Argentina
Detailed Assessment of Compliance of Basel Core Principles for Effective Banking Supervision

This paper is a detailed assessment of compliance of the Basel Core Principles for effective banking supervision adopted by the Argentinean government. The financial sector in Argentina is dominated by the banking sector, with financial conglomerates managing about 85 percent of banking assets, 78 percent of investment funds, and 32 percent of insurance business. The Executive Board identifies the need for strengthening political and financial independence of the Central Bank of Argentina (BCRA). They also recommend a suitable legal framework for banking supervision and powers to enforce compliance with laws and regulations.

Abstract

This paper is a detailed assessment of compliance of the Basel Core Principles for effective banking supervision adopted by the Argentinean government. The financial sector in Argentina is dominated by the banking sector, with financial conglomerates managing about 85 percent of banking assets, 78 percent of investment funds, and 32 percent of insurance business. The Executive Board identifies the need for strengthening political and financial independence of the Central Bank of Argentina (BCRA). They also recommend a suitable legal framework for banking supervision and powers to enforce compliance with laws and regulations.

I. Introduction, Context, and Pre-Conditions

1. The BCRA and the SEFyC are to be commended on their thorough supervision, their implementation of risk-based supervision, and their thorough examination process. Since the 2001-02 crisis, financial sector indicators have improved significantly and the banking system weathered well the impact of the global financial crisis, with high capital levels, the introduction of a capital buffer, and low NPLs. Nevertheless, shortcomings on the regulatory and supervisory framework still remain, in particular regarding independence, legal protection to supervisors, loan provisioning, and consolidated supervision warrant enhancements. The effective implementation of the new risk management regulation will be an important tool for improving bank management and in some cases oversight of the major risks in the banking system, in particular country and transfer risk, market risk, and interest rate risk in the banking book.

Introduction

2. This assessment of the state of compliance with the BCPs in Argentina has been undertaken as part of a World Bank Observance of Standards and Codes (ROSC) mission. 1 The assessment was conducted from May 11 to 26, 2011. It reflects the banking supervision practices of the Central Bank of Argentina (BCRA) as of the end of April 2011.

Information and methodology used for assessment

3. The assessment is based on the following sources: (i) a complete self-assessment prepared by the BCRA; (ii) detailed interviews with the BCRA staff; (iii) review of laws, regulations, and other documentation on the supervisory framework and on the structure and development of the Argentine banking sector; and (iv) meetings with individual banks, the banking associations, the Ministry of Economy and Public Finance (MECON), external auditors, and financial think tanks.

4. The assessment was performed in accordance with the guidelines set out in the Core Principles (CPs) Methodology.2 It assessed compliance with the “essential” criteria only. The Methodology requires that the assessment be based on the legal and other documentary evidence, combined with a review of the work of the supervisory authority as well as its implementation in the banking sector. The assessment of compliance with the CPs is not, and is not intended to be, an exact science. Banking systems differ from one country to the next, as do their domestic circumstances. Furthermore, banking activities are changing rapidly around the world, and theories, policies, and best practices of supervision are swiftly evolving. Nevertheless, it is internationally acknowledged that the CPs set minimum standards.

5. This assessment is based solely on the laws, supervisory requirements, and practices that were in place at the time it was conducted. However, where applicable the assessors made note of regulatory and supervisory initiatives which have yet to be completed or implemented. In particular, regulations on risk management and corporate governance were recently issued, to be implemented by 2012.

6. The assessment team enjoyed excellent cooperation with its counterparts and, within the time available to perform their work, reviewed all the information provided. The team extends its thanks to the management and staff of the BCRA for their openness and participation in the process. The authorities are invited to provide comments on this draft version of the assessment, which will be reflected in the final assessment.

Institutional and macroeconomic setting and market structure—overview

7. The financial sector in Argentina is dominated by the banking sector, with assets representing about 34 percent of GDP as of December 2010 (Table 2). The insurance sector’s assets represent less than 5 percent of GDP and mutual fund assets are less than 2 percent of GDP. With the exception of Banco Credicoop, savings and cooperative banks are small. Private banks held about 56 percent of total banking sector assets and public banks 54 percent. The sector is moderately concentrated with the three largest banks representing 42 percent of banking assets.

Table 1:

Structure of Argentina’s Financial System, December 2010

article image
Source: BCRA, SSN

The remainder of insurance companies includes retirement insurance, disability and public transport insurance

8. The degree of conglomeration is high. Financial conglomerates manage almost 85% of banking assets, 78% of investment funds and 32% of the insurance business. Financial system assets are distributed between public sector conglomerates (27 percent), foreign conglomerates (28 percent), local private conglomerates (24 percent) and stand alone institutions (21 percent).3 Argentina is a host of international banks that belong to financial conglomerates whose parent companies are in Brazil, France, Germany, Great Britain, Italy, Japan, South Africa, Spain, Uruguay and the U.S. In turn, operations abroad of Argentine banks are considered small, and most of them correspond to the foreign branches of public banks. In addition to these, a couple of private local banks have small foreign operations in the Bahamas, the Cayman Islands, and Uruguay. Two of the conglomerates have parallel banks abroad. The large local conglomerates participate in the banking, insurance, and capital markets, but their main operations and risk exposures are generally in the banking sector.

