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### EXECUTIVE SUMMARY — Introduction and financial system structure
- Financial system assets are "slightly less than 50 percent of GDP".
- Banking sector accounts for two-thirds of the financial system.
- About 43 percent of bank assets are state owned.
- The three largest banks represent "about 40 percent of banking assets".
- Insurance sector assets represent "less than 7 percent" of the financial system.
- Mutual fund assets represent "less than 4 percent" of the financial system.
- Equity market is "about 10 percent of GDP", with "99 listed firms at end-2011".
- System-wide capital adequacy ratio reached "16.6 percent" (as of June 2012).
- Leverage ratio of "11 percent" (as of June 2012).
- Liquid assets (cash or holdings of central bank securities) amounted to "25 percent of deposits" (as of October 2012).
- Deposits from the public and private sector accounted for "almost 80 percent of total funding" (as of October 2012).
- Equity accounted for "another 11 percent" (as of October 2012).
- "Less 3 percent" of funding came from subordinated debt and foreign credit lines (as of October 2012).
- The BCRA conducts supervision through SEFyC and rates banking institutions on eight risk categories: capital, assets, market, earnings, liquidity, business, internal controls and management.
- Argentina is in the process of implementing Basel II and III.
- Overall assessment: Argentina has a well-developed financial safety net that has provided timely support to stressed institutions, but the system could be further strengthened.

### Crisis management: Emergency Liquidity Assistance (ELA) — framework, rules, and risks
- Framework features and scope:
  - BCRA empowered to provide peso loans to support distressed financial institutions in a wide range of circumstances.
  - Banks may apply for rediscounts or loans using public or private sector assets as collateral (wider range than normal liquidity facilities).
  - Assets (mortgages, auto loans, consumer loans, post-dated checks, publicly-offered securities) may be "pre-qualified" as collateral for "90 days".
  - Total assistance is capped at the equivalent of the capital and reserves of the borrower, but the BCRA Board can decide to lift this limit "in times of systemic stress".
  - ELA scheme included in articles 17 b and c of the BCRA’s charter and described in Communication A5304 of May 10, 2012.
- Main operational rules:
  - ELA is available to financial entities that, having exhausted other BCRA borrowing opportunities, have a liquidity ratio of "less than 20 percent".
  - The maximum borrowable amount is the lowest of:
    - The amount requested by the prospective borrower;
    - The amount necessary to get the borrower’s liquidity ratio up to "30 percent";
    - The size of the funding sources that the borrower has lost;
    - The amount consistent with the BCRA’s monetary policy.
  - Any bank’s total borrowing from the BCRA is limited to its capital base (specified in BCRA Charter), but may be exceeded "Where it becomes necessary to provide adequate liquidity to the financial system, or where general and extraordinary circumstances so warrant at the discretion of an absolute majority of the members of the Board".
  - Initial term is "180 days" with possible extensions of further periods of "180 days". Interest payable every "30 days".
  - Loans must be repaid if the borrower’s liquidity ratio rises above "30 percent", by an amount depending on the excess.
  - Interest rate is "1.35 times BADLAR for the first 180 days, and 1.70 times thereafter."
  - Private sector collateral surplus margins vary from "25 to 75 percent", depending on collateral nature.
- Restrictions on borrowers and collateral:
  - Loans need to be collateralized with surplus margins of 25–75 percent, depending on the nature of the collateral, and loan applications must be accompanied by an independent auditor’s report attesting to the value of the collateral offered.
  - Borrowers are required to observe restrictions on their business activities, which become more severe as the amount borrowed increases relative to the bank’s capital base:
    - No borrower can pay dividends, make loans or pay fees to related parties.
    - If the loan exceeds 50 percent of the borrower’s capital base, the borrower is required to produce a rationalization plan.
  - When the limit specified by the BCRA Charter (article 17 b and c) is exceeded, borrowers must also agree to the potential application of article 35 bis of the Law on Financial Institutions.
- Observations and risks:
  - The BCRA’s facilities have not been tested in the current environment.
  - Banks currently hold far less government securities than in 2001–02 and may face steeper haircuts on collateral than in the previous crisis.
  - The BCRA should work with other supervisors to monitor potential liquidity risks outside its regulatory perimeter (stockbrokers balance sheet information to become available with the new Capital Markets Act; activities of money market mutual funds).
  - In extreme circumstances, central banks and governments may be compelled to support liquidity shortfalls in nonregulated entities; the BCRA should consider whether such entities should be subject to liquidity regulation or provided ELA facilities.

