Law No 25,780 introduces new provisions to the Financial Institutions Law and Central Bank by-laws

Article 35 bis of Law No 21,526, which was originally introduced after the Tequila Crisis, establishes the procedure for restructuring financial institutions that are not in a position to submit a regularization plan but have liquidity and/or solvency problems. This procedure takes place before the financial institution’s license is revoked and also applies for financial institutions voluntary liquidation or in other cases of winding up.

The original procedure allowed the Central Bank to exclude an equal value of assets and liabilities from a financial institution in crisis and transfer them to a healthy institution. Law No 25,780 changes the rule of equivalence and now allows the exclusion of greater liabilities than assets, which now are valued at their liquidation values. In both cases, solely preferred liabilities can be excluded.

These preferences or privileges were also modified by Law No 25,780. The previous regime established three privileges in the following order (i) bank deposits up to Argentine pesos 5.000, (ii) bank deposits over Argentine pesos 5.000 with terms longer than 90 days and (iii) the remaining bank deposits. The new privileges incorporated after the reform have the following order:

(i) Bank deposits made by individuals or corporations up to Argentine pesos 50.000 or an equal amount in foreign currency. This privilege can only be held by one person per bank deposit.

(ii) Bank deposits over Argentine pesos 50.000.

(iii) Commercial loans granted to the restructured institution that affect international trade directly.

Law No 25,780 also introduces into Article 35 bis, different instruments that have been used in practice since the establishment of this procedure. Accordingly, Article 35 bis now includes the possibility of constituting financial trusts with the assets of the restructured institution and the possibility of partially excluding both assets and liabilities. Although these instruments are already being used, their incorporation to the text of Article 35 bis facilitates their use. Now, financial trusts that hold the assets of the restructured institution have legal representation to proceed in every trial related to the excluded assets.

In addition to the before mentioned provisions, Law No 25,780 included a new article into Law No 21,526 – Article 35 ter - that states that the acts carried out by the Central Bank in relation with this procedure can only be reviewed by courts in cases of clear arbitrariness or unreasonableness.

It is very important to acknowledge that, as from September 8, 2003, the new provisions apply to current restructuring procedures under Article 35 bis.

Article 50 of Law No 21,526 was also modified. The new wording states that financial institutions cannot file for bankruptcy nor reorganization proceedings (similar to Chapter 11 of the U.S. Bankruptcy Law). The aim of this change was to close the debate over the ability of financial institutions to file for reorganization proceedings, but the new wording does not seem to clarify the situation for former institutions.

Of the amendments to the Central Bank by-laws, the most important is the one that allows the Central Bank to temporarily lend the Federal Government funds up to an amount equal to 12% of the monetary base. The monetary base includes, for the purposes of this article, outstanding currency and sight deposits of financial institutions in the Central Bank, in current or special accounts. These temporary loans do not need to have a specific destination, and therefore can be used by the Federal Government at will.

Furthermore, the Central Bank is now allowed to lend to the Federal Government additional funds up to 10% of all cash resources obtained by the Federal Government in the last twelve months, if they are specifically destined to cancel obligations owed to multilateral credit institutions.

Another important amendment to the Central Bank by-laws is an attempt to stop the circulation of so-called quasi-currencies reinforcing the prohibition to issue currency by any organization other than the Central Bank. The new provision defines currency as any instrument whose acceptance can be imposed or induced directly or indirectly by the issuer for the cancellation of any kind of obligation or instruments issued for nominal values lower than or equal to ten times the value of the larger bill of national currency.

Law No 25,780 also revokes Decree No 1,311/01, which limited the power of the Superintendent of Financial Institutions. Consequently, the Superintendent recovers its original powers and is in charge of the approval of regularization plans of financial institutions and applying penalties established in Law No 24,526.

Finally, Law No 25,780 includes a temporary provision that states that, until December 10, 2003, the Central Bank is allowed to waive the privilege of its credits against financial institutions, in favor of the success of reorganization procedures.