9. The banking sector has restructured significantly following the banking and currency crisis of 2001-02 during which a run on bank deposits occurred, the government defaulted on its debt, and the peso was devalued. Four foreign banks have withdrawn following the crisis, but they still represented 33 percent of private sector deposits as of December 2010 4. Between 2002 and 2007, 23 banks disappeared in the local market as a result of mergers and market exits. The financial system received more than US16.2 billion in new capital injections between 2002 and April 2011, which led to a significant improvement in the financial system’s soundness (Figure 3). The banking sector is supervised by the Central Bank of Argentina (Banco Central de la República Argentina-BCRA).

Figure 3:
Figure 3:

Capital injections by Groups of Banks and Capital Compliance

Citation: IMF Staff Country Reports 2012, 268; 10.5089/9781475510607.002.A001

Source: BCRA, Argentina Self-Assessment – Core Principles for Effective Banking Supervision

10. Since the 2001-02 crisis, official financial sector indicators have improved significantly, and deposits and credit to the private sector have recovered partially. Banks are well capitalized with a capital adequacy ratio (CAR) for the system averaging 17.7 percent in December 2010, 5 and overly liquid. Non-performing loans to the private sector (90 days past dues) stood at 2.1 percent of total loans in 2010 and with the highest provision coverage in 10 years at 166 percent (Figures 4 and 5). Since 2005, profitability has been positive and improving, the return on average assets (RoA) reached 2.8 percent in 2010, and the return on equity more than 24 percent (Figure 3 bis). Banking assets and deposits have consistently risen since 2003 and represent respectively 35 and 26 percent of GDP. However, this remains significantly lower than before the crisis, as in 2000 they represented 58 and 30 percent of GDP respectively. Domestic credit to the private sector also remains low at 13 percent of GDP in 2010 (2 points denominated in foreign currency) compared to 22 percent in 2000 (14 points of foreign currency loans) (Figure 6bis), although growth has accelerated in 2010 and 2011 (Figure 6 bis).

Figure 3bis:
Figure 3bis:

Net income of financial sector (million pesos), and RoE

Citation: IMF Staff Country Reports 2012, 268; 10.5089/9781475510607.002.A001

Figure 4:
Figure 4:

NPLs by type of borrower, % total loans

Citation: IMF Staff Country Reports 2012, 268; 10.5089/9781475510607.002.A001

Source: BCRA, Financial Stability Report 1st Semester 2011
Figure 5:
Figure 5:

Provisions, % of NPLS

Citation: IMF Staff Country Reports 2012, 268; 10.5089/9781475510607.002.A001

Source: BCRA, Financial Stability Report 1st Semester 2011
Figure 6:
Figure 6:

Private Sector Credit, % GDP growth

Citation: IMF Staff Country Reports 2012, 268; 10.5089/9781475510607.002.A001

Source: BCRA, Financial Stability Report, 1st Semester 2011
Figure 6bis:
Figure 6bis:

Private Sector Credit, yoy %

Citation: IMF Staff Country Reports 2012, 268; 10.5089/9781475510607.002.A001

Source: BCRA, Report on Banks, August 2010

11. Credit is mostly focused on short term working capital loans and consumer loans. As of December 2010, 57 percent of the financial system’s private sector credit was extended to corporate borrowers, and 31 percent was made of consumer loans (Figure 8). Loans are mostly short term, with an average maturity of less than two years. Thus, Argentine large firms (mainly multinationals) finance themselves mostly outside the local financial system: as of June 2010, corporate external financing was about twice as high as local financing in percentage of GDP, although local financing has been slightly on the rise in the past years (Figure 7).

Figure 7:
Figure 7:

Corporate Credit, % of average GDP Credit

Citation: IMF Staff Country Reports 2012, 268; 10.5089/9781475510607.002.A001

Source: BCRA, Financial Stability Report, December 2010
Figure 8:
Figure 8:

Breakdown of Private Sector

Citation: IMF Staff Country Reports 2012, 268; 10.5089/9781475510607.002.A001

Source: BCRA, Financial Stability Report, December 2010

12. The rapid growth in credit over the last 2 years, combined with higher levels of NPLs in private domestic banks and in smaller banks, need continued monitoring. Credit to the private sector grew overall by 37.5 percent in 2010 and by another 42.8 percent (yoy) over the first 4 months of 2011 (Figure 9). Growth has been particularly strong for working capital loans, consumer loans, and credit card advances. As sustained credit growth is often associated with delayed increases in NPLs, this trend needs close monitoring. NPLs overall are low at 1.3 percent at the end of March 2011 for corporate loans, and 2.7 percent for loans to individuals. NPLs are the lowest for large public banks and foreign-owned banks, and the highest for private domestic banks and smaller banks (Figure 9bis).

