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New draft bills for financial institutions

Roberto E Silva Jr Martín G. Vázquez Acuña

Since the beginning of this year, three different draft bills to reform Argentine Financial Institutions Law No. 21,526, as amended (the FIL) have been presented to the Argentine Congress. Deputies Carlos Heller, Federico Pinedo and Gerardo Milman drafted them, respectively. All three projects are currently being analysed by the Finance Commission of the Chamber of Deputies of the Argentine Congress; it has conducted several hearings with different participants in the market.

Although a potential reform of the legal framework of the financial market has attracted the attention of the market and the media, it is not clear if any of these draft bills will have the necessary support to be approved by Congress, particularly in the context of the forthcoming presidential election to be held in late 2011.

Among the proposed reforms, the draft bill drafted by Deputy Heller – who is a close ally of President Cristina Fernández de Kirchner – represents the most dramatic change in the legal framework applicable to the financial markets.

Heller's draft bill's definition of financial activity as a public service, and, therefore, designed to satisfy public purposes (such as the saving and credit needs of all citizens, the universal access to financial services and the equal distribution of financial activity, in addition to the preservation of the stability of the financial activity) reflects a significant advance in the scope of the governmental intervention in the banking market.

In that regard, Heller's draft bill introduces the concept of democratisation of financial services pursuant to which financial institutions are required to offer low income clients certain essential services subject to limited commissions (or even gratuitously) and to grant at least a 38% of their total financings to small and medium businesses and 2% to micro endeavours. Moreover, it imposes a cap in the interest rate applicable to loans granted to small- and medium-size business and fixes maximum rates on personal loans of less than ARS100,000 (approximately $25,000) to not exceed the average interest rate of the market for this type of facilities by more than 5%.

In connection with the treatment of foreign capital financial institutions, this draft bill sets forth that entry to the banking market by foreign capital institutions (which include entities whose capital is held in a percentage of 30% or higher by foreign companies or individuals or which are otherwise controlled by foreign companies or individuals) is subject to reciprocity requirements and to prior approval of the Executive Branch (as opposed to the current Central Bank approval requirement). It also makes the foreign head office of local branches jointly and severally liable for all liabilities incurred by such local branch as a consequence of its local operation. Additionally, local subsidiaries of foreign companies are required to disclose the scope of the liability assumed by their foreign shareholders in connection with the local operations of their subsidiary.

Heller's draft bill also restricts the expansion of activities of financial institutions. Central Bank authorisation for the opening of new branches shall give priority to the expansion of the geographical coverage of the financial system and, consequently, the Central Bank is entitled to temporarily suspend the authorisation for the opening of new branches in those areas considered to be adequately covered by the financial system. On the other hand, the draft bill gives the Central Bank the mandate to control the level of concentration of the banking system and to apply the necessary measures in case of antitrust violations. More importantly, private financial institutions are subject to an 8% maximum participation limit on the total amount of the private sector deposits and loans. Finally, financial institutions are prohibited from having equity participation in other financial institutions.

This draft bill also includes a detailed treatment of several prudential regulations applicable to financial institutions. In that regard, it sets the minimum capital requirements applicable to the different types of financial institutions and establishes certain guidelines for loans to one borrower limits and foreign exchange liabilities exposure. On the other hand, it restricts derivatives transactions to commercial banks with prior authorisation from the Central Bank.

Another important feature of this draft bill is the replacement of the current deposit insurance privately managed system for a public deposit insurance system. This new system (as the one currently in place) will be mandatory and funded by the financial institutions, but will be managed and guaranteed by the Federal Government. The maximum coverage amount will be increased from ARS30,000 to ARS100,000.

Finally, following the international trend in this subject, Heller's draft bill includes a special section covering financing consumer protection matters. This section contemplates the creation of a new body within the Central Bank: an ombudsman for the consumers of financial services, with the purpose of defending and protecting consumers from abusive practices conducted by financial institutions, mandates the Central Bank to implement a Banking Good Practices Code and requires the financial institution to organise a consumer helpdesk.

Roberto E Silva Jr and Martín G. Vázquez Acuña

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