### Crisis management: Bank resolution and related tools — experience, legal powers, and recommendations
- Historical record and P&A model:
  - Since 1995, the BCRA was involved in "36 bank resolutions" with only one resulting in a depositor payout.
  - In "34 of these cases", the purchase-and-assumption (P&A) process was used successfully, with "98.6 percent of deposits being assumed".
  - In 2002, a bridge bank process was used.
  - One case of open bank assistance to a systemically important bank and one credit union payout of all insured deposits in 1996.
  - There have not been any resolutions since 2005.
- Legal powers, restructuring measures, and liquidation:
  - LEF grants BCRA authority to adopt corrective or resolution measures; section 35 bis and article 44 set out restructuring and revocation powers.
  - Measures under section 35 bis include booking losses against provisions, capitalization by shareholders, withdrawal of approval for shareholders to remain, sale of the entity or rights to subscribe capital increases, and exclusion of assets selected by the BCRA and liabilities.
  - LEF article 34 authorizes the BCRA to require corrective plans; failure to provide the plan within 30 days authorizes license revocation.
  - Article 49 of the BCRA charter allows suspension of operations for 30 days (may be extended to 90).
- Bridge banks and open bank assistance:
  - 2002 bridge bank example: Executive Decree 838/2002 licensed Nuevo Banco Bisel S.A., Nuevo Banco Suquía and Nuevo Banco Entre Rios as bridge banks; trusts issued certificates A (good assets) and B (residual value); FGD purchased ARS$190 million and ARS$132 million in preferred shares in later sales.
  - Recommendation: The LEF could be amended to explicitly include bridge bank and open bank assistance tools and the BCRA should review internal guidelines.
  - Suggested regulatory features for bridge banks: limit duration of bridge bank license, define permitted activities, establish appropriate situations (large/complex banks), identify licensing authority.
- Policy concerns and safeguards for open bank assistance:
  - Concerns: competitive distortion, partial loss allocation to shareholders/creditors, reinforcement of "too-big-to-fail" moral hazard.
  - Recommended safeguards: require determination that temporary funding is necessary to foster financial stability; allocate losses to equity holders and unsecured creditors; apply least-cost assessment with exceptions for systemic risk in line with FSB Key Attributes (October 2011) and FDIC practices.

### Crisis preparedness framework: Prompt corrective action and supervision
- Current practice:
  - SEFyC supervisory approach is risk-based; inspector-in-charge assigned; banks receive annual CAMELBIG rating on a scale of 1–5.
  - Some regulatory restrictions and fines are directly linked to the bank’s rating (e.g., banks rated 4 prohibited from lending to related parties or expanding; banks rated 3 or worse pay higher deposit insurance premiums).
  - BCRA has implemented quantitative corrective action triggers keyed off the CAMELBIG rating.
- Suggested enhancements:
  - Enhance prompt correction action scheme by adding additional supervisory action benchmarks and automatic preventive prudential measures tied to benchmark capital or liquidity thresholds similar to CAMELBIG triggers.
  - Examples of preventive quantitative triggers (illustrative, not calibrated to BCRA):
    - 75 percent of buffer or level in excess of regulatory minima:
      - Recapitalization plan required; No asset growth unless permitted.
    - 80 percent of minimum capital:
      - Recapitalization plan; No salary increases for senior management; Dividend restrictions or elimination; Issue stock or sell the bank; Restrict interest rates to market average; Replace Board; Replace senior management; Divest subsidiaries/assets.
    - 30 percent of minimum capital:
      - Appoint receiver; No repayment of subordinated debt.
  - Benefits: reduce regulatory delays, increase incentives for managers/shareholders to rectify problems, and improve transparency.
- Supervisory escalation:
  - Failure to address weaknesses could lead to resolution under LEF article 35bis; article 49 allows suspension; supervision may be transferred to the Specialized Supervision Department for recovery monitoring.

### Deposit insurance and contingent funding
- Structure and governance:
  - Deposit Insurance Fund (FGD) is a "pay box" style deposit insurance fund established in 1995 by Decree 540/95.
  - SEDESA exercises fiduciary oversight over the FGD; Board of Directors composed of three members for a term of three years.
  - Steering Committee of the FGD (Article 10 bis of Decree 540/95) meets only when summoned by the central bank; composed by a representative of the BCRA who chairs without right to vote but with power to veto decisions, according to the Trust Agreement signed March 7th, 1997.
- Funding and reserves:
  - The BCRA establishes the risk-adjusted annual premium within the range specified in the FGD legislation between 0.015 and 0.06 percent (currently 0.015 percent).
  - Risk-adjusted premiums are based on the soundness rating assigned by SEFyC and other quality indicators.
  - Current FGD reserves amount to the equivalent of 1.3 percent of total deposits and 4 percent of covered deposits.
  - Current reserve investments: U.S. Treasuries (65 percent) and BCRA instruments (LEBAC) (35 percent).
- Contingency funding risks and options:
  - SEDESA lacks adequate access to back-up funding for the FGD if a systemic crisis drains its reserves.
  - If insufficient funds, SEDESA could issue bonds to depositors in payment of the deposit guarantee (Article 13bis of Decree 540/95), but bonds are unlikely to restore depositor confidence in a crisis.
  - The BCRA can require financial institutions to advance premiums up to amounts equal to "two years of the minimum regulatory premium" (Article 9) and increase the deposit insurance premium up to 0.06 percent (Article 6), but these actions could strain banks in a severe crisis.
  - Recommendation: give SEDESA access to a line of credit from MECON for use in systemic crises; define a contingency funding plan for the FGD jointly by BCRA and MECON.