Figure 9:
Figure 9:

Private sector credit, % annual growth

Citation: IMF Staff Country Reports 2012, 268; 10.5089/9781475510607.002.A001

Figure 9bis:
Figure 9bis:

Classified loans in % of total loans

Citation: IMF Staff Country Reports 2012, 268; 10.5089/9781475510607.002.A001

13. Deposits remain short-term with a large public sector base, although term deposits have been growing quite steadily over the last 2 years. Since mid-2009, term deposits have displayed a sustained growing trend (Figure 11). However, as of December 2010, short term deposits still represented about half of total private sector deposits (Figure 10). In addition, public sector deposits account for 30 percent of the total deposit base, about twice as much as the level observed before the 2001-02 crisis (Figure 10 bis). Foreign currency deposits amounted to about 18 percent of private sector deposits, far less than the 65 percent observed in 2000.

Figure 10:
Figure 10:

Composition of private deposits

Citation: IMF Staff Country Reports 2012, 268; 10.5089/9781475510607.002.A001

Source: BCRA, Financial Stability Report, December 2010
Figure 10bis:
Figure 10bis:

Public versus Private Deposits

Citation: IMF Staff Country Reports 2012, 268; 10.5089/9781475510607.002.A001

Source: BCRA, statistical bulletins
Figure 11:
Figure 11:

Monthly variation of private deposits, in $ million

Citation: IMF Staff Country Reports 2012, 268; 10.5089/9781475510607.002.A001

14. Banks’ exposure to the public sector has decreased substantially in recent years, although less so for public banks. The exposure of banks to the public sector (loans and investments), which had nearly reached 50 percent in 2002 decreased to 12 percent of assets in 2010 for the system as a whole and to about 22 percent for public banks. Public banks continue to rely significantly on public sector deposits for funding (45 percent of total liabilities versus 15 percent for national private banks as of end 2010).

Preconditions for effective banking supervision

15. The BCPs recognize that a number of preconditions are necessary to enable the development of a stable banking sector capable of supporting economic growth through sound intermediation. The BCP methodology sets out the necessary foundations of a sound banking supervisory system as including: i) sound and sustainable macroeconomic policies, ii) a well developed public infrastructure, iii) effective market discipline, and iv) mechanisms for providing an appropriate level of systemic protection (or public safety nets). For each of these preconditions, the BCPs describe desired elements. Preliminary findings with regards to these preconditions in Argentina are summarized below. Further analysis of these pre-conditions will be carried out in the context of the planned FSAP.

Sound and sustainable macro-economic policies

16. After a sharp slowdown in the wake of the global crisis, the Argentine economy has returned to a strong growth path. After growing by 0.9 percent in 2009, real GDP expanded 9.2 percent during 2010, supported by high commodity prices and strong domestic demand. Economic growth is expected to moderate somewhat in 2011 due to capacity constraints and some erosion in external competitiveness. The average official inflation rate based on Consumer Price Index for Greater Buenos Aires (CPI-GBA) was 10.5 percent in 2010, while inflation as measured by the provinces exceeded 20 percent on average. The official inflation rate has remained just below 10 percent in recent months, while inflation continues to exceed 20 percent in many provinces, amid mounting evidence that the economy is running close to full capacity.

17. The banking system in Argentina weathered well the impact of the global financial crisis. There was no bank failure during the crisis, and asset quality and capital adequacy have remained solid. Capital adequacy ratio increased from 16.9 percent in 2008 to 18.8 percent in 2009, but decreased to 17.7 percent in 2010. Non-performing loans increased slightly from 3.1 percent of gross loans in 2008 to 3.5 percent in 2009, but decreased to 2.1 percent in 2010. However, both deposit growth and private credit expansion slowed significantly. Deposit growth declined from an average of nearly 23 percent in 2006-07 to 15 percent in 2008, but steadily rose to 39 percent in 2010. Growth of credit extended to the private sector dropped from an average of nearly38 percent in 2006-07 to 20 percent in 2008, but rose to 36 percent in 2010. Rapid credit growth over the last two years requires continued monitoring. A full assessment of the condition of the financial system will be carried out under the Financial Sector Assessment Program which the authorities have requested for 2012.

18. The presence of well functioning elements of public financial infrastructure has supported financial sector growth in Argentina, including an adequate credit registry managed by the BCRA, a system of collateral and pledge registration and execution considered effective by market players, rapidly improving corporate accounting and auditing regulations, flexible and well tested safety nets (including an effective deposit insurance and bank resolution framework), and an efficient national payment system. Nevertheless, continued progress is desirable, especially with regards to the oversight of the payment systems, and corporate and financial institutions accounting, financial disclosure, and governance. A detailed description of these issues is provided in the BCP Detailed Assessment.

