An assessment of the transparency aspects of the Basel Core Principles (BCPs) for banking supervision in Argentina was conducted in 1999 by the International Monetary Fund (IMF). The report found that Argentina had an effective legal basis for banking regulation and that its supervisory practices appeared to be consistent with the disclosure aspects of the BCPs. The report also found that the relevant laws and regulations in Argentina were effectively implemented. It noted that the Central Bank of Argentina (BCRA), through the Superintendency of Financial and Exchange Institutions (SEFyC), is responsible for monitoring regulatory compliance and enforcing the law. However, the IMF assessment was conducted prior to the 2001-2002 financial crisis in Argentina. Since that time there has been insufficient information publicly available regarding Argentina's compliance with the BCPs. The Argentine banking supervisory framework separates banking regulation from supervision and the SEFyC is responsible for banking supervision. According to a 2004 IMF report, the BCRA is making progress in strengthening banking supervision. Financial reporting obligations by all banks have now been fully reinstated as of prior to the 2001-2002 crisis. In addition, a capital adequacy regime was reintroduced in January 2004 requiring banks gradually amass adequate capital relative to their exposure to sovereign and interest rate risk. Nevertheless, the IMF contends that close central bank supervision is needed, given continuing weaknesses in banks' balance sheets.

General Overview

The 1999 International Monetary Fund (IMF) assessment focused on the transparency aspects of the Basel Core Principles (BCPs). It regarded Argentina's banking legal framework as efficient and found the supervisory framework to be in line with the disclosure practices of the BCPs. Nevertheless, the assessment was performed before the 2001-2002 financial crises, and there is insufficient information publicly available since, as to Argentina's compliance with the BCPs. The IMF report noted that banking supervision is conducted by the Superintendency of Financial and Exchange Institutions (SEFyC), which reports to and is funded by the Central Bank of Argentina (BCRA).

A 2004 IMF report states that Argentina has improved its regulatory banking framework, thanks to later reporting obligations and minimum capital requirements. The BCRA website provides data on the banking system performance, disclosing that profitability has increased since 2005 and non-performing loan ratios have decreased. However, the IMF also reported that the bank's balance sheets continue to show some weaknesses and concluded that close supervision by the BCRA is needed.

The Principles

1. (1) Clear responsibilities and objectives for each supervisory agency.

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According to the 1999 IMF assessment, the charter of the BCRA grants responsibility to the SEFyC for supervising the banking system. Nonetheless, there is insufficient information publicly available as to Argentina's compliance with this principle.

1.(2) Operational independence and adequate resources.

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According to the 1999 IMF assessment the SEFyC reports directly to the BCRA's board and is funded by the same entity. Still, there is insufficient information publicly available as to Argentina's compliance with this principle.

1.(3) A suitable legal framework for authorization and ongoing supervision.

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The 1999 IMF assessment reports that Argentina has an appropriate legal framework for banking supervision. The SEFyC is authorized to intervene in banks including the imposition of inspectors. However, there is insufficient information publicly available as to Argentina's compliance with this principle..

1.(4) A suitable legal framework to address compliance with laws as well as safety and soundness concerns.

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The 1999 IMF assessment states that the SEFyC has the capacity to address and intervene when a bank fails to comply with the regulatory framework and/or enters into economic and financial distress, especially liquidity problems. However, there is insufficient information publicly available as to Argentina's compliance with this principle.

1.(5) Legal protection for supervisors.

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There is insufficient information publicly available as to Argentina's compliance with this principle.

1.(6) Arrangement for sharing of information between supervisors and protection of confidentiality of shared information.

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There is insufficient information publicly available as to Argentina's compliance with this principle.

2. Clearly defined permissible activities for banks and control of the use of the word 'bank'.

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There is insufficient information publicly available as to Argentina's compliance with this principle.

3. Criteria for structure, directors, operating plan, controls, financial condition and capital base.

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There is insufficient information publicly available as to Argentina's compliance with this principle. The 2007 BCRA report titled "Prudential Regulation" states that the BCRA has the sole authority to explicitly authorize the functioning of every new banking institution looking to do business in the country. Among the requirements for such authorization is the minimum amount of capital condition. Managers and directors must also evidence appropriate background and professional experience. Also, each branch must gain BCRA authorization separately. This regulation also applies to foreign branches operating in Argentina. Furthermore, the World Bank 2003 database provides evidence that entry into the banking sector requires an accepted system of surveillance in its country of origin, a published organizational chart, and financial projections for the first three years of operations.