### Coordinating arrangements, systemic risk monitoring, and cross-border cooperation
- Institutional roles and mandates:
  - Core agencies of the financial safety net: BCRA (ELA, resolution, preventive action, least-cost determinations, cross-border information exchange), SEDESA (trustee for FGD), MECON.
  - The BCRA has a mandate for financial stability and macroprudential policy (BCRA Charter article 3); must consider financial stability in regulatory/supervisory duties (article 4(a); LEF article 4).
  - CNV exercises macro and microprudential regulation and supervision over capital markets; SSN over insurance market.
  - The BCRA and MECON share responsibilities over macroprudential instruments, detection of systemic risk increases, and decisions regarding adoption, implementation and enforcement of macroprudential policies.
- Coordination and information sharing:
  - BCRA and MECON belong to the Coordinating Council of Monetary, Financial, and Exchange Policy, chaired by the Minister and comprising the Secretary of Economic Policy, the Secretary of Finance, and the President, Vice President and a Director from the BCRA.
  - Confidentiality: information obtained by the BCRA is confidential (LEF, article 40); SEFyC inspections are confidential (BCRA Charter, section 53); CNV and SSN bound by similar duties; exceptions exist for formal requests among agencies and for AML purposes.
  - BCRA, acting through SEFyC, has cooperation and information exchange agreements with the CNV and the SSN; requests for information must be in writing except in urgent matters.
- Cross-border cooperation and CMGs:
  - The BCRA has concluded MOUs with cross-border supervisors in multiple jurisdictions; MOUs follow international best practices but typically do not deal with resolution issues.
  - Recommendation: Review liquidation arrangements with host country supervisors, including information on Crisis Management Groups (CMG), to aid contingency planning.
  - Box 3 points: BCRA should establish information exchange agreements with resolution authorities in home jurisdictions; participate in or establish contact with CMGs; develop or obtain bank-specific recovery and resolution plans for G-SIFI where applicable.

### Legal protection and liability
- Current legal protections:
  - Article 35ter of the LEF: actions taken by the BCRA or the SEFyC are subject to court review only in events of arbitrariness or when manifestly unreasonable.
  - Articles 49 of the BCRA Charter and 35bis of the LEF: suspension and resolution actions taken by the BCRA cannot be subject to a claim for damages against the BCRA and the National State by the financial institution, its creditors, shareholders, and managers.
  - BCRA personnel bylaws: BCRA may advance sums to fully or partially cover legal costs in criminal proceedings due to facts derived from the exercise of duties.
- Liability risks and recommendations:
  - Liability may arise if supervisory authority fails to act despite knowledge of serious bank problems, measures were inadequate, or shareholders challenge interventor appointments.
  - Recommendation: enhance protection for BCRA staff from lawsuits; raise the threshold for lawsuits to "gross negligence" for civil liability of BCRA employees.
  - Recommendation: extend legal protection to SEDESA staff.
  - Employees facing personal actions should have access to resources for defense, including indemnity for costs.

### Key recommendations (selected)
- Emergency Liquidity Assistance
  - Maintain surveillance over activities of nonbank financial companies to detect emergence of systemic liquidity risks. (BCRA, in conjunction with CNV). Timeframe: Near Term
- Bank Resolution Frameworks
  - Clarify in the norms the resolution framework in case of a systemic crisis, formalizing the figure of bridge bank and necessary regulations and manuals (BCRA). Timeframe: Medium Term
  - Set strict conditions to the use of open bank assistance (BCRA). Timeframe: Medium Term
- Correction Action Arrangements
  - Enhance prompt correction action scheme (BCRA). Timeframe: Medium Term
- Deposit Insurance Scheme
  - Establish a contingent funding mechanism for the FGD (MECON, FGD). Timeframe: Medium Term
- Coordinating Arrangements
  - Establish a high-level systemic committee comprising all players of the safety net to monitor and plan for crisis coordination (BCRA, MECON, CNV, SSN, FGD). Timeframe: Medium Term
  - Review liquidation arrangements and crisis management group formation in significant jurisdictions (BCRA). Timeframe: Medium Term
- Legal Protection
  - Raise the threshold for lawsuits to gross negligence (BCRA). Timeframe: Medium Term
  - Extend legal protection to SEDESA (BCRA). Timeframe: Medium Term

Note: “I-Immediate” is within one year; “NT-near-term” is 1–3 years; “MT-medium-term” is 3–5 years.

