THE ARGENTINE EXPERIENCE WITH FINANCIAL CONGLOMERATES

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www.cnv.gov.ar
DOES INTEGRATED SUPERVISION WORK IN EMERGING
MARKETS? THE ARGENTINE EXPERIENCE WITH FINANCIAL
CONGLOMERATES Fifth Annual Financial Markets
Development Conference The World Bank The
International Monetary Fund The Brookings
Institution
Narciso Muñoz Comisión Nacional de
Valores República Argentina April 2003
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AGENDA

• Definition of a financial conglomerate (F.C.)
• Financial conglomerates in Argentina
• Some examples of F.C. behaviour in Argentinas
  2001 crisis
• A map of Argentinas regulators
• Integrated supervision in Argentina
• Does integrated supervision work in emerging
  markets? Argentinas case

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AGENDA

• Definition of a financial conglomerate (F.C.)
• Financial conglomerates in Argentina
• Some examples of F.C. behaviour in Argentinas
  2001 crisis
• A map of Argentinas regulators
• Integrated supervision in Argentina
• Does integrated supervision work in emerging
  markets? Argentinas case

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DEFINITION OF A FINANCIAL CONGLOMERATE (F.C.)

• Diversified financial firms with complex
  organizational and management structures whose
  large scale activities cross national borders and
  sectorial bounds
• Any financial group that comprises at least two
  of the following activities under different
  regulatory schemes Banking, Insurance and
  Securities

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AGENDA

• Definition of a financial conglomerate (F.C.)
• Financial conglomerates in Argentina
• Some examples of F.C. behaviour in Argentinas
  2001 crisis
• A map of Argentinas regulators
• Integrated supervision in Argentina
• Does integrated supervision work in emerging
  markets? Argentinas case

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TYPES OF F.C. IN ARGENTINA

• TYPE I TYPE II

BANK CENTERED F.C.
INVESTMENT COMPANY CENTERED F.C.
Bank
Investment Company
Bank
Pension Fund
Pension Fund
.
Insurance Co
Insurance Co.
Mutual Fund
Mutual Fund
Brokerage House
Brokerage House
Financial Services Co
Financial Services Co
Credit Card Issuer
Credit Card Issuer
Others
Others
42 are Type I
58 are Type II
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IN THE NINETIES FINANCIAL SERVICES IN ARGENTINA
EXPERIENCED THREE SIMULTANEOUS PROCESSES
CONCENTRATION
FOREIGN OWNERSHIP
CONGLOMERATION
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CONCENTRATION (1995-2001)
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FOREIGN OWNERSHIP

• Participation in the banking system
  Foreign owned banks vs. Argentine owned banks

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CONGLOMERATION

• F.C. were largely owned by foreign investors
• (2001)

• F.C. Obtained more financial resources than the
  rest of the industry
• (2001)

F.C. 83
State Owned 15
Foreign 81
Rest industry 17
Privately Owned (Arg.) 4
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AGENDA

• Definition of a financial conglomerate (F.C.)
• Financial conglomerates (F.C.) in Argentina
• Some examples of F.C. behaviour in Argentinas
  2001 crisis
• A map of Argentinas regulators
• Integrated supervision in Argentina
• Does integrated supervision work in emerging
  markets? Argentinas case

