Flexibilization of Liquidity Requirements for Financial Institutions

Background

After the Tequila crisis, in order to strengthen the financial system and avoid a massive withdrawal of deposits, the Central Bank implemented a minimum liquidity reserve system which replaced the old minimum cash requirements system.

Under the minimum liquidity reserve system, the required minimum liquidity reserve was determined in accordance with the term of maturity of the relevant transactions, and financial institutions were able to obtain income from the assets held by them allocated to complying with such minimum liquidity reserve requirements.

Recently, the Central Bank Charter was modified eliminating the restrictionwhich prohibited the Central Bank from compensating financial institutions for their assets held with the Central Bank pursuant to the minimum liquidity reserve requirements.

New System

The Communication admits two reserve systems: (i) it establishes a new minimum cash reserve system, which applies to demand accounts (checking and savings accounts), while (ii) it maintains the existing minimum liquidity reserve requirements, which continues to be applied to time deposits and other financial intermediation obligations.

The recitals of the Communication specify that recent studies made by the Central Bank evidence that time deposits are more sensitive than demand deposits to changes in the risk perception of the Argentine financial system. Therefore resulting in the need for different standards applicable to each of these kinds of deposits, with greater minimum liquidity reserve requirements in the case of time deposits.

Demand Deposits: Minimum Cash Reserves

Checking and savings accounts, revolving credit lines associated with checking accounts and other “demand” transactions, in both local and foreign currency, require compliance with a minimum cash reserve requirement.

This reserve may be integrated by cash held by the financial institutions, deposits in accounts at the Central Bank (one for each applicable deposit currency), and/or government bonds issued by the Republic of Argentina, in both cases, within limits established by the Central Bank.

The minimum cash reserve requirements for demand transactions will be 15.5% (previously such requirement was 18%). The reserve must be constituted in the same currency as the corresponding liabilities.

The balance that financial institutions (other than banks) may have in their checking accounts with commercial banks may be fully computed (up to 100%) to meet the minimum cash reserve requirements.

Time Deposits: Minimum Liquidity Reserve Requirements

Time deposits and other financial intermediation liabilities (in pesos, foreign currency and public or private securities) other than deposits which are subject to “minimum cash reserve requirements” and other exclusions specifically provided by Central Bank regulations, must comply with minimum liquidity reserve requirements.

Most of the alternatives for integration of the minimum liquidity reserves remain unmodified and include US dollar denominated assets. The Communication adds two more assets to these options: the balance of US dollar checking accounts and the balance of US dollar special guarantee accounts established for the benefit of electronic clearing houses.

Minimum liquidity reserve requirements are set at 22%, 15% and 10% of the amounts held as time deposits, depending on their term.