*Source: IMF staff report — EXECUTIVE SUMMARY (Argentina).*

### EXECUTIVE SUMMARY ___________________________________________________________________________ 4

### EXECUTIVE SUMMARY

### Introduction
- Financial system size and structure:
  - Financial system assets are "slightly less than 50 percent of GDP".
  - Banking sector accounts for two-thirds of the financial system.
  - About 43 percent of bank assets are state owned.
  - The three largest banks represent "about 40 percent of banking assets".
  - Insurance sector assets represent "less than 7 percent" of the financial system.
  - Mutual fund assets represent "less than 4 percent" of the financial system.
  - Equity market is "about 10 percent of GDP", with "99 listed firms at end-2011".
- Bank balance-sheet metrics (dates as in source):
  - System-wide capital adequacy ratio reached "16.6 percent" (as of June 2012).
  - Leverage ratio of "11 percent" (as of June 2012).
  - Liquid assets (cash or holdings of central bank securities) amounted to "25 percent of deposits" (as of October 2012).
  - Deposits from the public and private sector accounted for "almost 80 percent of total funding" (as of October 2012).
  - Equity accounted for "another 11 percent" (as of October 2012).
  - "Less 3 percent" of funding came from subordinated debt and foreign credit lines (as of October 2012).
- Supervision:
  - The BCRA conducts supervision through SEFyC.
  - Banking institutions rated on eight risk categories: capital, assets, market, earnings, liquidity, business, internal controls and management.
  - Argentina is in the process of implementing Basel II and III.
- Overall assessment:
  - Argentina has a well-developed financial safety net that has provided timely support to stressed institutions, but the system could be further strengthened.
  - Review focuses on adjustments needed as the financial system evolves and becomes more complex.

### Crisis management: Emergency Liquidity Assistance (ELA)
- Framework features and scope:
  - BCRA empowered to provide peso loans to support distressed financial institutions in a wide range of circumstances.
  - Banks may apply for rediscounts or loans using public or private sector assets as collateral (wider range than normal liquidity facilities).
  - Assets (mortgages, auto loans, consumer loans, post-dated checks, publicly-offered securities) may be "pre-qualified" as collateral for "90 days".
  - Total assistance is capped at the equivalent of the capital and reserves of the borrower, but the BCRA Board can decide to lift this limit "in times of systemic stress".
  - ELA scheme included in articles 17 b and c of the BCRA’s charter and described in Communication A5304 of May 10, 2012.
- Main operational rules (as stated):
  - ELA is available to financial entities that, having exhausted other BCRA borrowing opportunities, have a liquidity ratio of "less than 20 percent".
  - The maximum borrowable amount is the lowest of:
    - The amount requested by the prospective borrower;
    - The amount necessary to get the borrower’s liquidity ratio up to "30 percent";
    - The size of the funding sources that the borrower has lost;
    - The amount consistent with the BCRA’s monetary policy.
  - Any bank’s total borrowing from the BCRA is limited to its capital base (specified in BCRA Charter), but may be exceeded "Where it becomes necessary to provide adequate liquidity to the financial system, or where general and extraordinary circumstances so warrant at the discretion of an absolute majority of the members of the Board".
  - Initial term is "180 days" with possible extensions of further periods of "180 days". Interest payable every "30 days".
  - Loans must be repaid if the borrower’s liquidity ratio rises above "30 percent", by an amount depending on the excess.
  - Interest rate is "1.35 times BADLAR for the first 180 days, and 1.70 times thereafter."
  - Private sector collateral surplus margins vary from "25 to 75 percent", depending on collateral nature.
- Observations and risks:
  - The BCRA’s facilities have not been tested in the current environment.
  - Banks currently hold far less government securities than in 2001–02 and may face steeper haircuts on collateral than in the previous crisis.
  - The BCRA should work with other supervisors to monitor potential liquidity risks outside its regulatory perimeter (stockbrokers balance sheet information to become available with the new Capital Markets Act; activities of money market mutual funds).
  - In extreme circumstances, central banks and governments may be compelled to support liquidity shortfalls in nonregulated entities; the BCRA should consider whether such entities should be subject to liquidity regulation or provided ELA facilities.

### Crisis management: Bank resolution and related tools
- Historical record:
  - Since 1995, the BCRA was involved in "36 bank resolutions" with only one resulting in a depositor payout.
  - In "34 of these cases", the purchase-and-assumption (P&A) process was used successfully, with "98.6 percent of deposits being assumed".
  - In 2002, a bridge bank process was used.
  - One case of open bank assistance to a systemically important bank and one credit union payout of all insured deposits in 1996.
- Recommendations for resolution framework:
  - Review and update bank resolution framework, processes and norms about tool options in case of systemic crisis.
  - Formalize the figure of bridge bank and necessary regulations and manuals (see Table 1 recommendation).
  - Set strict conditions for the use of open bank assistance.
  - Establish clear principles for systemic situations to safeguard the use of public funds.
  - Review liquidation arrangements with home country supervisors, including information on crisis management groups (CMG), to aid contingency planning.

### Crisis preparedness framework: Prompt corrective action and supervision
- Current practice:
  - BCRA’s supervision is risk-based and focuses on early supervisory action.
  - Early supervisory action can be triggered by the bank’s risk rating (CAMELBIG).
- Suggested enhancements:
  - Enhance prompt correction action scheme by adding additional supervisory action benchmarks and automatic preventive prudential measures tied to benchmark capital or liquidity thresholds similar to CAMELBIG triggers.
  - Automatic triggers would be implemented automatically when thresholds are breached, with exceptions documented and requiring BCRA Board approval.
  - Such measures reduce regulatory delays, increase incentives for managers/shareholders to rectify problems, and improve transparency.