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Ia. COMPARED TO OTHER COUNTRIES, F.C. INVESTED
LARGE SUMS IN BANK DEPOSITS
of Investment
80
70
60
50
40
30
20
10
0
Total
Pension Funds
Insurance
Mutual Funds
Avge. 99/00
Avge. 96/00
Avge. 97/00
Avge. 99/00
Argentina
Chile
Japan
OECD
USA
Chiles Mutual Funds Figures N/A
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Ib. IF WE LOOK AT THE INSURANCE INDUSTRY, THE
PERCENTAGE IN BANK DEPOSITS IS HIGHER FOR F.C.
THAN FOR THE REST OF THE INSURANCE COMPANIES
Deposits vs Total Investments - June 2001
60
50
Average F.C.
Insurance Co.
40
30
Average non
conglomerate
20
Insurance Co.
10
0
General
Pension
Life
Labour Risks
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Ic. THE CASE IS SIMILAR WITH PENSION FUNDS
WHILE BANK DEPOSITS FLED, PENSION FUNDS
INVESTMENTS IN THESE INSTRUMENTS INCREASED
Pension Funds deposits in Banks - Dec 00 / Nov 01
Pension Funds
Bank Deposits
Mill us
Mill us
3,800
81,000
3,600
76,000
3,400
71,000
3,200
3,000
66,000
2,800
61,000
2,600
2,400
56,000
Jul-01
Dec-00
Abr-01
Jun-01
Nov-01
Feb-01
Mar-01
Oct-01
Jan-01
Aug-01
Sep-01
May-01
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IIa. IF WE LOOK AT THE BALANCE SHEETS OF
INSURANCE COMPANIES WE WILL SEE CONGLOMERATE -
SIDED BEHAVIOURS
MOREOVER, THE TREND INCREASES IF WE LOOK AT THE
OTHER INVESTMENTS OF THE F.C. COMPANY
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IIb. EXAMPLE OF INTERGROUP OPERATIONS FAVOURING A
F.C.
MONTH 4 5 Pension Funds subscribe the Shares of
Company X
MONTH 10 Company X reduces its debt with banking
system
MONTH 1 Company X with large bank debt
MONTH 4 Company X public offering of shares
Main Creditor Bank G 51
Broker G Brokerage House
Pension Fund G subscribes more than 65 of the
issue
Average reduction 18 Reduction with Bank G
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AGENDA

• Definition of a financial conglomerate (F.C.)
• Financial conglomerates (F.C.) in Argentina
• Some examples of F.C. behaviour in Argentinas
  2001 crisis
• A map of Argentinas regulators
• Integrated supervision in Argentina
• Does integrated supervision work in emerging
  markets? Argentinas case

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DIFFERENT GOVERNMENT AREASSUPERVISE DIFFERENT
REGULATING AGENCIES
Legislative Power
Executive Power
Ministry of Economy
Ministry of Labour Social Security
Central Bank
Superintendency of Financial Exchange
Institutions
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EACH REGULATORY AGENCY SUPERVISES A DIFFERENT
INDUSTRY
National Securities Commission (CNV)
Superintendency of Pension Funds
National Superintendency of Insurance
Superintendency of Financial Exchange
Institutions
SROs
Insurance Companies
Pension Funds
Banks
Mutual Funds
Foreign Exchange Agents
Retirement Plans
Public Offerings
Public Trusts
Other Financial Institutions
Rating Agencies
Central Depositories
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AGENDA

• Definition of a financial conglomerate (F.C.)
• Financial conglomerates (F.C.) in Argentina
• Some examples of F.C. behaviour in Argentinas
  2001 crisis
• A map of Argentinas regulators
• Integrated supervision in Argentina
• Does integrated supervision work in emerging
  markets? Argentinas case

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ACHIEVEMENTS

• 1999/2000
• In accordance to a conditionality of the IBRD
  Special Loan for Structural Adjustments a
  Permanent Committee of Evaluation of Financial
  Regulation was established to oversee the
  development of Financial Conglomerates and
  Regulatory Arbitrage.
• Members of the Committee
• Secretary of Finance
• President of the Central Bank
• Undersecretary of Finance
• Undersecretary of Financial Services
• President of the National Securities Commission
  (CNV)
• Superintendent of Insurance Companies
• Superintendent of Financial and Exchange
  Institutions
• Superintendent of Pension Funds

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ACHIEVEMENTS

• 2001/2002
• A working group headed by the Secretary of
  Finance was set up through a IADB Loan.
  Objectives Study and propose reforms of the
  financial Sector. The group produced a paper for
  discussion with a fairly detailed proposal of an
  integrated regulatory Agency supervising
  Securities, Insurance Pension Funds
• The Ministry of Economy prepared a draft of a
  Decree to provide the CNV with stronger
  enforcement powers - as recommended by the IFIs
  - similar to those exercised by the rest of the
  Argentine Regulatory Agencies upon their
  industries