4. Authority to review and reject transfer of ownership.

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The 2007 BCRA report titled "Prudential Regulation" affirms that "merger, consolidation, and transfer of goodwill may be arranged between institutions of the same or different type, and will also require prior approval from the Central Bank" (pp 20-21). Additionally, institutions must report to the BCRA any negotiation on shareholding blocks that result in a change of ownership structure. However, there is insufficient information publicly available as to Argentina's compliance with this principle.

5. Authority to review major acquisitions and investments.

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There is insufficient information publicly available as to Argentina's compliance with this principle.

6. Minimum capital adequacy requirements (meet Basle Capital Accord for internationally active banks).

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According to the BCRA's 2007 report on Prudential Regulations, "the minimum level of capital requirement financial institutions have to comply with is the minimum between the core capital and the sum of the requirements for credit risk and for interest rate risk. In addition, financial institutions must comply with a market risk requirement that is calculated daily." (p.3). The amount of core capital varies, depending upon the jurisdiction where the institution's main activity is carried on. However, there is insufficient information publicly available as to Argentina's compliance with this principle. .

7. A method exists for the evaluation of procedures related to loans, investments and portfolio management.

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There is insufficient information publicly available as to Argentina's compliance with this principle. However, per the 2007 Central Bank report titled "Prudential Regulation," clear-cut classifications have been set up to measure loan's quality. The report states that "the classifications are based on "the clients" payoff capacity and projected cash flows for commercial debtors, and the payment behavior for housing or consumption loans. Some of the indicators that must be used to classify commercial loans are: liquidity, structure of financing, repayment behavior, governance and management standards, information technology systems, business sector outlook, relative situation within its business sector, legal status of the firm, the existence of refinancing and write-offs, etc" (p. 9). Classification must be carried out at least once a year. In the case that a loan represents 5% or more of a financial institution's required capital, classification must occur every 3 months, and for loans of Ar$1000000 or which total between 1% and 5% of the institution's required capital classification shall be done every 6 months. Furthermore, when another financial institution downgrades the classification of a particular debtor, a review must be performed.

8. Policies, practices and procedures for evaluating the quality of assets and the adequacy of loan loss provisions and reserves.

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There is insufficient information publicly available as to Argentina's compliance with this principle.

9. Prudential limits and management information system on concentration of exposure.

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According to the 2007 Central Bank report titled Prudential Regulation, "when an excessive concentration of liabilities determined (in relation to holders or terms) which may imply a substantial risk regarding a financial institution's liquidity or a systemic risk, the BCRA may order additional requirements on such institutions' liabilities or take such additional measures as it may deem fit" (p.17). However, there is insufficient information publicly available as to Argentina's compliance with this principle.

10. Arm's length rule and monitoring for connected lending.

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As stated in the BCRA's 2007 report on Prudential Regulations, there are limits on the amount that can be lent to related parties. Still, there is insufficient information publicly available as to Argentina's compliance with this principle. .

11. Policies and procedures for country risk and transfer risk.

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There is insufficient information as to Argentina's compliance with this principle.

12. Measuring and monitoring market risk. Limit and/or specific capital charge on market risk exposure.

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The BCRA 2007 report titled "Prudential Regulation" states that financial institutions shall build up capital to account for market risk exposure of their portfolios. Market risk is calculated on a daily basis and a report has to be sent to the BCRA every month. The method "delta plus" recommended by the Basel guidelines is used for controlling the market risk of options. However, there is insufficient information publicly available as to Argentina's compliance with this principle.

13. Comprehensive risk management processes.

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According to the BCRA's 2006 report titled "Survey on Stress Testing" the System Analysis Office at the BCRA has used stress testing analysis related to market, liquidity, interest, and exchange rate risks since 2005. In addition, the BCRA monitors different vulnerabilities in the banking system through a stress survey of financial institutions. The stress testing methodologies aim at evaluating the stability of the financial system and can be classified in two broad categories: sensitivity testing and scenario analysis. The 2007 BCRA report titled "Prudential Regulation" states that the minimum reserve or liquidity requirements are set as a percentage of demand and time deposits. The applicable rate for calculating the reserves to be held by the bank are based on the type of the deposit, whether it is in local or foreign currency, and on its maturity.