### Deposit insurance and contingent funding
- Current structure:
  - Deposit Insurance Fund (FGD) is a "pay box" style deposit insurance fund.
  - Deposit Insurance Corporation (SEDESA) exercises fiduciary oversight over the FGD.
- Funding risks and options:
  - SEDESA lacks adequate access to back-up funding for the FGD if a systemic crisis drains its reserves.
  - If insufficient funds, SEDESA could issue bonds to depositors in payment of the deposit guarantee, but in a crisis bonds are unlikely to restore depositor confidence.
  - The BCRA can require financial institutions to advance premiums up to amounts equal to "two years of the minimum regulatory premium", and increase the deposit insurance premium—but in a severe crisis these actions could strain banks.
  - Recommendation: give SEDESA access to a line of credit from MECON for use in systemic crises; define a contingency funding plan for the FGD jointly by BCRA and MECON.

### Coordinating arrangements and systemic risk monitoring
- Current institutional roles:
  - Core agencies of the financial safety net: BCRA (ELA, resolution, preventive action, least-cost determinations, cross-border information exchange), SEDESA (trustee for FGD), MECON.
  - Coordinating Council of Monetary, Financial, and Exchange Policy currently composed of BCRA and MECON officials.
- Recommendations:
  - Establish a high-level systemic risk monitoring committee comprising BCRA, MECON, CNV, SSN, and FGD to:
    - Develop contingency planning for crisis management;
    - Meet on a recurring frequency to highlight systemic risks;
    - Ensure legal hurdles for crisis action are identified and cleared;
    - Ensure procedures for implementing resolution and recovery tools are well defined.

### Legal protection
- Current legal framework:
  - BCRA law and the Law on Financial Entities (LEF) state that the BCRA cannot be subject to a claim for damages for suspension and resolution actions.
  - These statutes do not address BCRA staff.
- Recommendation:
  - Enhance protection for BCRA staff from lawsuits; raise the threshold for lawsuits to "gross negligence" for civil liability of BCRA employees.
  - Extend legal protection to SEDESA.

### Key recommendations (from Table 1)
- Emergency Liquidity Assistance
  - Maintain surveillance over activities of nonbank financial companies to detect emergence of systemic liquidity risks. (BCRA, in conjunction with CNV). Timeframe: Near Term
- Bank Resolution Frameworks
  - Clarify in the norms the resolution framework in case of a systemic crisis, formalizing the figure of bridge bank and necessary regulations and manuals (BCRA). Timeframe: Medium Term
  - Set strict conditions to the use of open bank assistance (BCRA). Timeframe: Medium Term
- Correction Action Arrangements
  - Enhance prompt correction action scheme (BCRA). Timeframe: Medium Term
- Deposit Insurance Scheme
  - Establish a contingent funding mechanism for the FGD (MECON, FGD). Timeframe: Medium Term
- Coordinating Arrangements
  - Establish a high-level systemic committee comprising all players of the safety net to monitor and plan for crisis coordination (BCRA, MECON, CNV, SSN, FGD). Timeframe: Medium Term
  - Review liquidation arrangements and crisis management group formation in significant jurisdictions (BCRA). Timeframe: Medium Term
- Legal Protection
  - Raise the threshold for lawsuits to gross negligence (BCRA). Timeframe: Medium Term
  - Extend legal protection to SEDESA (BCRA). Timeframe: Medium Term

Note: “I-Immediate” is within one year; “NT-near-term” is 1–3 years; “MT-medium-term” is 3–5 years.

*Source: IMF staff report — EXECUTIVE SUMMARY (Argentina).*

### 9.      Borrowers are subject to restrictions on their activities which become increasingly

### 9.      Borrowers are subject to restrictions on their activities which become increasingly

### Restrictions on borrowers and collateral
- Loans need to be collateralized with surplus margins of 25–75 percent, depending on the nature of the collateral, and loan applications must be accompanied by an independent auditor’s report attesting to the value of the collateral offered.
- The surplus margins and auditor attestation protect the BCRA against loss and mean that proprietors of an insolvent bank using the ELA facility must give up more value in collateral than they receive in cash.
- Borrowers are required to observe restrictions on their business activities, which become more severe as the amount borrowed increases relative to the bank’s capital base:
  - No borrower can pay dividends, make loans or pay fees to related parties.
  - If the loan exceeds 50 percent of the borrower’s capital base, the borrower is required to produce a rationalization plan, which would expose insolvency or dependence on implausibly optimistic asset valuations.
- When the limit specified by the BCRA Charter (article 17 b and c) is exceeded, borrowers must also agree to the potential application of article 35 bis of the Law on Financial Institutions, under which the BCRA may restructure the borrower in defense of depositors, pending revocation of its license.

### Emergency Liquidity Assistance (ELA) framework and testing
- The BCRA’s facilities have not been tested since the new ELA regulation was established in 2003.
- While the framework worked well in the previous crisis, it has not been tested in the current environment where:
  - banks hold far less government securities than in 2001–02, and
  - banks may face steeper haircuts on collateral than in the previous crisis.

### Monitoring risks outside the regulatory perimeter
- The BCRA should work with other supervisors to monitor potential risks outside its regulatory perimeter, including:
  - reviewing balance sheet information of stockbrokers (which will become available when the new Capital Markets Act comes into force), and
  - monitoring activities of money market mutual funds.
- Rationale:
  - Experience from the United States shows liquidity crises can emerge outside the regulatory perimeter.
  - In extreme circumstances, central banks and governments may be compelled to support liquidity shortfalls in such institutions despite no prior undertaking or regulatory oversight.
- If systemic liquidity risks are identified outside the banking system, the BCRA should consider:
  - whether the entities should be subject to some form of liquidity regulation, and
  - whether facilities for providing them with ELA should be developed.