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ACHIEVEMENTS

• 2003
• First conclusions of the working group on the
  behaviour of F.C. in the period 1995-2001
• At present, studies on regulatory arbitrage are
  taking place
• CONCLUSION
• Argentina is taking the first steps towards the
  coherence harmony between regulations
  practices in the financial Sector as a whole

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MISHAPPENINGS

• 1995-1999
• The economic policy was partially based on the
  belief that foreign owned financial conglomerates
  would be an everlasting deterrent to possible
  attacks to the conversion plan that linked the
  peso to the dollar at a fixed rate of one to one.

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MISHAPPENINGS

• 2000-2001
• Confronted to a flee of financial capital, the
  economic policy shifted to
• Secure the liquidity of the banks disregarding
  the rest of the financial sectors
• Funnel this liquidity to the Government, in order
  to allow the latter to obtain internal credit
  when external sources became scarce

CONCLUSION The systemic risk increased drastically
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AGENDA

• Definition of a financial conglomerate (F.C.)
• Financial conglomerates (F.C.) in Argentina
• Some examples of F.C. behaviour in Argentinas
  2001 crisis
• A map of Argentinas regulators
• Integrated supervision in Argentina
• Does integrated supervision work in emerging
  markets? Argentinas case

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DOES INTEGRATED SUPERVISION WORKIN EMERGING
MARKETS? ARGENTINAS CASE

• YES, BECAUSE
• We have already seen that integrated supervision
  is needed to deal with F.C. in Argentina
• Everyone is aware of this situation and has been
  working at modeling a new framework in this
  direction
• We are collecting enough information to draw a
  map of rules regulations in force in the
  different Agencies which will allow to set new
  parameters to avoid regulatory arbitrage and to
  correct enforcement unbalances

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DOES INTEGRATED SUPERVISION WORK IN EMERGING
MARKETS? ARGENTINAS CASE

• YES, IF
• If Government, both Executive Parliament, are
  convinced that the markets will benefit much more
  from a sound financial system based on a strong
  independent supervision than based on separate
  weaker agencies ruled by different Government
  Jurisdictions
• If the other players involved (consumers,
  clients, pensioners, regulated entities, etc.)
  understand that they will benefit more by the
  possibilities of reducing the systemic risk
  derived of an integrated supervision rather than
  by the eventually closer control exercised by
  sectorial controller
• If a law can be passed swiftly to modify
  preexisting regulatory schemes into an integrated
  regulation, without altering major economic
  achievements (i.e. Pension Funds Act, Central
  Bank Act)

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DOES INTEGRATED SUPERVISION WORKIN EMERGING
MARKETS? ARGENTINAS CASE

• YES, BUT
• But the conditions of the previous scenario may
  not be rapidly achieved
• Then, a coordination between regulators can be
  set and enforced much easily by secondary
  legislation (decrees, resolutions)
• Accordingly an 80/20 approach to the modification
  of the system may work a large portion of the
  rules might be adjusted with minor changes, and
  problems should be solved immediately when
  detected, instead of waiting for major
  legislative turning points

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DOES INTEGRATED SUPERVISION WORK IN EMERGING
MARKETS? ARGENTINAS CASE
CONCLUSION
EVOLUTION TAKES TIME, STRENGTH AND ADAPTABILITY
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www.cnv.gov.ar
DOES INTEGRATED SUPERVISION WORK IN EMERGING
MARKETS? THE ARGENTINE EXPERIENCE WITH FINANCIAL
CONGLOMERATES Fifth Annual Financial Markets
Development Conference The World Bank The
International Monetary Fund The Brookings
Institution
Narciso Muñoz Comisión Nacional de
Valores República Argentina April 2003