BCRA securities) - Income from govt. and BCRA securities - Credit losses - Losses or gains due to market risk (non-sovereign) - Change in RWAs - Losses or gains due to market risk (sovereign) - Other (taxes, dividends, ...) ### Press Release excerpt and Executive Board Assessment (July 12, 2013) - Context: - IMF Executive Board discussed the Financial System Stability Assessment with Argentina, conducted in the first half of 2013. - Key system facts: - Banks account for about two-thirds of financial sector assets, or 35 percent of GDP. - The Sustainability Guarantee Fund (FGS) was, at the time of the review, the country’s largest institutional investor, with assets of over 10 percent of GDP. - The FGS accounted then for 20 percent of the financial system (11 percent of GDP) and was interconnected with the financial system through deposits as well as large equity stakes in some private banks. - Assessment highlights: - Banks appeared resilient to a wide range of shocks: significant buffers, solid capitalization, low leverage, ample liquidity, conservative funding strategies, and strong asset quality. - Banks were generally profitable in nominal terms, benefitting from a low cost of funding, but the return on equity in real terms was still low by regional standards. - Public sector measures influenced credit allocation: BCRA programs to increase lending to SMEs at lower interest rates and longer maturities; government requirements for insurance companies to invest a significant share of assets in infrastructure or growth-oriented projects. - Insurance sector vulnerabilities in 2013: large percentage of solvency capital was illiquid and not fully suitable to protect companies in adverse events; non-life sector weaker than life or retirement sectors, facing credit and liquidity risks. - 2011 assessment recommended improvements: independence and legal protection for supervisors, loan provisioning rules, consolidated supervision, adoption of risk-based supervision in insurance, and strengthened resources and independence of the National Insurance Supervisor (SSN). - Executive Directors’ recommendations: - Caution on government’s expanded role in credit allocation; most Directors recommended capping the Líneas de Crédito para el Sector Productivo program and phasing it out as loans are repaid to avoid eroding banking profitability. - Strengthen prudential regulation and governance of the FGS to contain liquidity and credit risks; many Directors considered the FGS should focus only on its role as a pension reserve fund. - Continue implementation of Basel III roadmap; strengthen independence for the central bank (BCRA) and other supervisory agencies; enhance loan provisioning standards; strengthen consolidated supervision and legal protection of supervisors. - Strengthen financial oversight for insurance sector and securities markets: adopt risk-based supervisory approach for insurance; strengthen resources and independence of the National Insurance Supervisor and the National Securities Commission; most Directors recommended lifting mandatory investment requirements for insurance companies. - Establish a high-level systemic risk monitoring committee of all relevant institutions; BCRA to work with other supervisors to monitor potential liquidity risks outside its regulatory perimeter, develop a contingency plan for systemic crises, and an enhanced prompt corrective action regime. *Source: _cr1664 - 5. Regulatory and Market-Based Standards and Parameters (IMF PDF)* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr1664.pdf_