### Bank resolution framework (P&A model and legal features)
- The bank resolution framework is based primarily on the Purchase & Assumption (P&A) model, implemented with support of the Fondo de Garantía de Depósitos (FGD) under a least-cost criterion.
- P&A process details:
  - Deposits and assets with economic value of the failed bank are transferred to create a new business unit (good bank).
  - Assets can be transferred directly to the acquiring bank or to a trust fund that issues certificates of participation to the acquiring bank.
  - The transfer of assets and deposits:
    - does not require the consent of debtors and creditors,
    - cannot be challenged in court, and
    - effectively transmits obligations and rights.
  - Actions by the Superintendent of Banks and the Board of the BCRA related to transfer of assets and privileged liabilities under a resolution process do not require any judicial authorization and cannot be stopped nor subject to judicial appeal.

### Experience and key statistics
- Since 1995 the BCRA has been involved in 36 bank resolutions with only one resulting in a depositor payout.
- In 34 of these cases, the P&A process was successfully employed, with 98.6 percent of deposits being assumed.
- In 2002 a bridge bank process was developed; there was a case of open bank assistance to a systemically important bank and one credit union payout of all insured deposits in 1996.
- Assistance available through the FGD was supplemented in the past by a government contribution through the Fiduciary Fund for Bank Capitalization, last used in 2002. Since then the FGD has been self-sustaining and has not required additional support or an increase in premium.
- There are currently three banks under recovery programs and none is receiving FGD assistance. The three institutions currently under special supervision for recovery plans are in compliance with benchmarks imposed by the SEFyC and have returned to profitability.
- There have not been any resolutions since 2005.

### Legal powers, restructuring measures, and liquidation
- Pursuant to the LEF, the BCRA may adopt corrective or resolution measures at its sole discretion for financial entities facing solvency or liquidity problems.
- When deficiencies are so severe that stabilization cannot normalize the institution, the BCRA may choose between ordering restructuring to protect depositors or revoking the license (LEF, articles 35 bis and 44).
- Measures available under section 35 bis include:
  - booking of losses against partial or total provisions for doubtful assets,
  - capitalization by shareholders,
  - withdrawal of the BCRA’s approval for shareholders to remain and transfer of stock by a deadline,
  - sale of the financial entity or rights to subscribe capital increases, and
  - exclusion of assets selected by the BCRA and liabilities.
- LEF article 34 grants the BCRA authority to require banks to develop plans to address deficiencies (solvency/liquidity, minimum reserves, noncompliance with prudential limits, noncompliance with regulatory capital minimums). Failure to provide the plan within 30 days authorizes the BCRA to revoke the bank’s license.
- Article 44 establishes the BCRA authority to resolve a bank when it has failed to meet its plan or faces solvency/liquidity deficiencies beyond its ability to correct. Once the BCRA withdraws the license, the appropriate bankruptcy court assumes responsibility for liquidation and appoints a liquidator.
- Under article 49 of the BCRA charter, the Superintendent can suspend the bank’s operations for a period of 30 days (may be extended to 90) during which a determination can be made as to whether the bank can be restored.

### Bridge banks and open bank assistance: past use and suggested regulatory clarification
- 2002 bridge bank example (Crédit Agricole Resolution Case):
  - Executive Decree 838/2002 licensed Nuevo Banco Bisel S.A., Nuevo Banco Suquía and Nuevo Banco Entre Rios as bridge banks to resolve Banco Bisel S.A., Banco Entre Rios, and Banco Suquía after Crédit Agricole exited Argentina.
  - Bridge banks assumed deposits; assets were placed in trusts issuing certificates A (good assets) and B (residual value). Certificate A transferred to bridge banks; Certificate B and unsecured creditors remained with banks being resolved.
  - Suquía was sold in 2004, Entre Rios in 2005 (FGD purchased ARS$190 million in preferred shares), and Bisel in 2006 (FGD purchased ARS$132 million in preferred shares).
- Recommendation: The LEF could be amended to explicitly include bridge bank and open bank assistance tools and the BCRA should review internal guidelines to address risks related to those operations.
- Suggested features to address in regulation for bridge banks:
  - limit the duration of a bridge bank license to establish a resolution timetable,
  - define permitted activities of the bridge bank,
  - establish situations appropriate for a bridge bank (large and/or complex banks),
  - identify the licensing authority (previously licensed by executive decree).

### Policy concerns and recommended safeguards for open bank assistance
- Open bank assistance concerns:
  - a weak institution remains open and competes with sound institutions,
  - shareholders and creditors lose substantial portions of their investments but not all,
  - it reinforces “too-big-to-fail” moral hazard since normally used for large institutions.
- Recommended safeguards (consistent with FSB Key Attributes, October 2011, and FDIC practices):
  - require a determination that temporary funding is necessary to foster financial stability and will permit implementation of a resolution option best able to achieve an orderly resolution; and
  - allocate losses to equity holders and residual costs, as appropriate, to unsecured creditors.
  - FDIC guidance: open bank assistance must be the least costly option to the insurance fund, except in cases of “serious adverse effect on economic conditions or financial stability” or “systemic risk to the banking system” where deviation from least-cost may be permitted.