19. Nonetheless, the capacity of the financial sector to further support the growth of the Argentine economy remains constrained. While credit to the private sector and deposits have consistently risen since 2003 and represent respectively 13 and 26 percent of GDP, they remain significantly lower than before the crisis (in 2000, they represented 22 and 30 percent of GDP respectively), 6 and substantially lower than in other emerging economies. 7 Despite efforts by the authorities to expand access to banking services across the country, it remains particularly limited in some regions. 8 Similarly, Argentina’s capital market and insurance sectors are small compared to similar economies, with total market capitalization of 17.5 percent of GDP 9 in the first quarter of 2011 and insurance premium accounting in 20010 to 2.7 percent of GDP. In addition to being limited in volumes intermediated and invested, Argentina’s financial system is mostly short term, with a scarcity of investment and housing finance products. The deposit base and use of capital markets instruments remain indeed largely transactional and short term, as, in view of Argentina’s historical macro-economic volatility, individuals remain wary of placing longer term savings in the domestic financial sector. With mostly short term liabilities and uncertainty regarding the inflation index, 10 banks are unable to extend long term loans to finance productive investments and housing needs. The November 2008 nationalization of the private pension funds, and the ensuing refocusing of the investment policy in favor of large public investment projects, have further affected banks’ and corporate ability to tap domestic long term capital market resources. This has further constrained banks’ ability to lend long term. As private pension funds were major users of the domestic capital markets, this development has also affected the depth and liquidity of the stock exchanges. The government may want to review whether the existing regulatory controls on foreign exchange, prices, and trade further affect banks’ intermediation capacity. 11

20. Government efforts to enhance macroeconomic and financial sector policy predictability and certainty would go a long way in further encouraging the development of long-term financial intermediation and investment instruments to support economic growth. Most important of all is the necessity to continue building depositor and investor confidence in the domestic financial sector, through the maintenance of stable macroeconomic conditions and of strong financial sector regulation and supervision by independent authorities. The government’s ongoing work to remove uncertainty on inflation levels and bring the inflation level to single digit is also critical to enable banks to develop adequate instruments to support long term lending and to enable the pricing of long term securities. The government could also consider adopting a medium term Financial Sector Development Strategy to demonstrate its long term commitment to financial sector growth and stability.

A well developed public infrastructure

21. The BCPs state that a well developed public infrastructure supporting sound financial intermediation needs to comprise six elements related to the legal, accounting, auditing, financial and payment system oversight frameworks. These elements include: a) a system of business laws (including corporate, bankruptcy, contract, consumer protection, and private property laws) which is consistently enforced and provides a mechanism for the fair resolution of disputes, b) comprehensive and well defined accounting principles and rules that command wide international acceptance, c) a system of independent audits for companies of significant size, to ensure that users of financial statements, including banks, have independent assurance that the accounts provide a true and fair view of the financial position of the company and are prepared according to established accounting principles, with auditors held accountable for their work, d) an efficient and independent judiciary, and well regulated accounting, auditing and legal professions, e) well defined rules governing, and adequate supervision of, other financial markets and, where appropriate, their participants, and f) a secure and efficient payment and clearing system for the settlement of financial transactions where counterparty risks are controlled. Key findings regarding the presence of these key elements of a well developed public infrastructure to support sound financial sector development and supervision are summarized below.

22. The presence of well functioning elements of public infrastructure has also supported financial sector growth in Argentina, including an adequate credit registry managed by the BCRA, a system of collateral and pledge registration and execution considered effective by market players, rapidly improving corporate accounting and auditing regulations, flexible and well tested safety nets (including an effective deposit insurance and bank resolution framework), and an efficient national payment system. Nevertheless, continued progress is desirable, especially with regards to the oversight of the payment systems, and corporate and financial institutions accounting, financial disclosure, and governance. A detailed description of these issues is provided in the BCP Detailed Assessment.

Accounting and Auditing

23. Significant strengthening of Argentina’s auditing and accounting framework is underway. A 2009 ROSC on Auditing and Accounting concluded that Argentina’s statutory framework for accounting and auditing was reasonably sound although it is fragmented and at times unduly complex, with many laws setting different requirements for particular sectors and/or jurisdictions. With regard to financial reporting and auditing standards, the ROSC recommended efforts to adopt portions of the International Financial Reporting and Standards (IFRS) as Argentine standards are still less demanding than their international counterparts, strengthening the auditing function, enhancing compliance with existing laws, regulations and standards, and achieving a greater level of integration within the accounting and auditing profession and collaboration among regulatory agencies. Government efforts to remedy these issues have culminated with the mandatory adoption of IFRS for all listed companies (except banks) as of January 1st 2012.12 The BCRA is working on a proposal to require the use of IFRS standards for banks’ financial statements as of 2014. Another positive development has been the Central Bank’s project to set up a central repository of corporate financial statements. In addition, the securities supervisor (Comision Nacional de Valores, CNV) has submitted a new structure to the Ministry of Finance which includes a specific department and additional resources to oversee accountants and auditors.13 The CNV is also working with the accounting profession on the adoption of the International Auditing Standards (IAS) within the next two years.