14. Adequate internal controls.

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According to a 2006 report by the Center for Financial Stability (CEF), the BCRA has been regulating internal control practices closely and has clearly defined those practices, the internal control system per se, its components, and objectives. The CEF document adds that "regulation establishes that the board or an equivalent body is the primary responsible within the bank for the existence of an adequate internal control system. At the same time, the board is in charge of selecting those members of the internal audit unit that have the responsibility for correctly evaluate the appropriateness of the internal control" (p. 34). Nevertheless, there is insufficient information publicly available as to Argentina's compliance with this principle.

15. Strict "know-your-customer" rules and high ethical and professional standards.

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The 2004 Financial Action Task Force (FATF) document reports that Law No. 25.246 lays out the requirements for customer identification practices, identifies the required reporting entities, and grants the Financial Intelligence Unit (UIF) the capacity to issue compulsory guidelines for reporting parties in a number of issues, such as "customer due diligence, record keeping, suspicious transactions reporting and internal control procedures" (p. 24). Some Anti-Money Laundering (AML) requirements are not set in the law but are imposed by the UIF. This causes inefficiencies in the system, since the UIF lacks supervisory capacity. As a result, the BCRA is left with the task of supervising the implementation of UIF resolutions, along with the Securities and Exchange Commission and the Superintendency of Insurance. But, of these agencies, the only one that has experience on AML practices is the BCRA. Additionally, there are some reporting parties for whom it is not clear which is the official supervisory agency. According to the 2006 UIF report, the UIF is reviewing its own regulatory framework to harmonize the country's money laundering regulations with international standards. However, there is insufficient information as to Argentina's compliance with this principle.

16. Effective supervisory system consisting of on-site and off-site supervision.

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Per the BCRA 2006 report titled "Report to the National Congress" off-site supervision includes information submitted by the institution, interaction with the institutions' officials, gathering information from various sources or market agents, and a series of control routines. Nevertheless, there is insufficient information publicly available as to Argentina's compliance with this principle.

17. Regular contact with bank management and understanding of bank's operations.

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There is insufficient information as to Argentina's compliance with this principle.

18. Analytical reports and statistical returns on solo and consolidated basis.

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The 1999 IMF report states that banks must publish semiannual consolidated balance sheets and quarterly consolidated audited reports, income statements, notes, and auditor's reports. The BCRA publishes individual banks' balance sheets every month, along with performance indicators and off-balance sheet transactions. However, there is insufficient information subsequent to the 1999 IMF report publicly available as to Argentina's compliance with this principle.

19. Independent validation of supervisory information through on-site examination or external auditors.

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Based on the 1999 IMF report, the appointment of external auditors must be approved by the SEFyC. Such approval is granted only if the SEFyC agrees that the auditors have complied with the required qualifications. The Audit Control Department monitors the work done by the institutions internal and external auditors. However, there is insufficient information subsequent to the 1999 IMF report publicly available as to Argentina's compliance with this principle.

20. Ability to supervise on a consolidated basis.

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Per the 1999 IMF report, banking groups, domestic and foreign, must submit to the SEFyC semiannual consolidated balance sheets. If a foreign banking group has already been supervised on a consolidated basis at its country of origin, the local supervision is waived. If not, a recognized audit firm has to perform the supervision. However, there is insufficient information subsequent to the 1999 IMF report publicly available as to Argentina's compliance with this principle.

21. Consistent accounting policies and practices that provide a true and fair view of the financial condition of the bank.

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According to the 1999 IMF report, balance sheets submitted each half year by the controlling shareholders must include the opinion of a certified public accountant. The appointment of external auditors requires the SEFyC approval which depends on the auditor's experience. The report also states that the BCRA sets the accounting and auditing standards to be used, which must be consistent with the guidelines set by the Argentine Federation of Professional Councils in Economic Sciences (FACPCE) and with the U.S. Generally Accepted Accounting Principles (GAAP). Nevertheless, there is insufficient information publicly available as to Argentina's compliance with this principle.

22. Adequate supervisory measures to ensure timely corrective action.

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According to the IMF 1999, the Law on Financial Institutions provides that violations of the legal and regulatory framework by financial institutions shall be corrected by the BCRA through a variety of enforcing tools and sanctions. However, there is insufficient information publicly available as to Argentina's compliance with this principle.

23. Banking supervisors must practice global consolidated supervision over their internationally-active banking organizations.

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There is insufficient information as to Argentina's compliance with this principle.

24. International exchange of information with other supervisors.

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There is insufficient information as to Argentina's compliance with this principle.

25. Supervision of local operation of foreign banks and information sharing with home country supervisors.

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There is insufficient information as to Argentina's compliance with this principle.