### Crisis preparedness, supervision, and prompt corrective action
- The SEFyC supervisory approach is risk-based and assigns an inspector-in-charge to monitor each bank (or group for smallest/lowest-risk banks), consolidating onsite and offsite supervision.
- Banks receive an annual CAMELBIG rating on a scale of 1–5; supervisory plans and follow-up are calibrated to the rating.
- Some regulatory restrictions and fines are directly linked to the bank’s rating:
  - banks rated 4 are prohibited from lending to related parties or expanding through branches or acquisitions;
  - banks rated 3 or worse pay higher deposit insurance premiums;
  - SEFyC can levy fines, suspend managers, directors or auditors and shareholders, and revoke the bank license.
- The BCRA has implemented quantitative corrective action triggers keyed off the CAMELBIG rating; additional quantitative preventive triggers could be considered (examples provided, not calibrated to BCRA requirements):
  - 75 percent of buffer or level in excess of regulatory minima:
    - Recapitalization plan required.
    - No asset growth unless permitted by the BCRA.
  - 80 percent of minimum capital:
    - The actions above plus: No salary increases for senior management; Dividend restrictions or elimination; Issue stock or sell the bank; Restrict interest bank can pay to attract deposits to the average in its market; Replace Board; Replace senior management; Divest of subsidiaries, assets.
  - 30 percent of minimum capital:
    - Appoint receiver; No repayment of subordinated debt.
- Failure to address weaknesses could lead to resolution powers under LEF article 35bis. Article 49 allows suspension from transacting business for 30 days (extendable up to 90 with BCRA board approval).
- Once a bank fails to correct deficiencies, supervision is transferred to the Specialized Supervision Department which monitors restructuring and coordinates SEDESA involvement and manages sale of assets and liabilities.
- Recommendation: Establish preventive prudential measures automatically triggered when benchmark capital or liquidity thresholds are breached to reduce regulatory forbearance, provide incentives to managers and shareholders, and improve transparency.

### Deposit Insurance Guarantee (FGD) and governance
- The FGD is a “pay box” style deposit insurance fund, established in 1995 by Decree 540/95 as a pre-funded mechanism from premiums paid by covered entities.
- The BCRA establishes the risk-adjusted annual premium within the range specified in the FGD legislation between 0.015 and 0.06 percent (currently 0.015 percent).
- Risk-adjusted premiums are based on the soundness rating assigned by SEFyC and other quality indicators.
- Current FGD reserves amount to the equivalent of 1.3 percent of total deposits and 4 percent of covered deposits.
- Current reserve investments: U.S. Treasuries (65 percent) and BCRA instruments (LEBAC) (35 percent).
- SEDESA exercises fiduciary oversight over the FGD:
  - SEDESA administration is governed by a Board of Directors composed of three members for a term of three years, who may be reappointed.
  - The Steering Committee of the FGD (created by Article 10 bis of Decree 540/95) meets only when summoned by the central bank; it is composed by a representative of the BCRA who chairs the Steering Committee without right to vote but with power to veto decisions, according to the Trust Agreement signed March 7th, 1997 between the central bank and SEDESA.
  - Members of the Steering Committee may also hold a position in the Board of Directors of SEDESA.

*Source: Excerpt from IMF staff report (chapter/section)._

### 30.      The BCRA performs most key functions envisioned by the International Association of

### 30. The BCRA performs most key functions envisioned by the International Association of Deposit Insurers (IADI) principles

### Deposit insurance framework and powers
- The Argentine deposit insurance system integrates the FGD as a pay box style of deposit insurance fund, and the BCRA as the implementing authority.
- The BCRA:
  - sets the risk-adjusted premium within an authorized range,
  - monitors the condition of the banking system,
  - manages the resolution/recovery process,
  - declares insolvency,
  - determines least-cost option to be employed,
  - has information exchange agreements with cross-border supervisors,
  - and consequently performs most key functions envisioned by the IADI principles.
- The steering committee of the FGD must opt for the payment of the deposit insurance unless alternatives to capitalize or provide liquidity are less costly.
- Exception: if revocation of a license could endanger stability of other financial entities or the system as a whole, costlier alternatives may be carried out; under no circumstances can those alternatives involve an amount higher than the insured deposits of the financial entity (Decree 540/95, section 10 bis).

### Funding and contingency arrangements
- SEDESA lacks adequate access to back-up funding for the FGD that it may need if a systemic crisis drains its reserves.
- If SEDESA lacks sufficient funds, it could issue bonds to depositors in payment of the deposit guarantee (Article 13bis of Decree 540/95), but bonds are unlikely to restore depositor confidence in a crisis.
- The BCRA can require financial institutions to advance premiums up to amounts equal to two years of the minimum regulatory premium (Article 9).
- The BCRA can increase premiums up to the regulatory maximum of 0.06 percent (Article 6).
- Constraints at the time the FGD was established (Convertibility Law and former BCRA Charter) prevented the BCRA from issuing currency and acting as lender of last resort, amplifying liquidity shortages; those restraints no longer exist.
- The BCRA can provide solvent banks a source of liquidity to add a buffer to the FGD and prevent liquidity insolvency.
- Recommendation: give SEDESA access to a line of credit from MECON for use in systemic crises.