Supervision of non bank financial markets

24. The supervision of non bank financial markets is strong overall, although further progress can be achieved in insurance and capital market supervision, and monitoring of NBFIs may need to be strengthened as these institutions grow in significance. Securities markets are supervised by the Comision Nacional de Valores (CNV) established by Law in 1968. Insurance companies are supervised by the Superintendencia de Seguros de la Nacion (SSN), established by Decree in 1937 and further enshrined in the 1973 Insurance Law. A detailed assessment of the work of these institutions has been carried out as part of parallel reports reviewing their compliance with IOSCO and IAIS principles. Their conclusions point to strong supervision overall, but indicate opportunities for further strengthening (see reports). Credit mutuales and cooperatives are monitored by INAES, the National Institute for Associations and the Social Economy. As these entities grow in size and client base, consideration may need to be given to enhancing their regulation and supervision.

Payment system

25. The Argentine economy is largely cash-based, but the use of non-cash payment instruments is increasing. The macro and financial instability of the early 2000s led individuals to prefer short term liquid financial instruments or to place money abroad. 14 Thus, since 2010, the government has implemented measures to encourage a transition towards non-cash transactions and an increase in bank use, including through the offering of cost-free peso-denominated savings accounts and debit cards, and the reduction in commissions on electronic banking transactions. Newly introduced bank settlement checks are intended to be used instead of cash in real estate deals. In addition, financial institutions in Argentina have developed state-of-the-art networks and are able to supply efficient cash-management services. As a result, over the last years, the number of current and savings accounts has risen, as has the number of debit and credit cards in circulation. 15

26. The BCRA has played an active role in the development of an efficient national payment system. Among its major achievements is the implementation, more than a decade ago, of a Real Time Gross Settlement (RTGS) system. The BCRA has complemented the legal framework for payment systems, with a comprehensive regulatory framework for the operation of payment systems through Communicaciones, although further provisions for the protection of payment systems, including BCRA’s oversight function, are still needed.

27. BCRA provides liquidity to the banking system through its open market operations in the form of repos with BCRA paper. Since 2005 the BCRA also deals in overnight repos and reverse repos.

Effective market discipline

28. The corporate governance and information disclosure of listed companies is improving rapidly. Listed companies in Argentina with the exception of banks will be required to use International Financial Reporting Standards (IFRSs) as of January 1st 2012. The BCRA is working on harmonizing Argentine GAAP with IFRS for banks with an expected adoption of IFRS in 2014. All listed companies have to comply with strict transparency and financial reporting requirements 16, and have to have an audit committee, composed of a majority of non-executive directors, independent from the company and the controlling shareholders.17

Mechanisms for providing an appropriate level of systemic protection (or public safety net)

29. Argentina has a privately managed deposit insurance scheme. Deposits are protected by a deposit insurance fund, managed by a private company, SEDESA, created by law in 1995 18. All financial institutions authorized to operate by the BCRA must subscribe to the deposit insurance fund. The monthly contribution is determined by the BCRA and cannot be less than 0.015% and more than 0.06% of average outstanding deposits in local and foreign currency. To this amount, the BCRA can require another monthly contribution based on the risk of the entity, which cannot exceed 0.015% of average outstanding deposits. Deposits are guaranteed up to 120,000 pesos (about US$ 30,000) per person. Deposits remunerated above a reference rate determined by the BCRA are excluded. As of March 31, 2011 the deposit insurance fund amounted to about 5 billion pesos (US$ 1.25 billion), or 1.3% of total deposits, which is on the low side by international standards.

30. The bank resolution framework is flexible and well tested, although a formal contingency planning framework would be useful. Article 35 bis of the Law of Financial Entities established a bank resolution framework based on the Good Bank/Bad Bank model. This scheme enables the transfer of the deposits of the failed bank, with matching assets from the deposit insurance fund, to a sound bank. Since its creation, the deposit insurance fund has been used 28 times for bank resolutions, mainly between 1997 and 2003. There has been no resolution since the end of 2007. 19 Argentina’s strong and flexible legal framework for bank resolution and the BCRA’s extensive expertise in this matter would be further reinforced by the establishment of a clear framework for contingency planning, and the formalization in manuals of the process of banking resolutions carried out over the past 15 years.