Article 35 bis of Law No 21,526, which was originally introduced after the Tequila Crisis, establishes the procedure for restructuring financial institutions that are not in a position to submit a regularization plan but have liquidity and/or solvency problems. This procedure takes place before the financial institution’s license is revoked and also applies for financial institutions voluntary liquidation or in other cases of winding up.

The original procedure allowed the Central Bank to exclude an equal value of assets and liabilities from a financial institution in crisis and transfer them to a healthy institution. Law No 25,780 changes the rule of equivalence and now allows the exclusion of greater liabilities than assets, which now are valued at their liquidation values. In both cases, solely preferred liabilities can be excluded.

These preferences or privileges were also modified by Law No 25,780. The previous regime established three privileges in the following order (i) bank deposits up to Argentine pesos 5.000, (ii) bank deposits over Argentine pesos 5.000 with terms longer than 90 days and (iii) the remaining bank deposits. The new privileges incorporated after the reform have the following order:

(i) Bank deposits made by individuals or corporations up to Argentine pesos 50.000 or an equal amount in foreign currency. This privilege can only be held by one person per bank deposit.

(ii) Bank deposits over Argentine pesos 50.000.

(iii) Commercial loans granted to the restructured institution that affect international trade directly.

Law No 25,780 also introduces into Article 35 bis, different instruments that have been used in practice since the establishment of this procedure. Accordingly, Article 35 bis now includes the possibility of constituting financial trusts with the assets of the restructured institution and the possibility of partially excluding both assets and liabilities. Although these instruments are already being used, their incorporation to the text of Article 35 bis facilitates their use. Now, financial trusts that hold the assets of the restructured institution have legal representation to proceed in every trial related to the excluded assets.

In addition to the before mentioned provisions, Law No 25,780 included a new article into Law No 21,526 – Article 35 ter - that states that the acts carried out by the Central Bank in relation with this procedure can only be reviewed by courts in cases of clear arbitrariness or unreasonableness.

It is very important to acknowledge that, as from September 8, 2003, the new provisions apply to current restructuring procedures under Article 35 bis.

Article 50 of Law No 21,526 was also modified. The new wording states that financial institutions cannot file for bankruptcy nor reorganization proceedings (similar to Chapter 11 of the U.S. Bankruptcy Law). The aim of this change was to close the debate over the ability of financial institutions to file for reorganization proceedings, but the new wording does not seem to clarify the situation for former institutions.

Of the amendments to the Central Bank by-laws, the most important is the one that allows the Central Bank to temporarily lend the Federal Government funds up to an amount equal to 12% of the monetary base. The monetary base includes, for the purposes of this article, outstanding currency and sight deposits of financial institutions in the Central Bank, in current or special accounts. These temporary loans do not need to have a specific destination, and therefore can be used by the Federal Government at will.

Furthermore, the Central Bank is now allowed to lend to the Federal Government additional funds up to 10% of all cash resources obtained by the Federal Government in the last twelve months, if they are specifically destined to cancel obligations owed to multilateral credit institutions.

Another important amendment to the Central Bank by-laws is an attempt to stop the circulation of so-called quasi-currencies reinforcing the prohibition to issue currency by any organization other than the Central Bank. The new provision defines currency as any instrument whose acceptance can be imposed or induced directly or indirectly by the issuer for the cancellation of any kind of obligation or instruments issued for nominal values lower than or equal to ten times the value of the larger bill of national currency.

Law No 25,780 also revokes Decree No 1,311/01, which limited the power of the Superintendent of Financial Institutions. Consequently, the Superintendent recovers its original powers and is in charge of the approval of regularization plans of financial institutions and applying penalties established in Law No 24,526.

Finally, Law No 25,780 includes a temporary provision that states that, until December 10, 2003, the Central Bank is allowed to waive the privilege of its credits against financial institutions, in favor of the success of reorganization procedures.