### Coordinating arrangements and mandates
- The BCRA has a mandate for financial stability and macroprudential policy (BCRA Charter article 3).
- The BCRA must consider financial stability as it performs regulatory and supervisory duties (BCRA Charter, article 4(a); LEF, article 4) and the foreign exchange system (BCRA Charter, article 29).
- Powers apply to payment systems, settlement and clearing houses, money remittance entities, cash-in-transit companies, and any other activity related to financial and foreign exchange activities (BCRA Charter, article 4(g)).
- The BCRA and MECON share responsibilities over the set of macroprudential instruments, detection of systemic risk increases, and decisions regarding adoption, implementation and enforcement of macroprudential policies.
- Other agencies:
  - CNV exercises macro and microprudential regulation and supervision over capital markets.
  - Argentine Superintendence of Insurance (SSN) exercises them over the insurance market.

### Governance, information sharing, and cooperation
- The BCRA and MECON belong to the Coordinating Council of Monetary, Financial, and Exchange Policy, chaired by the Minister and comprising the Secretary of Economic Policy, the Secretary of Finance, and the President, Vice President and a Director from the BCRA.
- The Minister of Economy, or a representative, participates (without a vote) in board meetings of the BCRA (Article 12 of the BCRA charter).
- Decree 1759/72 sets a general duty for departments and agencies of the national public administration to cooperate.
- Confidentiality: information obtained by the BCRA in exercising its functions is confidential (LEF, article 40); SEFyC inspections are confidential (BCRA Charter, section 53); CNV and SSN are bound by similar duties (Capital Markets Law, sections 25, 26 and 27; Insurance Companies Law, section 74).
- Exception: section 27 of the Capital Markets Law provides that no confidentiality restrictions apply to the BCRA, the CNV, and the SSN, as well as their officials and employees, if information is formally required by the head of any such agency; same exception when requested by the Financial Information Unit in connection with Anti-Money Laundering Law 25,246 (Capital Markets Law, section 27).
- The BCRA, acting through the SEFyC, has cooperation and information exchange agreements with the CNV and the SSN; requests for information must be in writing except in urgent matters.
- Courts have the power to order the lifting of banking secrecy.

### Cross-border cooperation, MOUs, and crisis-management structures
- The BCRA has concluded MOUs with cross-border supervisors in: Bahamas, Brazil, Cayman, Chile, Germany, Italy, Mexico, Paraguay, South Africa, Spain, United Kingdom, United States, and Uruguay.
- MOUs follow international best practices but typically do not deal with resolution issues.
- Review of liquidation arrangements with host country supervisors, including information on the CMG, would aid BCRA contingency planning.
- Box 3 (Crisis Management Groups) points:
  - BCRA should establish information exchange agreements with resolution authorities in home jurisdictions of cross-border banks operating in Argentina.
  - CMGs (Crisis Management Groups) facilitate recovery and resolution of cross-border banks and include supervisors, central banks, resolution authorities, finance ministries, and deposit guarantee public authorities.
  - For G-SIFI, countries are developing bank-specific recovery and resolution plans (RRP) that outline cooperation objectives through CMGs, participants, crisis information-sharing processes, and mechanisms for informing host supervisors.
  - Importance for BCRA to participate in or establish contact with CMGs developed by home supervisors, and where CMGs are not applicable, to understand home-country recovery and resolution authorities and establish proper contacts and legal arrangements.

### Legal protection and liability
- Liability in crisis management may arise when:
  - the supervisory authority fails to act despite knowledge of serious bank problems,
  - measures were inadequate,
  - a shareholder challenges appointment of an interventor or other solution measures.
- Recommendation: liability should accrue only in the event of gross negligence or willful misconduct on the part of supervisory or resolution agencies or their employees.
- Employees facing personal actions should have access to resources for defense, including indemnity for costs.
- Legal provisions:
  - Article 35ter of the LEF: actions taken by the BCRA or the SEFyC are subject to court review only in events of arbitrariness or when manifestly unreasonable; court decides if the case has merit.
  - BCRA personnel bylaws: BCRA may advance sums to fully or partially cover legal costs in criminal proceedings due to facts derived from the exercise of duties.
  - Articles 49 of the BCRA Charter and 35bis of the LEF: suspension and resolution actions taken by the BCRA cannot be subject to a claim for damages against the BCRA and the National State by the financial institution, its creditors, shareholders, and managers.
- Recommendations to enhance legal protection:
  - (i) address BCRA staff liability in regulations that currently only address BCRA institutional liability,
  - (ii) require gross negligence as a threshold to the civil liability of BCRA employees and persons appointed by the BCRA such as interventors,
  - (iii) consider extending legal protection to SEDESA staff.

*ARGENTINA INTERNATIONAL MONETARY FUND*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr1666.pdf_