31. Work is also needed to establish an adequate framework for systemic oversight. The monitoring of macroeconomic and financial system trends and risks conducted by the supervisory authorities should be deepened and expanded to cover all sectors, including the unregulated Non Bank Financial Institutions (NBFIs) and key economic sectors. In addition to monitoring risks, the systemic oversight framework should include a system of early warnings and mechanisms to take actions to mitigate the risks. To this end, the government should re-establish a high level systemic oversight body to oversee overall financial stability in the entire financial sector and coordinate essential macro-prudential and systemic crisis management policies. 20 To achieve these objectives, adequate exchange of information between the financial supervisors will be essential. The SSN will also need greater access to foreign supervisors, in line with those enjoyed by the BCRA and CNV

II. Rosc, Main Findings, Summary, and Recommendations

Main Findings

Objectives, independence, powers, transparency, and cooperation (CP1)

32. The political and financial independence of the BCRA and the SEFyC should be strengthened. While the BCRA is an autonomous institution, the degree of its effective political and financial independence is not always sufficient. Of particular relevance are the needs to strengthen the rules to nominate and remove members of the BCRA board and the Superintendent, to strengthen financial autonomy, with a budget which should not depend on the approval of the Ministry of Finance, as well as eliminate the ability of the Minister of Finance to potentially overrule BCRA’s and SEFyC’s decisions.

33. The BCRA counts with a suitable legal framework for banking supervision, as well as with a reasonable set of powers to enforce compliance with laws and regulations. The current framework (as well as moral suasion) has enabled the BCRA supervision teams to exercise a significant amount of power thus far in enforcing compliance, but an amendment to the law should be considered to enable supervisors to impose sanctions or to require an institution to take remedial measures when an institution is likely to be engaged in unsafe or unsound banking practices in general. Currently the legal framework does not make explicit reference to safety and soundness concerns and the BCRA’s “cease or desist” power does not apply to practices that do not relate to bank products.

34. Legal protection for supervisors is limited. The Central Bank Law does not include protection for staff of the BCRA against lawsuits related to decisions made during the exercise of supervisory due diligence conducted in good faith. It should be amended to include protection provisions. Nonetheless, a regulation allows the BCRA to advance funds for the legal defense of supervisors in the event of criminal actions related to their professional activities conducted in good faith. For civil actions, where the BCRA establishes that the action was taken in good faith and no laws were infringed, supervisors can ask to be defended by the legal department of the BCRA.

35. The new bilateral agreements signed by the SEFyC provide a good opportunity to continue enhancing cross-agency coordination. Although informal exchanges of information between the supervisory agencies are frequent, they rely mostly on personal relations and had not been formalized until the SEFyC signed in May 2011 two separate Memoranda of Understanding (MoUs) with the CNV and the SSN respectively, to facilitate cross-agency cooperation. While this is a welcome step forward, these memoranda should be complemented by operational guidelines and rules on cooperation and information sharing.

Licensing and structure (CPs 2—5)

36. Permissible activities in Argentina are defined in the Financial Institutions law, encompassing all activities related to financial intermediation. The law expressly defines commercial, investment and mortgage banks, as well as finance companies, savings and loans and credit cooperatives. In addition, it enables the BCRA to consider other entities as financial institutions based on the nature and volume of their operations and other considerations.

37. The BCRA has a detailed process for licensing, transfer of ownership, and major acquisitions, but the scope of the assessment should encompass a broader assessment of shareholders. The licensing process encompasses fit and proper criteria, as well as business plans and financial projections assessments, among others. Transfers of ownership, as well as major acquisitions are subject to prior approval. There is a general prohibition for banks to own non-financial institutions with the exception of activities considered to be complementary to the financial business, where only notification is necessary. The current processes seem to be robust but would benefit from a broader assessment of not only financial soundness but also the full set of business activities developed by potential banks’ shareholders.

Prudential regulation and requirements (CPs 6—18);

38. Banks seem adequately capitalized overall but regulation would benefit from a review toward a more risk sensitive framework. Capital requirements are broadly in line with Basel I with some exceptions. On the upside, there are capital charges for interest rate risk in the banking book; a capital conservation buffer of 30% of the total capital requirement is required for a bank to be allowed to distribute dividends; and capital requirements for credit risk are sensitive to the CAMELBIG rating through a multiplying factor (0.97 to 1.15). On the down side, some risk weights are lower than Basle I (e.g. interbank exposures and some collateralized loans) and there is no capital requirement for operational risk. Looking forward, the SEFyC plans to progressively implement Basel II. In this context, it is important to ensure supervisors have powers to require additional capital for other risks along the lines of the pillar 2 of Basel II and to require banks to have a more forward-looking approach to capital management. Under Pillar 2 Banks and the SEFyC would need to adopt a more active role in assessing capital levels relative to banks risk-profiles.

39. It is advisable to move toward more forward looking provisioning rules before the next downturn. The current level of provisions appears to be adequate but, under the current backward looking regulation, it is likely to fall behind in the next downturn with growing credit risks, and increases in the share of non-performing and refinanced loans. The review should consider: (i) increasing the granularity of the classification of normal loans, (ii) moving forward the buildup of provisions for consumer loans as they deteriorate; (iii) establishing more stringent standards for the provisioning of refinanced loans; and (iv) removing the exception for the provisioning of exposures with the public sector.

40. Exposures to related parties are not fully captured under the regulatory and supervisory framework. The definition of related parties definition encompasses the financial conglomerate, major shareholders, board members, high management and their relatives but fails to encompass other direct and indirect interests of close family members. Supervisory procedures encompass the financial conglomerate up to the shareholders and their close relatives but do not go beyond that. Regulations and supervisory procedures should be enhanced, minimizing the risk of unintended exposures that could potentially undermine banks soundness.

41. The recent issuance of two regulations that will be effective from 2012 are important steps toward the modernization of standards for bank governance and risk management. The norm on corporate governance sets high standards for the organization, responsibilities, transparency, and control requirements in banks. The norm on risk management, issued during the mission, provides a comprehensive framework for banks’ risk management policies and processes, as well as specific minimum standards for credit, liquidity, market, interest rate, and operational risks. The development of the necessary capabilities, organization, and processes to fulfill the expectations set by these norms will require significant efforts from banks and supervisors.

42. The supervision of the most significant risks is already strong (credit liquidity and operational risks), but more needs to be done to achieve a more effective assessment of the management of these risks and to strengthen the supervision of other risks (market, interest rate, country, and transfer risks). Specific regulations have been in place for several years for the management of liquidity and operational risks, including information technology risks. As per these regulations banks are required to identify, measure, monitor, and control their risks. Supervisors conduct an onsite evaluation of compliance with these regulations. While there are no specific standards in effect for market and interest rate risks, supervisors also review banks policies and procedures during onsite exams. However, the assessment of the adequacy of risk management policies needs to be further strengthened. The BCRA has been working on this by implementing a comprehensive supervisory training program.

43. Supervisory procedures enable the SEFyC to have a reasonable assessment of the credit risk management process of banks but would benefit from further enhancements. Assessment of credit risk management is performed mostly through review of policies, samples of loans as well as origination procedures and techniques in the case of retail portfolios. Going forward, additional focus on strategies and a more pronounced bias toward policies and procedures risk assessment will enable supervision to better assess credit risk management in banks. Supervision of credit risk is also aided by the detailed off-site evaluation of the large borrowers by a dedicated area within the SEFyC, albeit with an opportunity to significantly improve the current methodology by adopting a more granular approach to risk valuation, anticipating trends regarding particular borrowers or sectors. In addition, the BCRA regulations provide a solid set of limits on large exposures although it might benefit from specific requirements regarding procedures and controls for concentration risk management.

44. The regulation of AML/CFT has been recently revamped. Since late 2010, the Unidad de Información Financiera(UIF) has enhanced powers for the regulation, supervision, and enforcement of AML/CFT. By Decree 1396/2010, of December 14, 2010, the UIF has been appointed as the sole coordinator for all aspects pertaining to AML/CFT and has been granted adequate powers to conduct onsite examinations and gain access to information. The decree also establishes that the regulations issued by the UIF cannot be modified or broadened by other regulatory agencies, strengthens the Know Your Costumer requirements and the framework for the assessment of suspicious transactions, and stipulates that those institutions that have the double role of supervisors and subjects obliged to report suspicious transactions, such as the BCRA and the CNV, must cooperate with the UIF. As a result, the BCRA and the UIF have agreed to unify the overlapping regulations issued by both bodies by August 2011. In the meantime, the UIF has given the regulations issued by the BCRA the status of complementary regulations.

45. The supervision of AML/CFT is undergoing a transition. In spite of not having explicit powers, the BCRA had issued regulation on AML/CFT for its supervised institutions and, for several years, has supervised compliance with these regulations. The BCRA supervision is thorough and aims at ensuring that banks have adequate policies and processes in place, including strict “know-your-customer” rules that promote high ethical and professional standards in the financial sector and prevent the bank from being used, intentionally or unintentionally, for criminal activities. In 2010, the UIF initiated its duties as supervisor by conducting onsite examinations, which have resulted in several enforcement actions and in a significant increase of suspicious transactions reports. In this context, the UIF and the BCRA have agreed on a new division of tasks. Starting in August 2011 the UIF will take the full responsibility for the supervision of compliance with AML/CFT regulation; the BCRA will only supervise the risks of ML/FT. The strengthening of the regulation and supervision addresses the weaknesses pointed out in the joint FATF/GAFISUD report, 21 but the new division of responsibilities between the BCRA and the UIF should be monitored, particularly during the transition, to ensure that supervisory and enforcement gaps are not created with the new division of work between the two entities.

Methods of ongoing banking supervision (CPs 19—21)

46. The BCRA has embraced the international trend toward the implementation of risk-based financial supervision, while maintaining a strong compliance framework. The allocation of resources and the planning of supervisory strategies and follow-up are effective and based on risks. The rating system for banking institutions, known as CAMELBIG, 22 is based on qualitative as well as quantitative analysis, and gives a high weight to the assessment of management and controls. The intensity and intrusiveness of the follow up plan are calibrated on the basis of the seriousness of the weaknesses and the CAMELBIG rating of the institution. The review of compliance with laws and regulations is also an important goal during onsite examinations, and the framework for this is effective. Nevertheless, the risk-based orientation of the supervisory approach could be enhanced by strengthening the supervisory processes and capabilities to assess risks and risk management, thereby completing the move to a full risk based approach.

47. There is an appropriate balance between onsite and off-site supervision and frequent contact with management. The SEFyC is organized in four departments: Supervision, Analysis and Audit, Information Regime, and Control and Compliance. The Supervision Department is in charge of the overall supervisory process, which encompasses both on-site and off-site supervision activities. The three remaining departments provide support for the supervisory process. The Analysis and Audit department includes a team of risk specialists responsible for monitoring banking system trends, conducting bottom-up stress tests on various risks (market, liquidity and interest rate risks) and providing specialized support for on-site inspections of market risks. This area issues reports on liquidity, foreign exchange and interest rate risks, as well as reports on fixed income instruments and derivatives. Nonetheless, the results and alerts stemming from the analyses and stress tests on various risks could be more closely integrated into supervisory strategies and decisions. To this end, a two way feedback between these two departments is necessary to: (i) improve the depth and quality of the risk analyses and stress tests carried out by the Analysis area; and (ii) use the improved risk analyses and stress tests as an input for the supervisory decision process and strategies. This also requires continuing to develop supervisory capabilities with regards to risk assessment and risk management.

Accounting and disclosure (CP 22)

48. BCRA accounting rules are generally prudent, but differ in some aspects with international standards. Supervisors verify that bank records are drawn up in accordance to BCRA accounting rules, and have implemented a strong process to closely monitor external auditors. The BCRA accounting rules are generally prudent, with the exception of the valuation of some government securities and the amortization of legal contingencies (Amparos) arising from the 2001-02 banking crisis. Other relevant differences with International Financial Reporting Standards (IFRS) include: loan loss provisions, linear amortization of intangible assets, linear accrual of derivatives and a more prudent treatment for deferred taxes. Nonetheless, notes to the financial statements disclose and value the differences between the BCRA accounting standards and IFRS. The BCRA has established an interdisciplinary committee to coordinate the transition toward IFRS.

Corrective and remedial powers of supervisors (CP 23)

49. The SEFyC has a well structured system for early corrective actions. The system is grounded on an effective escalation of the intensity, frequency and intrusiveness of supervisory actions coupled with the use of moral suasion and regulatory incentives and costs. For instance, banks with a poor CAMELBIG rating are limited in their activities and capacity to expand and pay higher premiums for deposit insurance. Sanctioning powers are adequate and used, although the slow sanctioning processes, especially when an appeal is presented, could sometimes hinder their effectiveness. The superintendent can issue cease and desist orders, but a legal amendment is recommended to widen their scope beyond credit activities. Further efforts are needed to improve the effectiveness of the few regularization processes that have lasted for several years without sufficient improvement.

Consolidated and cross-border banking supervision (CPs 24—25)

50. The SEFyC supervises banking groups on a consolidated basis, from the bank down. While financial information is also collected on the immediate parent companies, the unregulated parent companies do not fall within the supervision of the BCRA. To have an effective framework for consolidated supervision, it is recommended that unregulated parent companies be effectively brought under the purview of BCRA and that the LEF should provide SEFyC with explicit powers to regulate and to inspect them, including extending to them a set of prudential standards on capital, risk limits, and risk management and governance standards. The participation of local banking groups in insurance and capital markets also requires an adequate oversight framework for the risks these activities represent for the overall banking group. To this end, it is advisable that the role of lead supervisor of a financial conglomerate be established (supervisor of the local entity with the highest risks), and that its responsibilities with respect to consolidated supervision, as well as the responsibilities of the other domestic supervisors, are clearly defined.

Summary Compliance with the Basel Core Principles

Summary Compliance with the Basel Core Principles—ROSCs

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Compliant (C), Largely Compliant (LC), Materially Non-Compliant (MNC), Non-Compliant (NC), Not Applicable (N/A)

Recommended action plan

Table 2.

Recommended Action Plan to Improve Compliance with the Basel Core Principles – main recommendations

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III. Detailed Assessment

Detailed Assessment of Compliance with the Basel Core Principles

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